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Articles

The Professional Advisory

  1. Is it Time to Move?
  2. Staging A Dental Practice
  3. The High Cost of Dying
  4. Deal-Busters
  5. Patients - Attract and Retain
  6. Should I Stay or Should I Go?
  7. Is There a Buyer for Every Practice?
  8. Good, Better, Best - The Market has Spoken
  9. Smooth-Sale-ing
  10. Buying Time
  11. Patients, Patience, Patients
  12. A Real Patient
  13. Why Do a Practice Valuation? I'm not Selling
  14. Irrational Exuberance or The New Normal?
  15. Do dental equipment and dental technology affect a practice value?
  16. Finding and Being a Mentor
  17. Bigger is Better
  18. Daves Top Ten List for Buyers (Vendors should read this too!)
  19. How Well Do You Know Your Practice?
  20. Dave
  21. What will happen to dental practice Values in the next 10 years?
  22. Your Premises Lease is an Important Asset
  23. What are Associates Thinking?
  24. There is Life Outside the GTA
  25. When Is the Right Time to Sell My Dental Practice?
  26. Mergers are a Viable Option
  27. Is Your Associate an Asset or a Liability?
  28. Has your Practice Facility Kept Up With Your Billings?
  29. The 100 per cent of Gross Myth
  30. The Past, The Present and The Future
  31. Caveat Emptor
  32. Overpaid Long Term Staff
  33. Selling your Practice in Stages
  34. A Potential Pitfall of Selling Shares
  35. Value in Your Practice Through Balance
  36. Only Trusted Staff Can Defraud You
  37. To Own or Not to Own Practice Real Estate? That is the Question.
  38. Coping With A Large Patient Base
  39. Successful Dental Practice Transitions
  40. Taking Care of Business
  41. The Investing Dentist Phenomenon
  42. Two areas to focus upon that could negatively impact the value of your practice
  43. Organize your Debt in Order to Sell your Practice
  44. Having a Better Team
  45. How Do I Prepare My Practice For Sale
  46. How Do I Prepare My Practice For Sale? Part 3
  47. How Do I Prepare My Practice For Sale? Part 2
  48. How Do I Prepare My Practice For Sale? Part 1
  49. Advice to My Son or Daughter Graduating from Dental School
  50. Transition - What to Expect
  51. Discussion on Digital X-Rays
  52. Partnerships and Shotguns
  53. Strategic Planning - How to Get Started
  54. Calling All Vendors - Practices have Gone Up in Value
  55. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates
  56. Matrimonial Practice Valuations
  57. Purchaser's Guide to Affording a Practice
  58. Location Improvements Throughout Your Career
  59. Small Practice Valuations
  60. Partnerships – The Best and The Worst
  61. Changing Location When the Opportunity Comes Along
  62. Visual Presentation of Your Practice
  63. Presentation of Charts
  64. Your Premises Lease Can Be Your Worst Enemy
  65. How to Select an Appraiser for Your Practice
  66. How Are Your Billing Ratios?
  67. It Pays to Invest in Your Tangible Assets
  68. The Importance of Separate Financial Statements
  69. Five Time Frame Levels to Sell a Practice
  70. 12 Suggestions to Safeguard Computer Data
  71. How to Buy a Visible Practice
  72. Why is there a shortage of good practices today?
  73. The Importance of Equipment in the Purchase of a Practice
  74. The Balanced Practice
  75. Will My Practice Be Saleable in The Future?
  76. Buyer Be Aware
  77. Excess Profit - The Second Key
  78. Patients and Profits are the Keys
  79. Plan Ahead

Volume 3: Excess Profit - The Second Key

Download the PDF version now!

A motivating reason for owning a practice is its ability to pay you for more than  your efforts as a dentist. This additional pay is called the excess earning  capacity. It is calculated by normalizing the financial statements by adding back  expenses that are not recurring, or do not relate to the ongoing costs to run the  practice.

Such items as:

  • Personal insurance, automobile expense and large legal bills to solve a special situation would be adjusted in a normalizing process.
  • Leases to purchase equipment would be added back as this is how  the equipment is paid for, not how it is consumed. The  consumption, in the long run, is the depreciation which generally does not conform to the Capital Cost Allowance (CCA) that is  permitted by Revenue Canada. Generally speaking the CCA is greater than the consumption of the assets i.e. Equipment is generally written off at 20% per year declining balance – in seven years one would write off 80% of the cost of the asset purchased. BUT it will probably last on average 20 years or more.
  • Interest expense is also eliminated when normalizing the practice as the purchaser will have their own interest cost as the practice is turned over to them with all liabilities paid.
  • Associate fees are also eliminated in normalizing the income to enable a review of the overhead after it is normalized.

The next calculation is to reimburse the Dentists, including the owners of the practice, for their efforts based on a 40% remuneration. The remaining balance is the income before taxes from ownership. Since the practice principal is paid off in after tax dollars, the tax on the income from ownership is calculated as if this was the only income of the owner.

The normalized net income after taxes (net income) is the basis of the calculation of the value of the practice. These are the funds the purchaser would use to pay for the practice. This net income would be “Present Valued” over ten years at a selected Capitalization Rate which would establish the value of the practice. The Capitalization Rate is not static. With a high patient count and lower billings the rate would trend down. With contemporary equipment the value would also trend down and the lower the Capitalization Rate the higher the value. The community, the availability of parking, the new patients, and visibility of the practice would also have an impact on the Capitalization Rate.

It is critical that the practice has this excess earning capacity to payback the bank for the money borrowed to purchase the practice. Profit not billings establishes value.

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