6 August 2022

ANZ’s Bizarre Announcement Regarding MYOB 

ANZ announced that it was considering purchasing business software provider MYOB off private equity group KKR for $4.5 billion! This was quickly subjected to a barrage of criticism as KKR had purchased MYOB for $2.4 billion in 2019 and it has been losing market share to the more up to date Xero at a huge rate.  The idea that ANZ would provide KKR with a profit of $ 2.1 billion on purchase of a business which has lost a huge amount of market share in a short period suggested that ANZ’s appraisal of MYOB was inept.

ANZ Announces Intention to Buy Suncorp’s Banking Arm 

ANZ followed up the announcement concerning MYOB with an announcement that it had switched its affections toward a purchase of Suncorp’s banking business which is located in Queensland. This would merely restore ANZ’s share of the home mortgage market to the percentage it held several years ago before losing market share to other banks. The transaction is subject to approval by the Treasurer of Queensland and the ACCC. ANZ has said that it undertakes not to close Suncorp’s bank branches for three years. Some might interpret this to mean that closures will occur after three years.

Strange ANZ Capital Management Decisions

Earlier this year ANZ bought back 54,139,675 of its shares at an average price of $27.71 per share but has just issued new shares to retail investors at $18.90 and institutional shares at $21.65. It had obviously not contemplated purchasing either MYOB nor Suncorp’s banking arm when it bought back shares and has had to offer new shares at a substantial discount to market to complete an acquisition. Does anybody believe that ANZ’s CEO and Board know what they are doing? They appear to be making it up as they go.

CSL a Long-Term Winner 

CSL has grown to be one of the biggest companies listed on the Australian Securities Exchange by market capitalization. Its price on 31 July 2002 was $9.40 and 20 years later its price has grown at a compound annual growth rate of 18.62 percent despite coming off its high price of the last year. It pays small dividends but has been a phenomenal growth stock. It is widely recommended by brokers. Those clients with a knowledge of pharmaceutical products should go through CSL’s announcements to the stock market and search the list of pharmaceutical products under development a well as seeking authoritative advice. Do hit on CSLs 20year price chart.

I regard CSL as a cornerstone investment in our family superannuation fund. It has become a major global pharmaceutical company and as illness is widely spread there is a huge market for its products and products under development.

ARB A 20 Year Plus Success Story 

I own ARB in our family super fund and investment portfolio. ARB overreached itself and valuations reached lofty height before correcting. It is on a number of stock brokers recommended to buy list.

Readers should do their own due diligence noting that ARB is debt free and has been debt free for all but small periods in the last 20 plus years.

You will also note that it has regularly increased its product range through its in-house engineering design capability, increased the range of 4WD vehicles it provides quality accessories to and has bought smaller compatible businesses. It has market leadership among owners of 4WD drive vehicles trekking outback and around Australia trails.

Download ARB’s impressive 20-year price chart and examine its financials closely. It has an unbroken record of paying regular half yearly fully franked dividends. It is important that readers do their own due diligence and seek professional advice as required. Currently there are large order books for 4WD vehicles, the delivery of which has been delayed by a global shortage of semiconductors. This is being resolved and as these new vehicles arrive many of their owners will seek to fit them out with a range of ARB accessories.

Dental Buyers Hidden Value in Dental Fit Outs

If faced with a decision as to whether to buy an existing dental practice or start one from scratch, there are two critical assessments. First is the quantity of current dental fees and second the cost of fitting out and equipping a new practice. The second cost is usually underestimated as is the time spent in planning, gaining approvals, and a myriad of smaller costs which usually had not been budgeted for. While some equipment may be in imminent need of replacement usually there is a great deal which is serviceable as is the hidden plumbing, wiring, airlines and dental cabinetry. Starting as a day one owner with fees coming in an established telephone number, website, a location known to existing patients and time to do changes and upgrades in affordable steps has a great deal to recommend it.

Dental Practice Valuations: Basic Facts Dentists Need to Know 

All other things being equal:

1.     The most successful general dentist practices have one, two or three surgeries with a practice principal being the highest producer of fees. Beyond three surgeries, two of which are occupied by employed or contracted dentists, dental therapists or hygienists, a dental owner spends too much time supervising other dentists, dealing with treatments beyond their expertise and spending additional time on practice administration. It is invariably the case that tightening up appointments in employee surgeries and insisting that they work full sessions is far more beneficial than undertaking the additional cost of adding and fitting out a fourth surgery. In the case of practices with two associated owners four surgeries is the optimum maximum number with as much dentistry as possible done in the owner’s surgeries.

2.     Practice managers, other than a courtesy title for a receptionist, are profit and practice value destroyers. The most successful practices use a visiting bookkeeper for a few hours per fortnight, who updates accounts and wages, reconciles the bank account and presents the practice principal with a list of accounts to pay for approval. A fulltime practice managers wage including leave accrual plus superannuation plus work cover/workers compensation insurance typically costs $100,000 plus per year, which is vastly more than a visiting bookkeeper. The extra cost reduces profit and result in substantially lower practice value when selling a practice. Practice managers are profit sinks rather than creators of new business.

3.     Overly specialized general practices will have fewer potential buyers as the dentists capable of carrying on the treatment mix is limited. This materially impacts value. In extreme cases a practice restricted to particular treatments which are typically the province of a specialist will have negligible appeal to buyers. By contrast practices where a relatively experienced buyer can replicate all the treatments provided has the widest possible number of potential buyers and will be worth more than the specialized practice. Dental specialist practices value varies according to the number of potential buyers there are in each specialty. Orthodontists have greater resale value than the specialties with many fewer practitioners.

4.     Buyers most prefer practices located in established suburbs of major cities near to quality housing and with private and public education choices readily accessible.  New growth areas on the city fringes are less desirable and have a higher proportion of young families struggling with mortgages. Next after capital cities are regional centers and large towns within reasonable distances of capital cities and offering multiple education alternatives. Practices close to the coast are favored over practices a significant distance inland.

5.     Practices in small remote towns have little market appeal and can be extremely difficult to sell. They may have little value.

6.     Many years of examining the actual financials of many dentists indicated that practices with hygienists/therapists were no more profitable than practices without. Some owners prefer to have them so that that can have greater personal choice over the treatment options they perform personally.

7.     Maintaining dental premises to a good professional standard is vital to maintaining new referrals. Buyers look back over the rate of new referrals.

8.     If two practices have equivalent fees, profit and are located in equivalent locations the practice with fees increasing at a greater rate is worth more than one at which the new patient referral rate is declining. Buyers look back through financial years to establish referral patterns.

9.      Having satisfactory premises for purchase or long-term affordable lease. Is vital to the sale of a practice. If it is necessary for a buyer to obtain new premises and undertake expensive new fit out and meet relocation expenses, there may be little value in the practice goodwill.

10.  I observed over 33 years spent dealing with large numbers of dentists that the most consistent and profitable practices were NOT preferred providers to health funds.

11.  In recent years dental corporates have learned from past acquisition mistakes and limit their purchases to practices with at least two employee dentists plus an owner who is prepared to agree to a three year earn out contract built into sale. In the past some acquisitions with high performing dentists, with lots of specialized treatment plans, have experienced a sharp reduction in fees when the former owner has retired.

12.  Practices located inside major shopping centers usually have punitive rents which amount to several times the profession wide average rental cost as percentage of fees. They may also have punitive tenancy restrictions.  They usually struggle to make a profit over and above the amount a principal would be paid to work in another practice. Some are unsaleable and the only option a practice owner has is to close the practice referring patients to a colleague with a practice located away from the shopping center.

13.  Beware of uninformed accounting advice when purchasing. The only dentist that many accountants know is one who drilled their teeth. If seeking advice from an accountant about dental practice purchase demand to know how many dentists they provide accounting services to and how many dental practices they have valued. Test them by asking questions to which you know the answer. All businesses are not alike.

For more on buying and selling practices refer to the book “Financial Success for Dentists” and articles concerning buying and selling dental practices at grahammiddleton.com.

Veterinary Practices Buy or Set Up

Recently astonishing prices have been paid by corporate buyers of veterinary practices which freeze out potential veterinary buyers, but the corporates have a massive weakness. This offers huge advantage to vets who set up new practices near to large corporate practices. Unlike businesses which can replace staff with machines veterinary practice is labor intensive. No machine can enable a vet to do surgery on two animals simultaneously. The Australia-wide shortage of veterinary staff is causing some corporate practices to place themselves on bypass when no vet is available. Clients have long complained of the lack of vet staffing continuity in many corporate practices and as a result they leak patients to privately owned practices. I know of multiple instances of vets setting up new practices near to or between corporate practices and immediately experiencing impressive growth in fees. This is invariably sustained. There is nothing that corporates running small animal practices can do to stop this competition. Ideally two vets who are prepared to work hard should set up in partnership to cover each of their rostered absences. They will quickly surpass the income they received as employees and can build a practice asset having substantial goodwill value.

Valuations for Legal Settlement Purposes 

There are a number of so called ‘forensic accountants’ who claim to be able to value any type of business. But unless a valuer has had substantial ongoing experience of working with a particular type of business or practice, they are not competent to value the type of business or practice concerned. They often produce bizarre valuations but create doubts leading to settlements being delayed and adding greatly to legal and legal support costs. I have witnessed instances where a forensic accountant demonstrably had negligible knowledge of dental or veterinary practice fundamentals produced heavily distorted valuations which created substantial settlement delays plus further valuation, accounting and legal fees as resolution spilled into additional financial years.

Financial Advice for Your Children

The best learning is by experience and the following are tips for parents based on client experiences over many years.

·      Insist on them opening a bank account at an age where they are able to understand the needs to save and earn some interest.

·      If children are able to work, encourage them to get part-time jobs from age 15. The youngsters with a good part time work history while studying find it easiest to get a start in career employment.

·      Working part time in a parents practice or business doing basic tasks such as cleaning or relieving at the reception desk outside of school hours creates a sense of personal fulfillment.

·      Challenge them to save part of their earnings toward long term goals.

·      Earn at least one good reference from a boss.

·      Challenge them to save at least $100 from family household bills by being economical with energy use, mowing lawns or assisting in food preparation etc.

·      For older children assisting them toward home purchase provided that they have contributed a significant amount toward a deposit is recommended. Do not be overly generous. Having them make substantial home loan repayments is an essential financial discipline.

·      Debit cards are satisfactory but they should not have credit cards until they are in full time work.

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. 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.

Best wishes to all readers

Graham Middleton