Volume 3: Excess Profit - The Second Key

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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.

The Professional Advisory

  1. One Year Later

  2. Dealing with Unsolicited Offers

  3. Covid-19 Practice Sales Update

  4. When is the Right Time to Sell Your Practice and Why?

  5. Partnership Pitfalls

  6. The Real Cost of a Dental Practice Set-up

  7. Smaller Practice Realities

  8. Dental Market Update - 2019

  9. Creating Your Own Most Valuable Practice (MVP)

  10. Small Practice Economics

  11. The Market is Very Efficient

  12. How Can Dental Practice Values be Rising and Declining?

  13. Hygiene as a Value Driver

  14. The Value of a Good Team

  15. Is it Time to Move?

  16. Staging A Dental Practice

  17. The High Cost of Dying

  18. Deal-Busters

  19. Patients - Attract and Retain

  20. Should I Stay or Should I Go?

  21. Is There a Buyer for Every Practice?

  22. Good, Better, Best - The Market has Spoken

  23. Smooth-Sale-ing

  24. Buying Time

  25. Patients, Patience, Patients

  26. A Real Patient

  27. Why Do a Practice Valuation? I'm not Selling

  28. Irrational Exuberance or The New Normal?

  29. Do dental equipment and dental technology affect a practice value?

  30. Finding and Being a Mentor

  31. Bigger is Better

  32. Dave's Top Ten List for Buyers (Vendors should read this too!)

  33. How Well Do You Know Your Practice?

  34. Dave's Top Ten List for Vendors

  35. What will happen to dental practice Values in the next 10 years?

  36. Your Premises Lease is an Important Asset

  37. What are Associates Thinking?

  38. There is Life Outside the GTA

  39. When Is the Right Time to Sell My Dental Practice?

  40. Mergers are a Viable Option

  41. Is Your Associate an Asset or a Liability?

  42. Has your Practice Facility Kept Up With Your Billings?

  43. The 100 per cent of Gross Myth

  44. The Past, The Present and The Future

  45. Caveat Emptor

  46. Overpaid Long Term Staff

  47. Selling your Practice in Stages

  48. A Potential Pitfall of Selling Shares

  49. Value in Your Practice Through Balance

  50. Only Trusted Staff Can Defraud You

  51. To Own or Not to Own Practice Real Estate? That is the Question.

  52. Coping With A Large Patient Base

  53. Successful Dental Practice Transitions

  54. Taking Care of Business

  55. The Investing Dentist Phenomenon

  56. Two areas to focus upon that could negatively impact the value of your practice

  57. Organize your Debt in Order to Sell your Practice

  58. Having a Better Team

  59. How Do I Prepare My Practice For Sale

  60. How Do I Prepare My Practice For Sale? Part 3

  61. How Do I Prepare My Practice For Sale? Part 2

  62. How Do I Prepare My Practice For Sale? Part 1

  63. Advice to My Son or Daughter Graduating from Dental School

  64. Transition - What to Expect

  65. Discussion on Digital X-Rays

  66. Partnerships and Shotguns

  67. Strategic Planning - How to Get Started

  68. Calling All Vendors - Practices have Gone Up in Value

  69. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

  70. Matrimonial Practice Valuations

  71. Purchaser's Guide to Affording a Practice

  72. Location Improvements Throughout Your Career

  73. Small Practice Valuations

  74. Partnerships – The Best and The Worst

  75. Changing Location When the Opportunity Comes Along

  76. Visual Presentation of Your Practice

  77. Presentation of Charts

  78. Your Premises Lease Can Be Your Worst Enemy

  79. How to Select an Appraiser for Your Practice

  80. How Are Your Billing Ratios?

  81. It Pays to Invest in Your Tangible Assets

  82. The Importance of Separate Financial Statements

  83. Five Time Frame Levels to Sell a Practice

  84. 12 Suggestions to Safeguard Computer Data

  85. How to Buy a Visible Practice

  86. Why is there a shortage of good practices today?

  87. The Importance of Equipment in the Purchase of a Practice

  88. The Balanced Practice

  89. Will My Practice Be Saleable in The Future?

  90. Buyer Be Aware

  91. Excess Profit - The Second Key

  92. Patients and Profits are the Keys

  93. Plan Ahead