What Are Some Of The Factors That Practice Value Depends On?

Market Value
Goodwill
Interest rates
Effects of supply and demand in your area
Cash Flow
Expectation of future earnings growth, which can further be classified by:

Prospects for growth from the efficiency of operations

Expense to Gross Revenue (overhead)

Potential to increase production

Increased debt financing to invest (either inside or outside of the practice providing the investment yields a greater return than the cost of borrowed money)

The growth rate of a practice typically ranges between 0 and 20% and can be measured by a modified Return on Investment, (ROI)), as a proxy for the growth rate. Anticipation of the growth in profits makes one practice more attractive than another. An improving trend would signify increased value. It is important to know the reasons for the trend.

Investment In Financial Skills Training For Yourself And Your Staff Directly Increases Your Bottom Line

Do you know the importance of investing in your practice?

Do you know the importance of tracking the value of your investment into your practice, what your return is?

As the CEO of your practice I would like to suggest to you that you manage your practice just as you would any other type of investment. Make the effort to measure track and graph your practice's progress over time and follow its trends.

You should be applying this outlook to all of your assets. Ever think of your staff as an asset? Ever heard of human capital? Investment in the financial skills training and awareness of your employees directly leads to better practice performance and financial gain through:

Increased Revenue
Increased Productivity
Reduced Operational Errors
Increased Opportunity
Increased Job Satisfaction, Motivation and Staff Retention

Learn how to improve practice performance, increase financial gain and measure the value of your investment into your practice through Advanced Business Management for Dentists' (ABMD's) outlook and perspective available through its flagship online CE course, "Run Your Practice Like A Business, Think Like A CEO", available at www.ABMDDS.com.

ABMD's solutions include a web-based continuing education course, instructor led training and implementation, blended learning through live interactive workshops/Study Club, "Dentist-to-Dentist" Coaching and a knowledge-on-demand website dedicated to support this learning. ABMD is an AGD-PACE Provider of CE.

Are You Ready For Take Off?

What is “Dentist-to-Dentist” coaching?

Like an athletic coach working with an athlete to improve performance, a dentist coach works with you, the dentist client, to improve your performance.

Unlike the athlete’s coach, the dentist coach works YOUR agenda, and begins where YOU want to begin. Coaching is about you as a whole person: your values, your goals, your practice, your balance, fulfillment and life purpose. Coaching does not give you the answers, rather it helps you figure them out for yourself and facilitates you getting what you want. Nor does a coach expect you to see things from the coach’s point of view. It is your point of view that the coach tries to help uncover. If your are seeking clarity and empowerment, then a coach will assist you to find your power.

Think of coaching as a private conversation you are having with yourself, (only it’s the coach), that is designed to help you get what you want. It does this by coaching your whole person and not just the “dentist/clinician.” In this process you learn to advance your goals towards the fulfillment of your life’s purpose. One of my prime objectives of coaching is to help you discover the skills and the confidence to create the practice of your dreams, quite literally, and to empower you with some coaching tools and techniques that you can bring to your practice with the self-assurance of a leader and a visionary.

Of course, you and your coach have to build trust and rapport to help you bring forth what you want out of life. This is done by your coach asking powerful, creative, “out of the box” questions, by being non-judgmental, by being intuitive and curious and by helping you resist the temptation of your own “saboteur” that tends to oppose change and succumb to the status quo.

If you are curious and want to learn more about the coaching experience, I offer a complimentary 30-minute telephone sample coaching call. You can reach me, Coach Dan Kingsbury, DDS, at 888-881-2263 or dan@abmdds.com.

What Are Some Of The Problems Associated With A Practice Sale?

There are all kinds of problems or issues that go hand in hand with the sale of a Practice; usually all of them can be solved.

Consider the following:

Taking "positions" in the negotiation of a practice sale could be detrimental to the outcome. Try focusing on mutual interests. The buyer and seller have a mutual interest in that they are both investors, when all is said and done.

Make sure you agree on some fair standards of negotiation, ahead of time. Try to separate the "people" from the "problem", i.e. try not to let personalities get in the way. Focus on the common interests of buyer and seller and use objective criteria during the negotiation process.

Of course, this is the ideal scenario and not easy when it comes to the selling of a practice that you’ve put your heart and soul into and it is equally difficult for the buyer who is about to invest a substantial amount of money into a practice. For this reason, the use of a practice broker is key towards a successful sales agreement. The practice broker frequently demonstrates a "hand-holding" approach. However, it is important to note that the practice broker’s job is to get the very best price for the party he of she represents and to negotiate a successful sales agreement.

Staff Issues

Some of the problems to consider in regards to staff that may arise after the sale of a practice are: What if a staff person is let go following a practice sale? Who is legally responsible for compensation? What if key staff leave? What if the key staff are members of the seller’s family?

Group Practice Issues

Group Practices can potentially pose some specific problems. For example, what can you do to prevent the slippage of patients you purchased as part of the goodwill of the practice, to the other partners? The answer is to have a separate telephone number for each "partner" in the group in order to maintain separate identities. This should preserve the goodwill value of everyone involved in the group. Another thing the buyer has to be aware of is any rights of 1st refusal in a business agreement between the "partners". The potential buyer is an a vulnerable position after having possibly invested money into investigative and due diligence fees, and then finding out that the purchase opportunity could be sold out from underneath him or her to a partner in the practice.

What happens when the seller stays on as an associate?

Other issues to consider revolve around "authority", i.e. who’s in control of the practice if the seller stays on as an associate? Where will the old staff’s loyalties be? What about the transfer of patients to the buyer when the seller stays on in the practice? Part of the answer to these issues could be best addressed if the seller takes a 3-6 month holiday, switches office hours and agrees to reduce services.

Restrictive Covenants

Another concern can be if Dr. A, the seller, has a restrictive covenant with Dr. B, the associate, that says that Dr. B. cannot leave the practice and compete with Dr. A. during a specified time period and within a certain distance to the practice. If Dr. A. sells the practice to an outside purchaser, will the restrictive covenant with Dr. B be transferable to the new purchaser? This should be food for thought.

Seller’s Aged Receivables

How is the collection of the seller’s accounts receivables handled? The seller can deal with this problem alone OR the buyer could purchase the A/R’s for a discount considering the buyer’s time and trouble to collect the seller’s A/R’s and the fact that as the A/R’s age, they are less likely to be collected.

Re-Treatment of Seller’s Work

Sometimes, after the sale of a practice, the buyer has to re-treat "work" that the seller has done. When this happens, the seller should be responsible for all of the expenses needed to repair failed workmanship. To protect the buyer, an agreement should be signed to this effect between the seller and the buyer.

How Does A Buyer Select A Practice From An Investment Perspective?

The typical procedure for selecting a practice begins with an analysis of the entire business as a business. What kind of return on your investment would you be looking for?

Typically, the sources of information for this analysis include company reports, computer databases, and financial statements. This information is used to focus on the fundamental characteristics of the practice. Items including, but not limited to, earnings, book value, cash flow, and capital structure (i.e. how much is owned vs. how much is owed), are all analyzed to develop an estimate of the practice’s intrinsic value.

Once a practice is given an estimated value, this value is then compared to the market or asking price of the practice. If the current market price is substantially lower than the estimated value of the practice (from an investment perspective), then one could say that this practice could offer an above-average chance for profits and is likely a "good deal". If the asking price is considerably higher than the estimated value of the practice, then the buyer would have to seriously consider whether this is a wise investment.

Why Would A Seller Use An Investment Perspective To Value His Or Her Practice For An Eventual Sale?

In reality, both the seller and the buyer are investors. The seller is hoping to realize a good return on his or her investment into the practice and will likely invest the proceeds of the sale into some other investment vehicle. The purchaser is counting on the practice allowing for a good salary and a healthy return on the investment, as well.

Therefore, analyzing a practice from an investment perspective should align the interests of both parties, the seller and the buyer, towards a common value.The process to establish this value involves a combination of different valuation techniques to establish a range of values. From this range of values the seller selects a market price that can be justified to the buyer.

The key point to reinforce is that what both the seller and the buyer have in common is that they are investors. The "numbers" have to make sense to both of them and once that has been achieved, a sale price can be established that is satisfactory to both parties.

Health Savings Account Can Save Your Dentistry Practice “Real” Money

Rising health care costs including dentistry are taking a toll on Americans. According to a recent report by a consulting company, Mercer Human Resources Consulting, health care premiums paid by employers rose 6.1% in 2006. If you provide health care to your employees, these premiums are eating away at your profitability.

While managing health care costs is becoming a priority for our law makers, the debate for national health care continues. But there is a government program already in place that can help you and your employees reduce health care costs. This is the Health Savings Act (HSA) which was enacted by President Bush in 2003.

Employers Benefit from Reducing Costs
What if someone walked up to you and said your dentistry practice can save money with respect to health insurance while still maintaining the same level of care for your employees? This sounds almost too good to be true, but if you incorporate HSA into your health insurance coverage, you can make this happen.

The HSA program is meant primarily to benefit individuals, but employers can use it to reduce their insurance costs as well. Here is a brief summary of how the program works. Individuals can reduce their insurance premiums by enrolling in a qualified high-deductible plan and simultaneously opening an HSA through a financial institution. The HSA would be funded (up to the amount of the insurance deductible or the maximum ceiling amount) ahead of time, either by the employee or employer. Most medical expenses (including the insurance premium) can be paid from this account. The beauty of the HSA is that all money contributed to the account by the employee is considered pre-tax (like a 401(k) or IRA) and therefore reduce the employee’s taxes.

For employers, the HSA can be used to cut your health care costs dramatically. First off, you can lower employee premiums by enrolling in a health insurance plan with a higher deductible. Then help your employees sign up for a HSA and fund it at the start of the enrollment period. While your premium cost has dropped, the good news is that you are not taking anything away from your employees. Your employees get the same level of health care service. To the extent the employer contributes to the HSA, the employee does not realize the funded amount as income.

For 2006, the highest deductible for your employees under the HSA program is $2,700 for a single person or $5,450 for a married couple. In 2007, the highest deductible for a single person is $2,850 and for a married couple, $5,650.

As the employer, the cost for paying the employee health care plans and also funding their HSA accounts are fully expensed each tax year. On an after-tax basis, the total cost of the health insurance plan with the higher deductible plus your funding of the HSA for your employees will be less than what you are currently paying. By using HSA, your gross payroll will be smaller which has the additional effect of reducing your contribution for your worker’s social security payment. At the same time, your employees can continue to enjoy the same level of health care service.

Your Employees Benefit Too with HSA
In addition to dropping the cost of health care, your employees will get some additional benefits. For example, in situations where the health insurance will not pay for a particular procedure, this amount can be paid from the HSA which you have already funded. Additionally they can use the HSA to pay for dental care, eye care, and even non-traditional medicines.

Also, the HSA account would be owned by the employee with the added benefit that the unused amount can roll forward into the next year and taken with them if and when they change jobs. In the case where an employee has excellent health, the funds in the HSA can be invested in mutual funds or money markets – similar to an IRA.

Summary
In lieu of a grand plan to reform health care, the government has created a program - the Health Savings Act - that can help employers reduce the cost of their employees’ health insurance. By allowing an employer to sign up for a plan with a higher deductible, the insurance premium will drop. At the same time, employers will sign up and fund their employees’ HSA account. Both of these costs can be expensed. Thus, nobody loses anything and the health care costs for the employer decreases. It’s a win-win for all!

Posted by Henry Wong (hwong@pariveda.com)

Walking Through the Economics of HSAs – Big Savings

From our cursory overview of Health Savings Accounts signed into law by President Bush in late 2003 as part of the Medicare bill they seem to have outstanding potential to help families and individuals both lower current health care costs and sock away tax-free funds for future qualified medical expenses. Let’s dig a little deeper and quantify the economic benefits to participants by walking through a real-life comparison.

As noted in our first post on this topic, the Health Savings Account (HSA) program works in conjunction with high-deductible insurance plans. Instead of purchasing traditional, low-deductible insurance participants purchase qualified high-deductible insurance (at least $1,100 deductible for individuals, $2,200 for families in 2007) while setting up a tax-deferred Health Savings Account with a financial intermediary. The high-deductible insurance offers the Health Savings Plan participant savings in the form of lower annual premiums while the Health Savings Account affords a tax-advantaged means of saving for medical expenses.

HSAs can be funded up to the lesser of the insurance plan deductible or a government imposed maximum - $2,700 in 2006 and $2,850 in 2007 for individuals, $5,450 in 2006 and $5,650 in 2007 for families. As medical expenses are incurred, the participant may elect to pay for them using HSA funds. Any HSA contributions made by the participant, whether used during the year or left to accumulate, can be deducted from gross income come tax time.

High deductible insurance has historically been viewed with the stigma of lower quality coverage perhaps owing to the demographic it was originally intended to serve – those otherwise un-insurable. Yet with the advent of HSAs, the plans have been re-worked to appeal to a broader audience, with coverage typically similar to traditional health insurance offerings. Check out your insurance provider’s offerings and we think you’ll see what we mean.

Nonetheless, in order to conduct a relevant economic comparison between traditional and HSA insurance options, it’s crucial to ensure that each plan’s benefits are identical, or at least very similar. For our analysis we chose offerings from Blue Shield of California, specifically the “Shield Spectrum PPO Plan 1500” (traditional insurance) and the “Shield Spectrum PPO Savings Plan 2400” (HSA qualified). Our selection of Blue Shield of California as an insurance provider and the specific plans chosen are not recommendations, but instead meant to merely serve as an example of how we go about evaluating comparable offerings. There are certainly a vast number of health insurance providers available to you and product offerings that may, or may not, be more suitable.

In order to keep our analysis succinct we consider only coverage for a 40-year old individual in this post. It’s likely, though not confirmed, that evaluating family coverage as well as individuals of different ages will result in similar economic conclusions. If there’s interest, perhaps we’ll formally cover additional comparisons in the future. Let us know your thoughts.

Comparing Coverage
A quick overview of the comparability of the plans: The traditional insurance offers individual purchasers a $1,500 annual deductible and $40 fixed co-payments while the HSA-qualified offering has a $2,400 annual deductible with $35 fixed co-pays. Upon reaching the deductible, subscribers to the traditional plan make 30% co-payments with preferred providers (50% for non-preferred) until their out-of-pocket expenses reach $6,000 per year. Interestingly, individual subscribers to the HSA-qualified offering make identical 30% preferred provider co-payments only until reaching $3,200 of out-of-pocket expenses in a given year.

Readers can find a thorough comparison of the two plans here, but all-in-all we view the plan coverage is very similar.

Comparing Apples with Apples
In comparing the potential benefits of pairing a qualified high-deductible insurance policy with a Health Savings Account relative to traditional health insurance it’s necessary to look at each option on an after-tax and “apples to apples” basis.

In this analysis, there are two different tax effects that need to be considered. First, any HSA contributions provide the participant valuable tax benefits in the year they’re made, but leave funds tied up in an account that can only be accessed for health-related expenses. Alternatively, individuals subscribing to traditional insurance coverage receive no tax break for HSA deposits, yet the money they use to pay for their health expenses is not constrained – it could be used for healthcare, clothing, or even entertainment (perhaps a big-screen TV?).

Clearly the different constraints on the cash used to pay for medical expenses under the two strategies make this an “apples to oranges” comparison. Yet there is a way in which to make them directly comparable – simply assume any remaining funds in the HSA account at year-end are liquidated, paying all taxes and penalties needed to do so. Then, in each case, the individual would maintain comparable insurance throughout the year, and begin and end with un-encumbered cash.

From a practical perspective, the process of liquidating an HSA account at the end of the year is a “worse case” scenario that makes little sense, and we advise against doing so. Yet from a theoretical perspective it does serve the purpose of providing a better economic comparison between the two strategies and allows us to confidently state that “HSA accounts provides at least this much value relative to their traditional counter-parts”.

The second set of tax implications that need to be considered is the affect of itemized deductions on schedule A of the individual’s annual tax returns. If you recall, medical expenses (including insurance premiums, deductibles, co-payments, etc.) in excess of 7.5% of the tax filer’s Adjusted Gross Income are typically eligible for deduction. So, while out-of-pocket costs for the traditional insurance buyer may be higher, the possibility of an economic benefit afforded through itemized deductions is also higher.

However those choosing the HSA strategy are further disadvantaged relative to traditional insurance buyers when it comes to itemized deductions. According to the Internal Revenue Service you cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your HSA. In fact, you cannot include any contribution to the HSA or any distribution from the HSA, including distributions taken for non-medical expenses, in the calculation for claiming the itemized deduction for medical expenses.

So, while those with HSAs gain tax benefits from contributions made to the account, these benefits are partially offset through lower deductions for itemized medical expenses on Schedule A. We take both aspects into account in our analysis.

Onto the Analysis
We ran through a range of scenarios for our hypothetical health insurance buyer changing Adjusted Gross Income from $40,000 to $220,000 and the level of medical services purchased from $0 to $15,000 in a given year. The goal is to see whether any clear trends develop with regards to the relative merits of traditional versus HSA plans using out-of-pocket and after-tax, after HSA liquidation costs for comparison.

We present the case of an individual with $40,000 Adjusted Gross Income and Medical Services of $500 in the case below.

Under this scenario the out-of-pocket expenses during the year were similar yet the after-tax, after-HSA liquidation cost of healthcare were markedly lower under the Health Savings plan – primarily due to the lower insurance premiums required.

Putting our results in tabular form, here’s what we find.

Regardless of Adjusted Gross Income and medical services required, the HSA account proved to be the better option economically on an after tax, after liquidation basis. That said, for low service levels the HSA will require the participant to pony up more cash during the year.

Further Thoughts
Want to have your cake, and eat it too? Consider the following ideas offered by the HSA for America (quite a good resource) on their blog:

Put no money in the account, except when you incur a medical expense. This strategy allows you to legally "launder" any money used to pay medical expenses. In other words, by depositing money into your HSA, then immediately withdrawing it to reimburse yourself for medical expenses, you are making your medical expenses all tax-deductible. You may want to use this strategy if you are on a tight budget and want to keep your cash outlay as low as possible.

Fully fund the account, or at least put in as much as possible based on your budget. Take money out of the account any time medical expenses are incurred, and let the rest grow tax-deferred. This strategy will maximize your tax deduction, while making your HSA funds available to pay any non-covered medical expenses before your deductible is met.

Fully fund the account, but pay all medical expenses from a non-HSA account. Reimburse yourself for medical expenses at a later date. This strategy will allow you to maximize your tax deduction, and will also allow you to maximize the tax-deferred growth of your HSA. You can then reimburse yourself, tax-free, at any time in the future for medical expenses incurred over the ensuing years.

Furthermore, the idea of maximizing contributions to your Health Savings Account annually and waiting until the end of each year to determine the source to use in paying for your medical expenses based on your taxable situation may be of even more value. If you decide to pay out of the HSA account, simply write yourself a re-imbursement check. However in cases where you have excess cash on hand and qualify for tax deductions for amounts spent above 7.5% of your AGI it may be advantageous to pay for your medical expenses outside your HSA account.

Health Savings Accounts – A Survey of Options

In prior posts, we provided an overview of Health Savings Act signed into law by President Bush in 2004, laying out the details and mechanics of the plans relative to regular health insurance options and providing an economic comparison between the two. Our conclusion was that High Deductible Health Plans combined with Health Savings Accounts provide individuals and families a terrific way to both lower ongoing medical insurance costs and accumulate tax-free savings for future medical service needs.

In this post we take our analysis a step further, surveying the landscape of the budding Health Savings Plan account options available through a number of financial institutions. With over 1,100 banks, credit unions and brokerages offering plans, our survey isn’t exhaustive but our finding do point out the varying range of services and fees charged by HSA providers at large. We believe this can be of further economic benefit to those wishing to avail themselves of what we think will be a well-adopted and rapidly expanding health-care alternative.

The survey table can be found here.

Who are these guys anyways?

The first thing that struck us in looking at the various HSA account offerings is the plethora of startup firms dedicated solely to servicing this small, but growing, opportunity. Firms such as HSA Bank, 1^st HSA, Exante Bank, and Health Savings Administrators are all big online marketers with products that offer both savings and investment alternatives. The upside – convenience, as it’s easy to either enroll over the web or download an application. The downside – it’s impossible to know if any or all will be around in five years and, as first movers in the field they’re all looking to exploit the opportunity with fee structures that verge on embarrassing.

Fees, fees & more fees
So let’s talk about fees because the second thing that struck us in looking at HSA offerings is the wide range of fees that are currently being charged. In all, the prospective investor could be faced with possible setup fees, monthly maintenance fees, closing fees, check fees, and/or debit card fees – and that’s just for savings accounts. Add in investment management options, which can range from a select group of mutual funds to the more open platform of a linked discount brokerage account, and one may also incur mutual fund maintenance fees, as well as account minimum balance and transaction fees.

HSA-only opportunists all charge account setup fees and monthly service fees along with a variety of incidental fees.

Yet the good news is that fees are generally coming down as bigger financial institutions enter the game. Products from heavyweights BankAmerica and Wells Fargo, though limited in their investment options, charge only monthly service fees, albeit somewhat high at $3.75 to $5.

Starting Out – Go for Low Cost
Let’s face it, at their core Health Savings Accounts are meant to be backstops for our medical spending needs. As such, the first few years of having an HSA account should be dedicated to funding the account, not investing the balances. In this case you’re probably best off with a low-cost option, and among the lowest cost are those offered through local community credit unions. (We surveyed offerings from Patelco and Stanford Federal Credit Union in the San Francisco Bay area, but offerings in your area are probably comparable.) You’ll have to become a member and may have to open a traditional savings account to gain access to a chosen credit union’s HSA products, but the generous interest rates earned on the account coupled with the monthly maintenance fee savings likely more than justify the trouble.

For those wishing to forego the hassle of opening up a new banking relationship, look to your current financial institution’s offerings. Calculate the “all-in” annual cost of the offering and see how it stacks up for you. Keep in mind that for major bank’s products surveyed by us, you’ll need over $2,000 in BankAmerica’s HSA product and $900 in Wells Fargo’s before you actually earn any money, taking current interest rates paid and monthly maintenance fees into account.

Building the Nest Egg – When and How to Invest
In our opinion, one should have at least two years of possible out-of-pocket medical costs squirreled away in an HSA account before contemplating investing the balance. For individuals that likely amounts to balances of between $6,000 and $10,000 and for families its likely double. Again, your first priority is to ensure the money is there, if and when you need it.

Even with two years saved, we’d advise HSA participants invest only using lower-risk strategies, plenty of diversification stock sectors and a healthy portion (at least 40%) of income producing investments such as bonds and preferred stocks.