9 October 2022
Book Not Received?
It appears that some readers may have made a donation to the Delany Foundation but, for whatever reason, their emails providing their confirmation of donation and their address for mailing of their copy of “Financial Success for Dentists” has not reached me. If you have donated but not received your copy, please email me and I will send you a copy.
Crazy Market for Veterinary Practices
Some veterinary practices have been purchased by corporates at values which are simply unsustainable and with short work out periods for vendor vets who have been the major fee producers and client drawcards. Inevitably, as the departing vendors retire, the income will fall. Employed staff simply do not have the same incentive to work as hard as an owner operator. Workplace matters which a veterinary owner was quick to jump on go unnoticed, coffee breaks become longer, long-loved clients feel a difference in service and begin to drift away. Valuable long-term clients with pets with a problem—which a practice was previously happy to squeeze in at short notice—find that they get the “we are fully booked” treatment and mention their displeasure to other clients. Corporate managers are often inexperienced—for example, a former dental chairside assistant thrust into a managerial oversight role of a bunch of practices!
This all goes to reinforce my long-term observation that the best place to start a privately owned veterinary practice is close to a recently acquired corporate practice—the closer the better. Providing that the owner(s) of the new start up are prepared to work hard and concentrate on building relationships with clients, the transfer of clients from the corporate practice to the privately conducted practice is inevitable. Ideally a two vet partnership able to provide reliable extended hour service will dramatically outperform corporate practices nearby as they leak clients. Senior corporate management is faced with the huge difficulty of competing with a relationship practice with long-term owners.
Corporates have been paying extraordinary prices for practices on the basis that the profit multiple available on the stock market is much greater than that at which practices have traditionally traded in the private veterinary market. This is changing with a vengeance as the cost of long-term finance has increased substantially and is expected to increase further. The ability to float or refloat a veterinary conglomerate via IPO or alternatively to sell via a trade sale (passing the parcel) has just become vastly more difficult.
Recently a friend of mine sold a practice. During the period it was on the market a couple of successful vets well known to me made a realistic offer but were outbid by a corporate offer of vastly bigger magnitude. I suspect that it will be one of the last corporate acquisitions for a long time to come.
Dental Practice Sales
Corporates have not achieved the market penetration level in Australia experienced in the USA and there have been significant failures or mediocre performers.
The source of value in a practice is in its recurrent patient list. Practices which are overly dependent on a vendor dentist’s income generation may have little appeal to corporates who prefer established three chair practices with a substantial proportion of income generated by employed clinicians.
In respect to solo dentist practices with modest income, often the best avenue is to offer them to other dental practice owners in the catchment area as a basis of boosting another practice’s fee turnover. Often these prove beneficial to a buyer with spare capacity, with transfer of telephone, web site and joining of names assisting the practices’ amalgamation. The vendor needs to work part time for an agreed period to cement the transfer of goodwill.
The recent Covid related surge in working from home has been damaging to many capital city CBD practices. Gradual recovery is likely as the advantages of having staff at the office rather than working from home re-asserts itself.
Silly Advice to Potential Dental Practice Buyers
Recently a dental friend of long standing asked me at what price they should offer the practice to long-term employed dentists. He then offered the practice to them at a price commensurate with that of similarly located practices with similar fee base and attributes. The potential buyers consulted an accountant who claims a close association with the dental profession who advised a price of about half. The employed dentists decided not to buy. The practice was then placed on the market and quickly fetched an offer commensurate with his existing asking price. Accountants who play silly games with valuations in the hope of winning new clients do those prospective clients no good by proclaiming values absurdly below market. Over a period of around 30 years I was involved in the valuation of vast numbers of dental and veterinary practices and took care to observe as many actual sale outcomes as possible.
Residential Rental Units Selling At A Loss
A recent report indicated that existing real estate sales of Melbourne apartments have been at an overall loss. If buy and sell transaction costs are factored in, the losses are substantial. Extra regulation of residential tenancies which increasingly favor tenants over landlords signal that these are unreliable investments. There will be substantial concern by those who committed to buy units off the plan at prices of a year ago and who can now see the market falling by substantial amounts while their interest cost on settlement is rising. Ouch!
Queensland Reverses Additional Tax on Rental Properties
The Queensland government bowed to the refusal of other states to cooperate in providing information on properties owned in other states in calculating land tax. It also faced the reality that such a measure would virtually instantly end new development of buy off the plan developments leading to a worsening of the Queensland housing shortage. This in turn led to screams of anguish from developers and almost certainly from the unions covering Queensland construction workers.
Unpopular Facts about Coal Electricity Generation
The truth about coal generation of electricity is so unpopular that much of our political class and media, particularly the ABC broadcasters, are unwilling to acknowledge the facts. Coal is booming. The Australian Strategic Policy Institute has highlighted two international reports that make this clear.
· Last year global coal-fired electricity generation jumped by a huge 8.5 percent.
· The majority of countries pledged to phasing out coal actually increased their coal fired power generation in 2021. Climate change happy talk bears little relationship with reality. Coal accounted for the majority of the net energy increase in 2021.
· The top 10 countries in order for coal fired power expansion in 2021 were
o China
o India
o Vietnam
o South Africa
o The Philippines
o Uzbekistan
o Pakistan
o Indonesia
o Bulgaria and
o Japan
Eight of the ten nations are located in Asia, the center of global economic growth.
The transition away from fossil fuels was occurring in Europe prior to the impact of the Ukraine war and the US had partially moved from coal to gas.
China and India together accounted for 83 percent of new coal power in 2021, in which year coal accounted for 64 percent of China’s energy and, according to the Wall Street Journal, had 258 separate coal fired power stations by July 2022.
The vast majority of zero emissions energy globally is either nuclear or hydro, with nuclear being far more reliable. Australian geography does not allow for hydro becoming a substantial generator, nor do our periodic huge droughts. The uptake of solar power in Australia is proceeding at a good pace but as yet is a long way from meeting our long-term energy needs.
Recent Purchasers Locked into Higher Interest Rates by Falling Home Values and Locked into Existing Lenders
Prior to the series of Reserve Bank of Australia instigated interest rate increases, various commentators were regularly urging investors to search for other providers of lower interest loans. As interest rate increases have increased home values have fallen. Many recent buyers’ home values have fallen substantially, placing them outside the loan to valuation parameters of alternative lenders. Bank valuers will be increasingly more conservative in assigning values, not least because of potential legal liability. Those who purchased with maximum loans at the height of the market and low point of the interest rate cycle are in the most difficult position.
Housing Markets Not Yet at Bottom: Market Worse than Statistics State. Expect Falls in Sydney and Melbourne Markets from Peak to Trough to Exceed 20 Percent!
The lesson is that when asset values have increased at an abnormal rate, market corrections become a distinct possibility. As with other cycles we will only know when the bottom of the housing market has been reached when we are able to look back several months after it has occurred. It is highly unlikely that we are near the bottom as yet, particularly as many home owners with fixed term mortgages are yet to experience the impact of the recent series of Reserve Bank induced interest rate increases. I expect the weakening of most segments of the Melbourne and Sydney housing markets to continue into 2023 and to substantially exceed optimistic real estate industry forecasts. Higher interest rates, particularly as short-term fixed rate loans convert to market, will place a great deal of pressure on the market.
Recently a family member has been looking at houses in surrounding suburbs and we have been struck by the change in tone. Houses which would have gone to auction a year ago and likely experienced competitive bidding from potential buyers now attract negligible interest at open house viewings and agents are urging us to make offers even at well below stated price. Agents tacitly admit that properties have been overpriced and are desperate to attract an offer with which to bargain. This is symptomatic of a situation which occurs every few years when substantial economic change drives a collapse in the housing market. The stated fall of the housing market significantly understates the magnitude of the actual fall.
The housing market in Melbourne and Sydney has a lot further to fall!
If Upgrading Your Home Sell Your Existing One and Minimize Debt on Your New Home
Interest on a home is not tax deductible while rent on the former home is taxable. Owner occupied homes are kept in better order than those occupied by tenants and net rent on residential rental properties is poor after all landlord expenses are factored in. Invariably the new home is better located than the old, and hence has better capital appreciation. The best strategy is to sell the previous home which is usually capital gains tax exempt and use the net proceeds to reduce debt on the new home and if you have spare cash top up superannuation, subject to permitted limits.
Ideally in most cases debt on dental, veterinary or other business premises, the interest on which is tax deductible, can be maintained long term.
Do Industry Superannuation Funds Carry Hidden Losses at Times of Market Turmoil?
There is growing awareness of a major asset over-valuation risk in some large industry superannuation funds: this casts serious doubts as to their stated performance. In the current environment of increasing global interest rates and central banks tightening of money supply, assets values based on boom market assessments or on long term government bond yields as part of their valuation formula are unlikely to be saleable at arms-length on their boom time values. Shuffling of assets between controlled entities by global private equity players can disguise some real values for a time. The lessons of the Australian 1980s entrepreneurs following the global stock market correction of 1987 was that they were unable to stem the forces of higher interest rates and disappearance of real buyers. Messrs Bond, Skase, Elliott, Spalvins, etc found that there were no buyers of the assets purchased at boom prices. Kerry Packer, who had sold his Channel 9 television stations in Sydney and Melbourne to Alan Bond prior to the 1987 stock market collapse for $1 billion, subsequently bought them back together with Brisbane and Perth stations at a fraction of the price. Corporate raider Robert Holmes à Court was quickest to recognize that conditions had changed dramatically and was able to sell his controlling interest in Bell Resources to Alan Bond’s Bond Corporation but exposed the minority shareholders to having their assets snaffled by Bond Corporation in the form of unrepayable loans. Holmes à Court paid down massive personal debt but escaped with a reasonable fortune. The values of the companies operated by the 1980s entrepreneurs continued to be traded at often substantial values long after they were in fact insolvent or very nearly so, but the 1987 global stock market collapse signaled the beginning of the end when they could no longer shuffle assets between their controlled entities at boom time prices. Most of the big entrepreneurs of that period either were exiled, were rendered bankrupt and/or were jailed for corporate crimes.
Alternative assets—most notably private equity, venture capital and infrastructure—have appeared to be immune to the gyrations found in equity (share) and debt capital (bond) markets. This defies logic and raises serious doubts about the price for entering and leaving some large super funds.
According to the Australian Financial Review’s “Chanticleer” column of 6 October, the Australian Prudential Regulation Authority has questioned a handful of industry super funds about their valuation of high-flying tech stock Canva.
Super funds which have avoided private equity and venture capital investments are angry at the way funds playing the alternative asset game can avoid the discipline of marking to market valuation. Ultimately fund members will switch to funds which provide regular valuations to market if fund administrators play dangerous games of using above market valuations of unlisted assets and their valuation discrepancies become widely known.
The Albanese Government Needs to Honor Its Pre-Election Promise re: Stage 3 Tax Cuts
If the $180,000 tax threshold had been indexed for inflation since 2008-2009 when present treasurer James Chalmers was an adviser to then treasurer Wayne Swan, then it would be $259,000. The phase three tax cuts are merely giving back part of the tax increase via inflation. Counting partners of moderately high-income earners, it is estimated that about 2.5 million people are directly affected by the impact on family income. All of the budget pressures referred to by Treasurer Chalmers recently were known prior to the federal election. Both prime ministers Abbott and Gillard had their credibility destroyed by broken election promises.
Plummeting Shipping Charges a Sign of Approaching Recession
The cost of shipping containers from the far east to Europe has fallen by more than 50 percent. Container terminals are watching their piles of containers fall and ships have reduced their sailing speed to conserve fuel. There is a dramatic reduction in the number of containers being shipped. This is a leading indicator of an approaching global recession.
Elon Musk’s Massive Twitter Own Goal
As has become apparent Elon Musk’s binding takeover bid to purchase Twitter for $US44 billion (about $A69 billion) may have briefly looked realistic before the US Federal Reserve set about forcing up interest rates which quickly generated substantial increases across global banking. The value of major tech stocks which had been priced for perfection quickly plummeted. Musk set about trying to find a legal way to reverse his contractual obligation by claiming that Twitter had provided wrong details of its active accounts. Twitter is incorporated in the US state of Delaware and the Delaware Chancery Court, which has jurisdiction, has long had a conservative view concerning contractual obligations in takeover situations. It seems that high powered legal advice to Musk was that it would be unlikely that he could be allowed to void the contract. Musk then announced that he would proceed with the purchase. Financial reporting suggests that in the current financial climate Twitter is worth at least $US10 Billion less than the contracted price. Meanwhile the availability of loaned capital to finance takeovers has diminished and its cost has exploded. Musk has recently sold a substantial quantity of Tesla shares, to help him finance his Twitter purchase!
I am reminded that a few months before the global stock market crash of October 1987, the brash Alan Bond who had coveted Kerry Packer’s Sydney and Melbourne TV stations to add to his Perth and Brisbane stations raised his offer to a then unbelievable $1 billion. Subsequently Kerry Packer bought back the two he had sold as well as the additional two for a fraction of what he had been paid. Packer had cleverly structured part of Bond’s consideration in the form of convertible preference shares with a conversion right to ordinary shares at market price. As Bond ran the TV network badly, it was unable to pay dividends to ordinary shareholders after paying dividends on the preference shares, the share price kept falling until Kerry Packer closed the trap. Packer was quoted as saying you could only be lucky enough to get one Alan Bond in a lifetime. Entrepreneurs who pay too much for assets on the eve of major market corrections lose heavily.
Capital Markets Closing Down
New Private Equity deals and major mergers and acquisitions have dried up. The era of cheap pricing of money appears to have run its course. Most deals currently completing were contracted prior to the change in direction of global interest rates. Only very strong businesses can contemplate acquisitions in this changed environment.
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.
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
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 graham.george.middleton@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.
Please Pass On
If you like these newsletters, please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly at graham.george.middleton@gmail.com
Independence And Disclosure
I am not a representative of any accounting practice, financial planning firm, business or marketing consultancy. I spent 33 years as a business and financial adviser to mainly dental, medical and veterinary specialist and general practitioners. Since I retired as a director of a financial services group, of which I had been a founder, on 30 June 2020, I am no longer licensed as an investment adviser. Readers should treat the above as general advice and take professional advice as required.
General Advice
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. My website is now available at grahammiddleton.com.
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 readers
Graham Middleton 0448 784 594
