28 May 2024

My writings on dental practice valuations are also relevant to veterinary practices. See recent articles available at https://www.grahammiddleton.com/dental-articles

I provide business practice value related advice to dentists and veterinarians who in return make donations to the charity I support, the Delany Foundation. Donations are tax deductible. Valuable information on practice valuations can be found on my website  grahammiddleton.com.

If other readers find the information in these newsletters of benefit you may show your appreciation by donating to the Delany Foundation. 

Australian interest rates. 

Interest rates are now unlikely to reduce this year in either the USA or Australia. Both the US Federal Reserve and the Reserve Bank of Australia are now caught in a situation of persistently higher interest rates than their targeted ranges. The correct economic response is to slightly increase rates but it is likely that both are reluctant to upset their respective governments and will instead opt to maintain current rates until well into next year.  

Lukewarm response to the federal budget.

A wide range of economists made negative comments; some were lukewarm at best. The treasurer boasted of a modest surplus created by a variety of high taxes as a result of booming prices for iron ore and continuing high levels of coal and gas exports but there are already budgeted deficits which add up to $122 billion in the succeeding four years of what are referred to as the forward estimates. Opinion polling on the budget’s impact were not gratifying for the government. What at first glance appeared to be a budget setting for an early election has given way to a realization that the Albanese Government is now likely to serve its full term. There is a substantial increase in businesses being placed in the hands of liquidators while Telstra has announced a huge cut to its’ workforce. There are signs that all is not well in our economy.

Flight to bigger stocks.

It is timely to review investments and reduce holdings of small stocks due to softening economic outlook. It is safer to concentrate mainly on stocks in the ASX 200 list of companies and the S&P 500 exchange traded fund code IVV which is invested in the top 500 stocks listed on the New York Stock Exchange and NASDAQ many of its stocks being major global businesses. I much prefer Australian Bank Hybrids to investing in residential rental real estate. See below.

Currently held stocks which have done well for us are ARB Corporation Ltd, Car Group Ltd, Cochlear Ltd, CSL Ltd, Hub 24 Ltd, Goodman Group, The Lottery Corporation Ltd, Whitehaven Coal Ltd.

This is general advice and recipients must do their own research and source professional advice.

Accounting advice on professional practice acquisition. Dental/veterinary tends to be dangerously misinformed.  

I could give a multitude of examples.

Accounting practices of all sizes promote themselves as giving business advice whereas the vast majority simply complete the previous year’s financial statements and tax returns. At any particular moment they are so busy punching in clients’ previous year’s figures into their computer programs that most have little time to spend on client’s current situations. I acknowledge that there are a few exceptions.

Recently I saw what purported to be advice on a practice’s value from an accounting practice proclaiming its expertise in respect to dental, medical and veterinary practices, but on looking at the financials it was evident that a buyer would find great difficulty in making more income than they would receive working for another practice or practices on a contract basis. Yet the ‘expert’ accountants practice was happy to say that it was worth 1 to 1.5 times its annual fees!  It certainly is not.

Is Australia facing an economic slowdown?

The evidence is mixed but what is undeniable is that the average Australian has been suffering from a fall in living standards, a per capita recession, with the economic growth figures propped up by immigration.  

Where is your accounting being performed?

Some accounting practices including Synstrat Accounting are back dooring the preparation of client accounts to India and elsewhere but having a partner sign off the work. Naturally there can be hefty profit margins in the work billed to clients. Do you know where your accounts are being completed? and are you comfortable about it being subcontracted to an overseas enterprise? Professional accounting bodies need to require partners of accounting firms utilizing off-shore sub-contracting to process the preparation of accounts, to declare it to their clients as well as passing on cost savings.

Made in Australia often means a road to lowered living standards.

Centuries ago economists and smart business entrepreneurs identified that rather than every country trying to provide all of its needs internally there were enormous gains to be made through trade. Each country was best to concentrate on producing the goods for which it had a natural advantage and exchanging them via trade for the goods which other countries could produce more efficiently. This is demonstrated by a story I recall from an economics text long ago. It went like this.

During World War two there were three prisoner of war camps located in German-Occupied Eastern Europe. Camp one held British POWs, Camp two adjoining it Polish prisoners and Camp three adjoining the Polish camp held American POWs. Conditions were spartan but the British received periodic parcels via the Red Cross and among other goodies were cigarettes. The Americans in Camp Three also received parcels via the Red Cross and among their goodies were candy bars. The Polish prisoners received no parcels and were in a terrible condition.  Stanislaus, a Polish prisoner, managed to strike up a conversation through the fence with an English prisoner and ascertained that he was keen to obtain American candy bars. He was prepared to trade three packets of cigarettes for two candy bars. Stanislaus went to the wire connecting the American POW camp and enquired of an American prisoner what he craved for and found that it was cigarettes. He was prepared to trade three candy bars for two packets of cigarettes. Somehow Stanislaus persuaded the American to trust him with three candy bars to deal with the English prisoner, completed the deals and personally ended up with one candy bar and one packet of cigarettes. In due course having become the trusted intermediary he was able to expand on his success. The lesson is that each of the three gained more of what they wanted through trade.

The lesson for Australia.

Handing out big government subsidies to enterprises which cannot attract business capital is the very antithesis of the benefits to be gained from free trade. The current Labor Government appointed head of the Productivity Commission, Danielle Wood, has pointed out the pitfalls as has her predecessor, the widely respected economist Garry Banks, also appointed by a Labor Government. Recent decisions to hand out subsidies, including to a start-up manufacture of solar panels of which there is already global oversupply have been almost universally condemned. These are the very opposite of the strategy to free up the Australian economy which was the hallmark of the Hawke, Keating, Walsh triumvirate. Current Treasurer Jim Chalmers, reportedly a great fan of Paul Keating, clearly does not understand the achievements of that government which were carried on by Howard and Costello. Not only was Hawke well-endowed personally with economic knowledge but in Senator Peter Walsh, the gritty West Australian senator, farmer and Minister for Finance who regularly crushed unsound spending proposals, there was a financial spending discipline sadly lacking in the Albanese Government which has reversed many of the Hawke Government’s good decisions. Treasurer Chalmers and Finance Minister Gallagher suffer very poorly when compared to Keating and Walsh.

Government gas reversal.

Like many, we have solar panels on the roof of our house and some of our friends also have associated batteries and vehicle charging but there are significant limitations on the spread through the economy and the destabilization of the electricity grid at times of over-supply of roof top solar electricity.

It has been belatedly recognized by the Government that Australia needs more gas to power the transition toward renewable energy. However, the Victorian Government is yet to reverse its no gas drilling policy. It is clear that not only will Australia not meet its 2030 clean energy targets but also that wind and solar power, far from being free, are very costly and have many associated problems. Victoria and NSW are each paying to have the life of coal fired electricity generating plants extended. Public opinion is shifting markedly. Future governments may not survive massive future energy cost increases or industry blackouts.

Opinion polling is also shifting in favor of nuclear energy, albeit the polling numbers are not huge. Recently the parliament broke into laughter when, following Energy Minister Bowen demonizing nuclear power, Defense Minister Marles explained that Australia was paying British company Rolls Royce a huge sum to manufacture nuclear power plants for our future submarines. 

CSIRO report riddled with errors.

A recent CSIRO report indicating that nuclear power is not a viable option appeared to have been a case of reimagining facts to support a predetermined conclusion. It is contrary to the actual experiences of Finland, France, the Canadian state of Ontario and a host of G20 countries which either have nuclear power or are investing in it. The report assumes a life of 30 years for a nuclear plant which is bizarre given the fact that they last up to 80 years. At the same time the CSIRO report indicates that solar and wind have a lifespan of 25 years which is too long. The capacity factors of wind and solar should vary at between 25 and 33 percent but the CSIRO report has onshore wind capacity at 48 percent and offshore at 52 percent these figures are clearly errors. The report is so riddled with errors that it will prove to be a major embarrassment to the CSIRO.

Hidden costs of solar and wind are very high.

 While the huge emerging industrial powers of China, India, Indonesia and Bangladesh are increasing power sourced from wind and solar they continue to get much more from coal. Last year China got more additional power from coal than from solar and wind, India got three times as much, Bangladesh thirteen times and Indonesia 90 times! While superficially solar power is cheap while the sun is shining that does not take account of the huge costs of reliable back-up power including vastly expensive battery powered grid back-up.

Nor does superficial wind and solar cost analysis factor in the cost of recycling spent wind turbine blades nor exhausted solar panels. Think of third world countries dumping exhausted solar panels and batteries and leaking toxic waste into waterways and soil. 

Freakenomics’ cure for tobacco wars.

 The tobacco wars, with regular incendiary attacks on retail outlets established to sell illegal tobacco, has a simple economic solution. The underlying cause of the problem is the setting of federal tax on tobacco prices so high that there is a huge economic incentive to deal in illegally imported tobacco products. In the process a series of tobacco shops have been set alight or rammed with stolen vehicles. Competing underworld forces appear to be attacking shops supplied by their rivals. Victorian Police Commissioner Patton has said “It is not my problem!”. He is correct.

Supermarket chains sale of tobacco products to the tune of billions of dollars has dried up. Tobacco addicts are not going to pay a huge price for a heavily taxed packet of cigarettes in a supermarket when a nearby tobacco shop is selling untaxed packets illegally imported for around 10 percent of the supermarket price.

In their zeal to reduce the health hazards of smoking, politicians and bureaucrats raised the excise tax on tobacco products so high that it created a huge incentive to illegally import and distribute untaxed tobacco products. In the process government excise tax on tobacco has dried up while tobacco addicts can satisfy their need economically. There is a lowered tax rate at which sales will revert from illegal tobacco shops to supermarkets with a net revenue gain to the government. If the excise duty on tobacco products is adjusted the tobacco shops selling illegal products will go out of business as quickly as they started up, as will their suppliers. In its zeal to wean people off tobacco products politicians and their bureaucratic advisers have created income streams for criminals. 

Lessons from prohibition of alcohol sales in America?

 An amendment to the US Constitution banned alcohol from 1920 but was reversed by a further amendment reinstating alcohol from 1933. A significant side effect was the blossoming of illegal alcohol, distillation, importation and sales giving a substantial leg up to the American mafia. As the public mood swung toward reversal of prohibition it was organized crime which opposed the reversal because prohibition had been great for its business. 

Residential rental property returns are poor; particularly in Victoria.

 It has long been the case that the returns to landlords after paying all the expenses that fall upon them are so poor as to bring into question why anyone would invest in residential rental property when better returns are available elsewhere. After paying municipal and water rates, land tax, agents letting and management fees, tax accounting fees and repairs most owners are lucky to achieve a net return of 1 to 1.5 percent assuming good tenancy.  As an investment return it is extremely poor. The purchase costs including stamp duty and legal cost and the selling cost including agents commission and legal cost are expensive compared to shares. Currently a bundle of bank hybrid securities issued by Australia’s four major banks are paying a return grossed up with franking credits of slightly above 7 percent to maturity. Risk is assessed as moderate as all four banks have surplus tier one capital and are well regulated. Higher returns are possible from shares but involve a greater market knowledge and acceptance of greater risk.

People make the mistake of comparing rental investments with the increase in value of owner-occupied houses which are usually better cared for, tend to be in better locations and usually have substantial improvements made over the period of ownership including upgraded bathrooms and kitchens, extensions, modern heating and air conditioning, and a host of other improvements. 

An independent source of expert real estate advice.

 A source of advice that I trust on residential real estate in Victoria is Jeff Gole (0419 401 677). Previously a well-known agent, Jeff is now retired from being an agent and has freed up his weekends. He consults to those seeking informed advice regarding whether to buy, sell or hold, and to seeking assistance with choice of agents. I have known Jeff Gole for over thirty years, and have no financial interest in the service he provides.

Is investment advice worth what you are paying?

 The regulatory burden progressively became so great that advisers had to charge exorbitant fees to cover the time put in and the regulatory risk involved. The result is that the vast number of self -managed superannuation funds (SMSFs) now have no investment adviser attached. Unless they are very large, investment advice is not worth the cost. It is critical that those who have SMSFs spend considerable time understanding the share market and related exchange traded funds etc. Some tips:

·      Don’t consider starting an SMSF unless you and your spouse have a minimum of $400,000 to contribute in year one by rollovers and that year’s contributions, and unless you have the financial capacity to make regular substantial contributions in subsequent years.

·      Do not place surgery or business premises into an SMSF unless special circumstances mandate its necessity. Beware of accountants advising this action. In reality, most are simply trying to create another accounting client. It leads to other complications in the future.

·      Until you have developed a thorough understanding of the share market stick to investing in ASX 200 stocks, preferably ones with a history of paying regular dividends. It is critical that you read back through yearly and half yearly reports and that you check 1-year, 5-year and 20-year share charts before buying a stock. All are readily available via the ASX 200 portal.

Retirees with surplus capital helping children buy homes.

 Retirees with substantial capital surplus to their needs, particularly those likely to be caught in the announced and likely to be legislated taxation changes on superannuation balances above $3 million, are increasingly providing substantial assistance to children to complete purchase of homes and providing educational assistance to grandchildren. Passing on a portion of wealth during the time of life when it is most needed is of greater benefit in many instances than carrying surplus wealth to the grave and passing it on at a time when the greatest need may have passed its zenith. 

Looking back through history at the Jewish/Palestinian question 

1.     The modern state of Israel was established by a United Nations vote of 14/5/1948 in the early post World War Two period. Immediately following the UN vote Egypt, Saudi Arabia, Syria, Iraq and Lebanon declared war on the new nation of Israel with the support of some of the non-Jewish population of the area. History records that to the surprise of much of the world, the war resulted in a surprising victory to the new state of Israel. There have since been major conflicts in 1967 and 1973 and seemingly endless troubles ever since. The result of the 1948 war and later wars was the creation of substantial number of Palestinian refugees. There has never been a Palestinian state. Egypt, Jordan and Saudi Arabia no longer seek war with Israel. Lebanon is a confusion of internally competing interests and Syria, while harboring anti-Israel terrorist cells, has largely been consumed by its own civil war.

2.     Prior to the birth of Israel there was a British mandate arising from British victory over Turkey a supporter of Germany in World War One. The Australian Light Horse were a significant element of Allenby’s victorious British army.

3.     Prior to the British mandate the area was part of the Ottoman (Turkish) empire.

4.     Prior to the Ottoman Empire it was part of the Islamic state of the Mamluks of Egypt.

5.     Prior to the Mamluks of Egypt it was part of the Ayubid Arab-Kurdish Empire.

6.     Before the Ayubid Empire there was a Frankish and Christian Kingdom of Jerusalem.

And so on back through many centuries of history and many changes of power and rulers in the area including the Romans, Persians, Alexander the Great, Babylonians, and the ancient Kingdom of Israel and so on. Even Napolean touched on it briefly.

History inevitably becomes distorted depending on who’s view is being argued. What is undeniable is the existence in Israel of a large number of sites sacred to Jews, Christians and Muslims which over many centuries have been used as justification for ‘Holy Wars’.

The vast majority of Australians deplore the recent outbursts of antisemitism.

General advice and need to confirm. 

As I sold out of an accounting and financial services group, of which I had been a founding partner, on 30 June 2020 I am no longer licensed. The above is general advice and should be confirmed with a currently licensed investment adviser. One I would recommend to you is Campbell Thompson at Ord Minette who is both courteous and experienced. His number is 0407 839 229. His assistant Simone Shelton 0402 085 892 is a helpful person also. If you are after simple transaction advice, they are ideal. I use them but have absolutely no financial interest in any services that they provide to others.                                                              

My financial interest.

I have no financial interest in the advice I provided and seek no fee. I am secure financially and I seek no personal remuneration. If you find it worthwhile you are able to acknowledge it by making a tax-deductible donation to the registered charity which I support, the Delany Foundation who, I am confident, will apply it to worthy use.

Graham Middleton

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