18 October 2021
Graham Middleton Newsletter—18 October 2021
Coming Soon
My own website with loads of relevant information for dentists is being put together and will include lots of information on business and financial matters relevant to dentists. All I ask is that dentists who get good information from it consider including the Delany Foundation in their charity list. It does good work and is run by volunteers so administrative costs are negligible.
Why the Delany Foundation?
As a kid growing up in a relatively remote location off the electricity grid, I was fortunate to win a bursary to Holy Cross College in Sydney run by the Patrician Brothers, a selfless group of men bound by a vow of poverty. They were inspirational in the amount of work each contributed from teaching, coaching football teams, supervising the boarders, being officers of school cadets and a myriad of other tasks. A small group each carried the workload of several people. These days the Patricians are long retired from teaching and their former schools receive government funding which was non-existent at the time I was at school. There are many more teachers and the facilities are much improved. The Patrician Brothers started the Delany Foundation which provides support to schools in Ghana, Kenya and Papua New Guinea.
Several recent articles printed in Australasian Dental Practice are being distributed via my email list over the next couple of weeks. They contain important information which accountants are generally unable to provide to dental clients. These are also circulated to Dental Innovations members. Please do pass them on to a dental friend.
Contracting Dentists Rather Than Employing Them May Assist In Making Sale Of Practice Capital Gains Tax Free
Consider a practice with over-the-counter fees of $2.2 million. The ATO has imposed a turnover limit of $2 million on sale of business capital gains tax concessions. If say $800,000 of fees are produced by the owner and the other $1.4 million are produced by contractors who treat patients who are billed by them and they pay a facilities fee to the practice of say, 60 percent of billings the practice income is the owner’s $800,000 plus 60 percent of $1.4 million. This would amount to $1,680,000 of practice income. The application of the small business capital gains tax concessions is complex, and this is an area where special accounting advice is essential. Don’t be afraid to ask your accountant to refer you to a specialist in that area.
Essential Advice to Dentist Purchasing Practices
The September / October issue of Australasian Dental Magazine will contain an article offering vital advice to dentists purchasing practices. After publication it will be circulated to my dental email list.
Re-raising of the 10th Light Horse Regiment: Remembering a Famous Dentist
Under the temporary command of a dentist, Lieutenant Colonel Arthur Olden the 10th Light Horse Regiment, a West Australian unit, captured Damascus in 1918. The Australian Army has re-raised it as an Army Reserve Regiment. For more on this read the tribute to Lieutenant Colonel Olden in Financial Success for Dentists.
Benchmarking Your Dental Practice Performance: Avoid Becoming a Dental Island!
Follow the guide in Financial Success for Dentists to calculate your practice DEBDIT. If your practice has a DEBDIT of 56 to 57 percent with you being the main fee generator you are in sound territory. If your DEBDIT is significantly above this range take a bow but if it is markedly below it indicates that corrective action is required.
Preparing Your Practice for Sale
The old farm saying that you cannot fatten the pig the day you take it to market applies. Worse still is letting the appearance of your practice deteriorate because you don’t want to spend money when approaching a retirement date. To maximise practice value:
1. Don’t leave it too late. Multi-chair single-owner practices in which the principal’s surgery is solidly booked at least 4 full days per week are usually at their peak value. Sell before reducing to a three-day week. Observations over many years indicated that a practice principal stepping back to a 3 day per clinical week usually leads to a rapid deterioration in practice fees and a deterioration in staff performance.
2. View your practice as patients see it. It is critical to maintain the appearance. Deteriorating appearance has a negative impact on referrals, reduces staff pride and leads to an ageing and diminishing patient base. This is rather like the accountancy practice which stops marketing and watches its clients sell their businesses and retire one by one.
For further steps read Financial Success for Dentist.
Financial Success for Dentists
Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:
· Understand key practice valuation criteria.
· Learn how some dentists inadvertently reduce the value of their practice by $500,000
· Avoid long term errors when purchasing your practice.
There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.
I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.
To Obtain a Copy:
Go to the Delany Foundation website at http://www.delanyfoundation.org.au
Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.
Email financialsuccessfordentists@gmail.com confirming that your donation has been made, as well as your name and mail address
A copy of the book will be mailed directly to you
All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.
The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.
A complete and comprehensive career guide for mature and aspiring dentists.
Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.
—Merv Saultry, Founder Dental Innovations Network
The Impact of China’s Evergrande Property Problems
A major catalyst for the Global Financial Crisis of 2008 was unrestrained lending supporting a housing bubble in the USA. Loans which in many cases were made to borrowers with no or little income or assets fueled a building boom. Financial engineers assisted by negligent ratings agencies packaged up good and bad loans into ‘debt securities’ and on sold them to institutional investors as highly rated securities. Eventually the market woke up and shorted their market whereupon the structures and their investment bank creators collapsed.
What has become evident is that Evergrande and almost certainly other large Chinese builders have gotten themselves into deep financial difficulties. A vast number of buyers have purchased off the plan, paying for units which have yet to be built but the builders were relying on these new sales to finance the completion of earlier units and so on. Heavy borrowings from multiple sources have also occurred. Huge numbers of buyers had been induced by the hope of real estate investment profits to pay in advance into what developed into a massive Ponzi like scheme. Now that Evergrande (and almost certainly other huge building companies) has defaulted on debt repayments with huge buildings unfinished and the value of completed apartments plummeting, the inevitable market-wide panic has set in. It remains uncertain what action the Chinese Government will take and whichever course it adopts has significant problems. Investment in the housing sector and building construction is reported as representing 15 percent of China’s economy.
It is evident that this Chinese bubble like other historical bubbles will have massive consequences. Some bubbles have been:
· The Dutch Tulipmania bubble of 1637 which caused massive financial losses.
· The British South Seas Bubble which destroyed the wealth of many British aristocrats in 1711.
· The bursting of the 1929 Wall Street Stock Market bubble which led to the Great Depression.
· The Global stock market bubble fueled by heavily geared entrepreneurs which burst in 1987 leading to the collapse of many corporate empires.
History demonstrates that neither banking systems nor government actions can restore market conditions to that applying before a bubble bursts. Neither capitalist, socialist or communist systems can stand in the way of the consequences when bubbles burst.
Soviet rulers bragged that they would bury the capitalist West, yet their system failed as evidenced by the stark difference between communist East Germany and capitalist West Germany leading to the collapse of the Berlin Wall.
Regardless as to whether Evergrande and other troubled property development companies in China are propped up by the Chinese Government, forcing bankers to continue to support a myriad of Chinese property buyers will at best salvage substantially devalued property from the wreck—if indeed the apartments that they have paid for are ever completed. Confidence in the Chinese property market, the main investment medium for a vast number of Chinese has been so damaged that it will take many years to recover. Reports of ghost cities with huge amounts of vacant accommodation don’t add to confidence. Chinese local government finances have relied heavily on profits from land sales to developers which will now substantially cease. Global investor George Soros has said that the Chinese birth rate is overstated! Massive property development meeting population growth which has slowed and may have already turned negative is a formula for an inevitable housing collapse.
Some problems are just too huge for governments to rectify. Any government action big enough to rescue Evergrande and other troubled property development companies will have other huge consequences. One wonders whether in highly centralized government systems the subordinates to the person at the centre of power are too afraid to point out major problems until a disaster becomes too great to paper over the truth.
The Japanese Experience Post 1987
The global stock market collapse was particularly damaging to Japan which had many heavily indebted companies which were close to insolvent. The Japanese Ministry of Finance, a body which has existed for over 1,000 years papered over the disaster by forcing the banking system to lend its depositors savings to large companies at negligible interest rates to allow them to remain solvent. The real cost of this was born by depositors who received negligible interest and by individual borrowers who could only borrow at extravagant credit card rates. In this way the wealth of the populace was drained off to gradually repair the finances of industry. Somebody always pays when bubbles burst.
The Australian Experience Post 1987
In Australia, following the October 1987 global stock market correction, entrepreneurs including Alan Bond, Christopher Skase, Abe Goldberg, John Spalvins, John Elliott, Laurie Connell, Robert Holmes a Court and others watched their corporate empires collapse over the succeeding few years. First the stock market collapse wiped out huge amounts of their equity and the coup de grace was administered by rising interest payments exceeding income by huge amounts. Quickest to head for the exit was Robert Holmes a Court who sold his controlling Bell Group stake to Alan Bond and salvaged a portion of the wealth he had at the height of the boom. His reign as a master of the stock market was over. Most of the entrepreneurs had sad aftermaths. Their collapse took several years as their corporate empires collapsed into insolvency, with some entrepreneurs rendered personally bankrupt or fleeing into exile. Their failure was inevitable from the moment that the stock market collapse destroyed their equity and the markets for on-selling assets at inflated values evaporated. Rising interest rates and bankers worried about sustaining their own businesses stopped lending to entrepreneurs leveraging assets and demanded repayments leading to business liquidations. Australia’s adjustment was painful and it took five years for green shoots to begin to emerge in much of our economy.
The Lesson of History
The examples above and many more demonstrate that the bursting of China’s property development bubble will have huge and unavoidable consequences. The only real question is how the losses will be distributed between government, local government, property buyers, existing property owners, banks, bank depositors, individual borrowers, bond holders and equity investors. There is always a huge price to pay when bubbles burst.
General Advice
Advice on investments is general advice and readers must do additional research of their own accessing broker reports and taking professional advice as necessary. All investors must have a deep knowledge of individual company financial performance, business strategy and economic risk. Investment decisions must also relate to individual circumstances including net assets, annual income and years to retirement.
I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.
Best wishes to all
Graham Middleton
