Wednesday, February 24, 2010

Deferred Interest on Dental Balance Sheet - What is It?

I'm trying to understand some Balance sheets and was wondering if someone could explain why the deferred interest on a lease I have is listed on my assets. Since deferred interest increases the amount I owe on the loan wouldn't it add to the liabilities side of my balance sheet?

Hopefully you understand debits and credits. If you're incurring interest expense and NOT paying it, yes, it increases the loan balance. That's the credit side of the entry. Since you haven't paid it and since you're a cash basis tax payer and can't deduct it, the debit would fall to the balance sheet. Seems weird, right?

Think of it like this: you owe the bank $10k in interest; however, they say "Keep it for now, you'll owe it to us.” So they increase what you owe by $10k. It’s almost like they "gave" you another $10k, but you didn't receive it in cash. So if you want to show what you really owe the bank you have to increase the loan by $10k, which increases the liability; however, for your "balance" sheet to balance, you have to increase assets by $10k. Since you didn't receive it in cash, you have to add another asset called deferred interest.

Don't make me explain that again.....

Thanks Tim, that actually did help a lot. And explaining accounting principles to me is no easy feat!

This first appeared on Dentaltown.

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Friday, February 19, 2010

Dental Office Build-out Loan Term Questions

I received the following terms from a bank re: financing for build-out of a new dental office.

The proposed interest rates and the payments are as follows:

Term, Amortization Interest Rate Payment

5 years, 5 years 6.3% $9,736

7 years, 7 years 6.8% $7,498

5 years, 15 years 6.3% $4,301

7 years, 15 years 6.8% $4,410

I'm leaning towards taking the lowest interest rate and paying off the loan as soon as possible (option 1).

What would you recommend?

I recommend 7 yrs w/15 yr amortization.

If you can afford to pay it off in 5 years, the .5% diff in rate will barely be noticeable; however, if you run into cash flow problems that $4,410 payment will look SOOOOOO sweet compared to $9,736.

Do yourself a favor and give yourself the flexibility!

By the way, on $500k the .5% rate diff over 5 yrs is $9,731, or $1,946/year, or $162/month....after taxes would be $6,000/year, 1,200/year or about $100/month.

Are you saying 7yrs w/15yr amortization to it locked in for longer?

Yes, I know it's the conservative approach, however, having seen two fairly new start-ups go belly up in the past year around here I'd want the option of the lowest monthly payment possible IF I need it to avoid bankruptcy. If the .5% diff in rate really bugged me I'd pay it off in 4 instead of 5.....if I could!

I am leaning towards the 5yr w/15yr amortization BUT only if there were no penalties for paying off early.

Is that based upon at least SOME hindsight with respect to how successful you've been with your practice?

My payments would be lower each month with the 5 yr/15yr amortization, so it would help me out over the next 5 years if I couldn't afford higher payments.

I get that, though you're locked into the balloon payment in year 5 and as you said, if you can't pay it off in 5, you will likely pay a higher rate ASSUMING your're successful enough to refinance. THAT could be an even bigger challenge if things don't go as planned.

The only downfall to this approach is if interest rates increase in 5 years when I'm up for renewal (if I don't end up paying it off over 5 years).

I'd try my best to pay if off in 5, even if I had to sacrifice a little each month. From the numbers I'd posted, I'd save over $200k in interest by paying it off in 5 vs 15.

Except that paying it off in 15 years isn't one of the options you posted. If you could get a 10 or 15 year loan that may be an even better option depending on the interest rate.

That is why I'd go for a 5 year term (the cheapest interest), but have it amortized over 15 years so I have the option of drawing it out if finances aren't working out well.

You won't have the option (it's the bank's option if they're feeling generous) of drawing it out if times are tough. In fact, if times are tough the lender will probably not want to refinance it and demand payment in 5. That could be disastrous. When they say "amortized over 15 years" they mean you get the monthly payment of a 15 yr loan; however, it's a 5 yr loan so you have a LARGE balloon payment due at the end of 5 yrs.

BUT I'd insist on being able to pay it off in 5 with no penalties.

There's no need to insist, with a 5/15 amortization loan he MUST pay it off in 5 years.

I totally misunderstood the 5 yr / 15 yr amortization thing. I thought it was just a regular 15 year loan, but the rate was only locked in for 5 years. Thus at the end of 5 years you would simply lock it in again at the going rate. Thus it would be advantageous to lock it in for a longer period (7 years) at a slightly higher interest rate, if you planned on dragging it out over 15 years AND rates were going to be increasing.

I thought so based upon your reply.

Heck, you may be right. Though when it says "term"-5yrs, "amortization"-15 yrs, I think it's a 5 yr note using monthly p&i payments as though it's a 15 yr note so a LARGE balloon payment due at the end of 5 years.

This first appeared on Dentaltown.

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Friday, February 12, 2010

How Much Should a Dentist Spend and Save?

I was wondering how much one actually spends each year. It has nothing to do with what you make really.

I'm going to start a defined benefit plan to dump some money so Obama can't tax it and you have to commit to some serious change for contributions. Unlike profit sharing, you have to make the contributions.

I looked at the budget categories in the computer Quicken....and it totals what was spent in the year. I backed out fed and state income tax and it appears I spend about 100K. 

Do you have an idea what someone actually needs for spending? If you have any mortgages or payments, separate that for this exercise......

A novel approach to saving was the thought that taxes probably are going up (this lecture was a few years ago) and that it might be a good idea to not have a 401K or other retirement plan, but to go ahead and pay the taxes now because he predicted that taxes would be rising.

I hear this theory quite a lot. It’s really a matter of opinion. What we know is this: we have a progressive tax system. Meaning, the more you make the more tax you pay. Our current tax brackets are 0, 10, 15, 25, 28, 33, and 35.

Therefore, the income that we can defer now will likely be deferred at the highest tax brackets (28,33,35).

I too believe taxes will go up; however, again, it's the usually the highest brackets that get bumped. The lower brackets MAY get adjusted slightly.

When one retires they usually have several pots of money to draw from:

1. Social security (if it's still around)

2. Taxable funds (your retirement plans)

3. Non-taxable funds (your accumulated after-tax investments, homes, etc.).

Therefore, when you use money from those pots, you're using them in the lower brackets first and in my experience with my retired clients, we've had great success in managing the distribution of those funds from the second and third pots to "maximize" the lower brackets (to avoid reaching into the middle or higher brackets).

So in my opinion, even with rising tax rates, most doctors will still be deferring when they are in the higher brackets (33,33 so to be 35, 40, maybe higher) and have the ability to tax at the lower brackets (0, 10, 15, 25). The theory of deferring still makes sense.

By the way, this doesn't even consider the impact of payroll taxes, meaning, monies contributed to a PS or DB plan AVOID the payroll tax hit. Even if it's just Medicare AND when used in retirement years, there's no payroll tax to pay.

Also consider that many folks work and defer in states WITH taxes and will potentially move to states without taxes. For example, I have clients here in MD that deferred income and saved the 8% MD tax rate, move to FL to retire and are avoiding that 8% tax on the deferred money.

This first appeared on Dentaltown.

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Tuesday, February 9, 2010

Retiring Dentist - To Buy or Not to Buy....

Office info:
- Upcoming bedroom community
-Office on 2nd floor(above ground) and corner unit in small plaza, with good signage on the road (We can put another sign in window or on the building as well). About 10k cars traffic per day. Clinic has been at this place for 32 years. No advertisement done. Clinic is behind grocery store. Other anchor stores in area are shopping mall, Staples, Toys R Us, Starbucks, McDonalds, Burger King etc.
- Practice gross $674k(2008), $652k(2007) and $634k(2006)
- Hygiene production $220k(2008), $203k(2007) and $193k(2006)
-Net Cash Flow $264k(2008), $253k(2007) and $233k(2006)
- Market value $556k - as appraised by the listing company
- $372k goodwill
- $40k equipment
-Leasehold improvement $112k
-Furniture - $15k

The price may be reasonable based on the numbers given. You should dump the allocation to LHI. You'd be better off lumping on top of GW or carve a piece out for consulting. Hygienists been very consistent, which may be why growth has been limited. Dentistry has also been consistently low at $450k, when it could be closer to $600k for an $800k practice.

Have you done a demographic analysis of the area?

- Dentist is working 4 days/ week
- Leasing the office, rent would be $21k/ yr
- Office has no pan
- Office has 5 ops and is outdated, including very outdated equipment
- one fulltime hygienist(4days/week), another part-time hygienist(2days/week), one front desk (with dentist for 35 years), two assistant(daughters), and his wife(office manager) works there.

Whole family of retiring dentist is working in clinic. Dentist and his wife (office manager) are willing to stay for transition (3 to 6months) and 2 Daughters (who work as dental assistants) are willing to stay longer. Daughters (DA's) are paid $32/hr which I think is high and I won’t need two dental assistants. But if I fire one dental assistant (daughter) then I think rest of family will also leave and this will poison the transition. Daughters are being paid probably to save money on tax and cutting their salary to normal level or firing them will have a big impact on cash flow as they are being paid $53K/year each, $106K. I don’t like the idea of firing anybody especially in or after transition, but I don’t think daughters will accept less compensation.

This part of the analysis needs CAREFUL attention. As you've already noted family MAY be paid too high and I wonder if wife and FD BOTH are needed. Find out what the going rates are for assistants, etc. and have a heart to heart with the seller to see if he thinks the daughters will concede some of their compensation if it's too high. As you've noted a VERY delicate situation that could absolutely affect value and overall GW transfer.

Patient info:
- 1900 patients seen within past 24 months
- about 8 new patients/ month
- no HMO

There’s likely about 1,000 INDIVIDUAL patients going through the hygienist’s department IF the majority are seen twice per year. You'd need to do more due diligence to verify. Do a zip code analysis to see where the active patients are coming from.

5 years of experience, can do endo, oral surgeries etc., can handle what retiring dentist is doing. I can bring in orthodontist for a day each month or get ortho training myself, and also work 5 days/week to improve gross revenue.

Is the seller currently doing endo and oral surgeries? Are there any procedures you do that the seller does not and vice versa?

Are 8 new patients per month good enough?

I don't think so. You need that demographic analysis.

If not for the family employees I think this practice could have a lot of potential at the right price. The family\employees issue could kill any deal on this practice unless it can be resolved with them.

Thanks for the help. I think deal killers are whole family involved, low new patients, and old equipment. I may be able to advertise and bring new patients in. I could also stipulate in the contract that dentist family stays for 6 months.

Is this information regarding the practice you've detailed? It's not clear since you mentioned another clinic, but I’m assuming it is.

1. Talked to the owner dentist today and found that there is 2.5 years lease remaining, with two more 5 year options. BUT the second option has a 6 month demolition clause. Considering that it is an old building with new construction all around the area, there is good chance that building would be demolished. Then we'll have to find another place and start a clinic in 6 months.

Hmmm, that does seem to present another wrench. Certainly, it would be nice to work a deal where if the demolition clause is triggered after 2.5 years the seller would have to rebate say $150k to help fund the move or have the landlord kick in something. Though, I can't imagine why the landlord would do that.

2. Other factor is clinic is on 2nd floor, above ground floor and there is no elevator. How many old patients would I lose because of that?

What do you mean "lose"? If the clinic is already on the 2nd floor, hasn't the owner already "lost" those older patients he would have had? If those older patients are seeing the seller now without the elevator, why would they stop coming now?

3. There is no Pano

What do you think? The asking price is more than $550,000.

$556k to be exact, correct?

Even with the number’s potential, this just seems like too many potholes to maneuver around....

This first appeared on Dentaltown.

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Tuesday, February 2, 2010

Abandoned Dental Practice Issue

I was approached by a distant relative to buy his practice. He owns two practices one that has been established for a long time and is doing great and the other not so much, and that is the one that I am getting.

So here is the story:

He bought the practice in 2004 with his associate 75/25, the partnership did not work out so they sold it in 2006. The new dentist took over and then he abandoned the practice in 2009. The landlord then approached my relative for 3 months of lease delinquency which he paid including penalties. He then changed the practice name and created a new business entity for the practice, remodeled the practice and wants to get rid of it.

It sounds like your relative is still on a lease and therefore, has fixed the place up in an effort to get off the lease by "selling" something. Not quite sure what it is he actually "owns" to sell as the previous dentist who walked away "owned" the F&E. I suspect the landlord now owns it, unless part of the deal your relative worked out was to acquire the F&E in exchange for stepping back in. I'm also assuming your relative has already "profited" from the 2006 sale, correct?

How many more years left on the lease and what's the monthly payment?

He is selling it to me as leasehold improvements but all the patients will stay, he is not taking any.

How many patients were there before the prior owner walked? How many are there now? You don't have to answer that, in my opinion it really doesn't matter. What you're buying is the opportunity to start from scratch without the 120 day wait to build-out and furnish. Any patients that comeback are simply icing on the cake. How are the demographics for the area? Maybe that's why this practice hasn't been successful, maybe bad location, bad (read no growth) area? This gets to Jason’s point about your due diligence effort being MUCH more intense than other deals.

He also cannot sell the patients because he cannot provide previous tax returns to show for practice profitability.

...and because he really doesn't "own" them, does he?

Here is my question:

What should I be worried about?

I’d be concerned about the demographics of the area. Why hasn't this location been successful? What if the owner that walked shows up again?

Is it possible to transfer ownership of practice with an absentee owner?

If the "owner" isn't around, how can they transfer it to you? You're (or any buyer is) simply picking up the pieces. That's why I'd be looking at this as a scratch start type issue and I'd be approaching it that way.

Can the old owner come back in 5 years or so and say this is my practice and I am screwed at that point?

I doubt it. Besides, I'd be less concerned about 5 yrs. What if the previous owner comes back to town in one year? They don’t have to "re-claim" this location. All they have to do is advertise that they're back in town, as any new dentist could. I'd be thinking about how that might impact my start-up. It gets back to the demographics of the area and the location of this particular practice.

Please help if anyone was in a similar situation?

Our friend Jason Patrick Wood:

The bad news is that to properly protect yourself, you are going to have to spend a lot more than normal on due diligence. The reason: you are going to need to review all of the past documents between your relative and the associate you need to inquire into liens since there is a very, very good chance that these liens will not be satisfied by the purchase price if they are there.

This needs to be treated as a dental practice purchase, regardless of what he is intending on selling to you.

Tim Lott asks:


While I agree that the due diligence needs to be approached as though they're buying a practice, are all the other patient issues you mentioned really relevant if all they're doing is agreeing to occupy the space, signing a lease, and buying out the relative of their lease obligation?

Jason Patrick Wood responds:

Protecting yourself from the "old owner" is going to be the hardest and most time consuming part, and without knowing more of that previous relationship it may be easy or extremely difficult to get past. Let us know more if you can.

Tim Lott replies:

Yes. The previous owner is a complete unknown at the moment and can really mess everything up, especially if they re-enter the picture sooner rather than later.

This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at

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