20 December 2021

Why Have Dental Corporates Purchased a Much Smaller Proportion of Practices in Australia than in the United States? 

A major factor lies in the Australian taxation and superannuation rules which greatly advantage well performed dentists who own and operate their own practices—particularly those that operate two or three chair practices and share ownership with their spouse compared to those who contract themselves to a corporate dental group. Consider the following:

1.     The practice owner with a two or three chair practice can co-own it with a non- dental spouse and share income thereby using both parties zero and lower tax threshold points whereas a dental contractor is not permitted to do so.

2.     This owner can provide concessional superannuation to both of $27,500 currently per year whereas the dental contractor is not permitted to do so.

3.     This owner can also own their dental premises which if located in a major population center is likely to produce substantial capital gain over the period of ownership. Dependent as to whether the dentist has structured themselves appropriately and meets the small business capital gains tax concession tests, the gain may be tax free when sold. In the worst case only half of the gain will be taxable at the dentists marginal tax  rate. A dental contractor works in premises provided by the dental corporate which it usually rents from a third party.

4.     The practice owner who builds up their practice creates additional goodwill value to eventually on sell at retirement often at substantial gain. In the best case many dentists who have structured their assets carefully over time receive a tax-free gain on sale if they meet the conditions of the small business capital gains tax concessions. In the worst case only half their net gain will be taxable.  A dental contractor does not create saleable goodwill.

5.     The practice owner who employs/contracts other providers makes a margin on their fees. This opportunity is not available to a dental contractor. But note that an owner/lead dentist will generally achieve best results with no more than three chairs i.e. their own plus two filled by employees/contractors due to the invisible barrier effect.

Young dentists are overwhelming advantaged by gaining experience in well conducted privately owned practices and becoming practice owners themselves after gaining sufficient clinical experience. 

The Verdict 

Australian dentists simply cannot achieve anything approaching their total long term wealth potential contracting to dental corporates that dentists achieve by owning and effectively operating their own practices long term. 

For much more information on this subject refer to Financial Success for Dentists. See below.

Starting A Self-Managed Super Fund SMSF 

There is a huge amount of misinformation on the subject. 

·      Hustlers selling high rise apartments off the plan are quick to suggest that their potential sales targets can form an SMSF, rollover their existing super and take a non-recourse loan to purchase an apartment or two into the newly created SMSF. This should be avoided as;

·      Off the plan apartments frequently turn out to be worth much less on completion.

·      Non-recourse borrowings are invariably at a higher interest rate than other bank borrowings.

·      It is a poor reason to start an SMSF.

Accountants are fond of telling dentists and vets to start an SMSF and purchase practice premises into it. This produces business for the accountant but is usually not the best strategy. This needs to be picked apart. There are occasions where a dentist or vet needs to free up personal capital typically to cover a home upgrade. However, generally most will be better off long term by:

1.     Buying their premises personally with borrowings and maintaining deductible debt long term.

2.     Using spare cash flow to fund both concessional and additional non-concessional contributions into their SMSF for both themselves and their spouse with the object of exceeding their respective pension account limits well before retirement.  Over long periods investment in quality shares outperforms property. Superannuation is a medium for investing long term.

3.     Depending on overall structure of assets and careful planning they may achieve the small business capital gains tax concessions on disposal of both their practice and their premises at retirement.  In this way they maximise the advantages of both superannuation and capital growth on active business assets.

A couple should firstly build reasonable balances in an industry super fund and as a guideline may commence an SMF in the year in which existing super balances plus affordable concessional and non-concessional contributions will reach $500,000 of joint superannuation assets. 

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 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.

Dental Business Information at grahammiddleton.com 

A great deal of useful dental business information in the form of reproduced topics from 2013 to the present is available on this website. Please check it out and mention it to your colleagues. 

Veterinary Practice Staff Shortage Growing. The Growing Corporate Bubbles

All the vet practice owners I know report a huge shortage of vets seeking employment. At the same time veterinary corporates are paying huge prices for practices! Simultaneously there are many stories of corporate practices having staffing difficulties and spilling clients to nearby privately owned practices; yet major veterinary corporate operators are still paying previously unknown profit multiples for practices, with private equity owners now looking for sale opportunities at reportedly huge gains over prices paid for the groups something has got to give. The private equity owners will try and on-sell at a huge profit possibly through an IPO and stock market listing. At some point the music will stop and the owners at that time, like the failed 1980s entrepreneurs and shareholders in their companies will find that they have paid far too much. In recent years continuing falls in interest rates and readily available loans have allowed some bubbles to expand beyond reality. With signs that interest rates are likely to see several increases over the next eighteen months the private equity owners of veterinary corporates will be wise to sell out if they can find buyers before the weaknesses in their businesses become publicly apparent.

For a summary of financial bubbles, many of which burst, go to the article “Bulbs, bitcoins and bubbles” Jan/Feb 2018 at grahammiddleton.com

Does CSL’s Big Acquisition Provide a Buying Opportunity? 

CSL is to purchase Swiss firm Vifor Pharma for US $11.7 Billion ($16.4 billion Australian). 

The acquisition is funded by a combination of institutional capital raising of $6.3 billion new debt of $6 billion, cash, including share purchase plan for non-institutional shareholders and existing undrawn credit facilities.

The purchase expands CSL into a new range of medicine. Interested readers should go to CSL’s announcements.

I own CSL shares via my family superannuation fund and investment portfolio and have bought shares at the post institutional capital raising price. CSL’s share price has fallen substantially in what appears to be an overreaction to an acquisition likely to be earnings accretive in the short term and offer greater strategic opportunities in the medium term with a large suite of products in development. This may later prove to have been a good buying opportunity.

We may also participate in the share purchase plan dependent on likely price close to the closing date.

Those interested must do their own research and take professional advice as necessary. 

Takeovers Can Present an Opportunity to Make a Modest Profit and Sometimes a Substantial Profit: The Example of API 

Usually when a takeover bid is announced the price of the target company jumps but not quite to the offer price. It is then frequently the case that the target company rejects the first takeover offer and a second bid is made and bidders often follow a strategy of not making their best offer first up; sometimes too another bidder enters the contest. Shareholders who bought immediately after the first bid can sometimes make a nice profit by waiting for the contest to play out. A recent example still in play is that of API which received a takeover bid from Wesfarmers followed by an indicative higher bid from Woolworths. Shareholders who bought following the first bid are looking at a nice profit. 

Examples of successful outcomes for those who bought a company’s shares when the first takeover bid was made are Spark Infrastructure and Sydney Airport. In both these the regulatory formalities have concluded and the prices have moved close to what all most certainly will be the settlement payment. They have proved lucrative to those who bought on the first takeover attempt being announced.

A further example is that of Praemium. It received an unsolicited merger/takeover bid which has been rejected on the grounds that it undervalues the business. The market agrees and its share price has surged.

Those with SMSFs who are invested in the share market can generally make a profit by buying stocks when a takeover bid is announced. Clearly that is not as beneficial as owning them before a takeover announcement but generally does produce a modest profit.

I bought shares in the above stocks either in my SMSF or in an investment portfolio following the initial takeover bid. Investors considering similar strategies in the future are advised to read company announcements of takeover or merger proposals carefully and seek appropriate professional advice.

Now Live!

My website of information for dentists and veterinarians is now live. Go to grahammiddleton.com. There is here a growing archive of my newsletters and past articles. 

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. I own, via my family superannuation fund and investment portfolio, some of the stocks mentioned in this newsletter. 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.

I wish all readers their families and staff a pleasant Christmas and successful avoidance of the latest strain of Covid-19. 

Best wishes to all 

Graham Middleton