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Dr James:
Hey everyone, welcome back to the Dennis Union Vest podcast. I am joined today by David Hossine, and we are here today to talk about financial milestones whenever it comes to your journey as a dentist, which is a super fun one and obviously with relevance to David’s area of expertise, which is, of course, taxation. Being an accountant, david, how are you today?
David:
Hey, james, I’m very well. How are you doing?
Dr James:
I am amazing. Thank you for asking. I’m looking forward to this, actually, because we did one way, way, way back when, along the same lines, and what it would be nice to do today is make another one. Given how things have changed, given how the landscape has changed whenever it comes to taxation and finance, we can have a little bit of an update, because I remember that podcast did extremely well. So what do we mean by financial landscape? What do we mean by journey and financial milestones? What we mean is that, as you are progressing through your career as a dentist, naturally you start as a student, then associate, then you might become a practice owner or you might stay associate. Both are fine. But if you do become a practice owner or you might, if you do become a practice owner, you might want to listen to what we’re about to say, or you might progress on the multi-practice ownership and then, eventually, what unifies every single one of those career paths is that you one day will retire, of course, and what we’re going to cover today from a really high level is what do we have to be aware of in terms of our finances, in terms of key things that we should look out for, and key in terms of really important bits of information that we should know whenever we hit each one of those respective milestones. What are the biggies, so to speak, when it comes to your finances and when it comes to your tax affairs? David, would you say that’s an app description?
David:
Absolutely. The clinical life cycle of my clients will follow a very similar pattern. So, dentists, you tend to go through some very similar phases as an associate you learn in the ropes, you become experienced, you then potentially become a first time owner, either through buying or setting up a squat. Some will go on to be multi-site owners and then you’ve built your capital and you’ve got to think about your exit and retirement and through every single phase and milestone that we’ve just talked about, there are different income considerations, different capital considerations and profiles and planning points and challenges to get through. So kind of as you summarise there. I just thought that if we taught them through, if any of your listeners and we know that a lot of your listeners are very financially focused and if you’re close to any of these milestones, we can just give heads upon, as you at this point, these are the things that tend to pop up and be mindful and aware to ask either ask these questions or get the advice around these points that are key in that particular area.
Dr James:
That’s beautiful. And if I look back on my journey as an associate as an associate dentist never quite made it to practice ownership. I don’t think that will ever happen to me. But who knows, never say never. And I remember I just didn’t know what the heck to do and it was all off here say, and it was all things that I know that somebody had said to me this is a good idea, maybe you should do this, but not anywhere where it was just led out in front of me formulaic think about this, this, this, this and this. So I know I would have found this invaluable. So, on that note, david, if we start from the start, which seems sensible, let’s talk about the associates, and this can apply, I suppose, to associates who are newly qualified, but really associates who are at any point in their career. These are the things that they have to consider, wouldn’t you say?
David:
Yes, it’s alright. So first, newly qualified associates just starting out there my impritals. So get compliant with HMRC, get yourself registered, keep your accounts up to date and on time so you’re not into penalties and the black book with the revenue. Utilize the tax breaks that are legally available to you, and that could be things like incorporating as a limited company and thinking about how they impact superannuation, but we recently did a webinar on that, so I’m not going to talk too much about the company side because I think we’ve done it, if that makes sense.
Dr James:
Yeah, anybody who’s listening. If you want to have a really, really, really in depth discussion of limited company versus sole trader, it’s worth checking, like that previous episode that David and I did not so long ago 15 episodes ago, I think, something like that.
David:
Yeah, not sure I’m not counting, but then yeah. So then the associate gets a bit more experienced and becomes closer to thinking well, it’s time for me to become a practice owner and a business owner and take on that additional responsibility of being responsible for the business. It’s a big shift to go from being an associate to a practice owner. However, it’s a process that you’ve got to go through and take six to nine months, and the process is often it’s a life at once in a lifetime process. For many, you’ve got to deal with this lawyers and accountants on both sides, balance sheets, contracts and so on and there’s a lot to navigate through and, as I said, most associates will only go through that process once. So it you know, it makes sense that for many it will be very new. So then what? What are the key things to think about that in area no, often times, if you’re buying a practice, it’s either a limited company or not a limited company. Where it’s not a limited company, pretty straightforward, you just buy an assets. But where you’re buying a company and a lot of practices are in a company, you’re buying a balance sheet. Now, what the hell is a balance sheet? I Think many of your listeners won’t have that much experience looking at balance sheets and it won’t be obvious what that actually means. But a balance sheet is assets and liabilities at the point of completion. So why? Why is it important what? What that means is when you’ve completed and you buy the practice, not only do you have to get on with running the business and meeting the team and getting them Onside and thinking about your marketing and how you’re going to grow the practice. You’ve got to be aware of what has gone on financially prior to that point. Now, each of us in that process has got different roles and responsibilities. Your lawyer is there to protect you in paper and, the way I look at it as your accountant, is there to Protect you before it gets too late. Now, what do I mean by that? There are things that could be on the balance sheet that we should flush out, want to make sure we’re aware they exist and to to quantify them and Adjust for them in them, in the handing over of cash when you pay for the business. To put this into perspective, what I know if I’m talking about David, so a big area is if a practice is doing a lot of work that takes Deposits and advance. So patients come in, they pay over thousands of pounds for work that will be done over a period of time. Those are called patient deposits. But that’s money that the buyer, so the seller, has taken and, as the the buyer coming into the door, if the patients already paid for it, then you’ve not had that money and we have to flush that out, to quantify it and say, well, hang on a second. Potentially thousands of pounds here that we need to be aware of because that’s a liability for the seller and and a nightmare scenario for associates, which we we do see is where they’ve got a very good relationship With the seller and the seller said, look, you know me, I know you, you know the practice. It’s two million pound and we’re gonna do it as a locked box with no, no adjustments. But when you ask the question, you say, well, hang on a second, what about? Have you taken any deposits? And you can open that up and suddenly there’s hundreds of thousands of pounds with the people who paid in advance that the associate would have to do that work for if they’d not ask the question to say are you taking cash up front? And if you are, we need to know about it. So you got to have a nose for these things and I don’t expect associates to even even know to think about that. But though those are big things when you think about if you’re buying a company, you are buying a balance sheet and we need to know what it looks like. So the lawyers job is to legally give you recourse. So if that happens, then, yes, you can sue the seller. Well, it’s a lot harder to try and get your money back once you’ve paid for it. It’s much easier just to account for it before completion. So Think about the balance sheet that you’re buying and put it in front of your account of them to look at. There should be a formal due diligence done if it’s a company, less so if it’s if it’s not a company. But that’s a big area.
Dr James:
That is a biggie, that one, any other biggie, so to speak, that we should watch out for.
David:
Well, yeah, tax schemes. Tax schemes are always a problem. So you look at the balance sheet, we look at the tax returns for the company. If they’ve been Interesting tax avoidance schemes that have been entered into, really where we’re, into that, there becomes a strong argument to say Pause the deal, you’ve got a problem here, we’re not going to take that on. And the company will sell the assets to a new company and the old company stays with the seller and there are things that become a big red line and you just say, no, we can’t possibly do the deal, but it has to be fully restructured. Like that it’s, it’s rarely does happen.
Dr James:
Gotcha. Yeah, just things to watch out for. I guess that you might otherwise know about, which is the whole aim of the game, of the podcast, I suppose. Really. I have a quick question when it comes to practice ownership, but before I interject with that, I’m curious Is there any more things that you’d like to add in about that stage off the dentist journey?
David:
Well, another kind of common problem that is very easy to To avoid by talking to account is but when you either buying a seven-up, a squat, oftentimes you’ll talk to a bank and they will say oh yeah, we’ll come. You know 70% of the way, 80% of the way, to give you some funds towards that. Now, when you bought a practice or set up a squat, often it takes time you take a bit of an income dip. Why? Because you’re now paying a loan back. When you get the perspective through from the dental broker, it always says the accounting profits are 100, 200, 300,000. That doesn’t mean that that’s what’s coming in your pocket. That means that that’s what you will pay tax on. And then you pay the bank back as well. They should really put that in there that after you paid the bank, this is the net free cash flow. What that free cash flow position can be made much worse if you get the debt in the wrong place. If you have, I’m buying it. I’m buying it a company, but I’m taking the loan in my name. If you put the loan in your name when you repay the bank, that’s all treated as if you’ve taken a dividend and enjoyed that money personally. So you pay tax on the bank repayments and that can push you into.
Dr James:
Oh man, oh jeez.
David:
Wow, seeing it twice, and both times it was a simple, easily avoidable situation of the accountant being able to say put it in the company, don’t put it in your name is no, there’s no skin off, the banks knows they’ll go along with it. So it’s just a simple administrative error that can cost you hundreds of thousands.
Dr James:
Oh, my word, that sounds absolutely horrendous. Wonder what I’d for? For sure, ouch, ouch, anymore. Before we move on.
David:
No, no, I think that’s the main financial challenges. Obviously, if you set it up, a squat work with a good marketer. That’s the the other kind of nugget there. Squats can be a bit risky and they are coming back now make. The first six months of this year, the market in general slowed down because we were just into the rising interest rates, but we’re all settled into the new norm now. So those picking up and yeah, we’ve seen some good success stories with the squats. People who’ve done really well. Those who’ve done really well have worked with somebody a coach or a marketer to Be prepared so that everything’s ready, the door opens, you’ve got good patients coming in. That really makes a difference.
Dr James:
Yeah, I think so from experience. Yeah, a coach will pay for themselves by many times over A good one, a good coach at least. But yeah, ok, cool. Thank you so much for that, david. And what will do Presently or promptly is when we’ve on the multiple practice owners, people who are thinking about that next stage, going from one to many. But before we do that, just curious in your experience, people who are taking that leap dentists who are taking that leap into practice ownership From being an associate to owning their first practice, whether that be a squat or one they’ve purchased from someone else around about what age Do you reckon that happens on average?
David:
Curious. It’s a good question, james, and it’s more. It’s less to do with the age, it’s more to do with the financial capability of the dentist. So we are seeing younger dentists with family money getting in the game very early in the late 20s, and I take my hat off to these jobs and if they get it right and for me getting it right means Buying something that you can increase its value so you make a gain on it. I’m not over committing to a large practice that isn’t going to increase in value. So the ones who are coming in and buying practices for five, six hundred thousand and then significantly go under revenue whether that’s a liners or whatever but they do really well and so it’s less to do with the age and wisdom and sometimes the backing that these people have.
Dr James:
So Wonderful wonderful. OK, yeah, I guess the average age thing. I mean it’s probably so disparate, you know I’m. What I mean by that is you have the people who start, young people who start a little later. That is the average age necessarily representative, is the mean representative of the median, so to speak. If we wanted to get really deep into that, who’s to say Be interested to know what the data says? So I was just curious on that particular thing. Do you know what? I came across a chapter the other day Hopefully going to have one of the podcast very soon is based in Southern Ireland. He is twenty two, or sorry, he is twenty eight now, but he was twenty two whenever he started his first dental practice. He’s a full mouth implant surgeon. He does pterogoids, he does zygos, he does the lot. He’s twenty eight, he’s got five dental practice and he’s got a training facility in Dubai. Wow, what a chap, what a chap. So watch out for that podcast and the Dentist who invest podcast very, very, very, very soon. That’s going to be a fun one. Anyway, david, we digress slightly. Completely my fault, I’m pulling the conversation away for what we’re supposed to be talking about. Let’s move on to multiple practice ownership. What should we be wary of at that next stage?
David:
Yeah, so the mini groups is a growing area. If you look at the UK dental market ownership it’s still around 80% single site owners occupiers. But the mini groups are getting bigger and bigger by the day. So people who’ve got three to 20 and people in that category have an aspiration to grow to a certain level and cash out at a certain value and they are really good ways to make a lot of money. So if it’s done well, branded well, integrated well and sold at the right time to the right buyer, which is usually a corporate. But you have to catch them at the right time because obviously some of them are not buying right now and some are. Some are better than others, but that’s a whole other conversation. So these people are very financially motivated and, yeah, they’ve got different challenges. The big challenges that I come across for the people who are moving into multi site ownerships are where they are unincorporated. That becomes a big drain on them because on paper you say you know we’ve got three practices. On paper you add up the three profits and say, wow, that’s a phenomenal accounting profit, but it’s all financed through debt. And again you take off the bank repayments and the tax and so on and the figure is much smaller. Coming back to what we talked about, having debt in the right place, if it’s incorporated and the company’s repaying that loan repayments, cash flow can be much, much improved and tax saved because you’re not taxed on accounting profits. You taxed on, well, the company is, but that’s a lower rate 19 to 25% and then you only tax on what you draw, so your free cash flow becomes much, much better. The other challenges for multi site owners is and again connected to cash flow is if you buy a practice, you don’t get a tax write off or the purchase, the goodwill, whereas if you add four surgeries to your existing practice, you’re putting in chairs, cabinetry, plant and machinery. That’s all tax deductible. So it’s getting the balance right between should we be buying or should we be investing in the existing sites and what’s the impact on that? Yeah, then spreading the management team tooth in it. It has to be a well thought through strategy on how this thing works. How does it work and how does it exit as well, so we can talk about that. Next, a dental practice will be one of the biggest, if not the biggest, asset that a dentist will have, and I rarely see practices going for less than a million. Most of our clients will go for two, three million bound when they do sell. Now why is that important? Well, first of all, capital gains tax is 10% on the first million of gains. So if you’re thinking about selling, is it put together right? How many people are shareholders? Is there a spouse that could own some shares to utilize their million pound lifetime allowance? What about the kids if they’re at university age? All that needs to be thought about two years before you decide to sell, because if you’ve not had those conditions for two years, you don’t get the 10%. So, having that question answered, also really looking at how we put things in the right place and by that I mean we see this, unfortunately more than we should do is, let’s say, it’s a company, the CQC is in the person’s name and getting the CQC to move the registration from the person to the company at the moment is a 16 week process, and if you are in a process and that is found out just before you’re trying to sell this, you’ve then added months to what is a stressful process. So that sort of thing is important to look at as well. Practice sellers have different problems, so it’s usually corporates that will come along to buy the bigger practices. The deal structures that they put forward can be unfamiliar in terms of we’re giving you £3 million. Of that, £2 million is cash, £500,000 is shares and you’ve got deferred. So being able to talk to people to understand what different financial packages are put together, that needs talking through and again looking at the balance sheets and thinking about how the balance sheet works in your favour when you’re selling and what cash implications does it have for you.
Dr James:
Geez. A lot to watch out for and a lot to be wary of, and are there certain things that we need to be more conscious of, as that let’s say, mini corporate or small group grows?
David:
Yeah, I gotta be careful what I say. There are, yeah.
Dr James:
People can even stop it there, we can just say yeah, yes.
David:
I think that one advice that I will give I think it’s fair to say, and you know, is if you’re going down the corporate side, talk to people who’ve sold to that corporate to get their opinion on how did the process go for you. What did it look like on the other side?
Dr James:
Beautiful. Okay, nicely put Right. Well, anything else we need to add in there when it comes to purchasing multiple practices or happy draw line under that?
David:
No, no, that’s kind of it and so far as can be. You know, talked about this level, but if you’re in these milestones and you know dentists will go through some of these stages, and if you’re getting close to them and I say close them, not even at them let your accountant know, because they got to think about what advice they need to give to you when you’re at that point. So and some of it is so time-sensitive, like the two year period for the capital gains, that’s a big window you’ve got to be communicating and telling your accountant I’m thinking of selling and don’t leave it until you know the week before you’re selling to make that phone call.
Dr James:
There we are boom top stuff All right. Now onwards to the biggie which is the R word, which is retirement, which is what we spend a lot of our life chasing, or at least we’re told that we should do. What do we need to consider whenever it comes to taxation at that milestone?
David:
Yeah, so we’ve kind of talked about that with the sales side. The biggest asset will usually be the practice sales, so beyond that you’re then into your own personal retirement. I don’t advise on people’s personal retirement. It’s whether you want to be on a beach or still busy. I think it’s hard to switch off. If you’ve worked all your life hard and you’ve enjoyed that process, it’s hard to switch it off and just be on a yacht somewhere.
Dr James:
There’s a little bit of a mirage when it comes to retirement, and what I mean by that is we perpetually are chasing this oasis suppose it’s a oasis of happiness, and what I mean by that is it looks like it’s always just in front of us and we’re told at that point we’re gonna have loads of free time and then when we get there, flipping two weeks in, we’re bored. The number of people I’ve seen that happen to you. So if you can realize high level that that potentially could happen to you as someone who is in their 30s, 40s, 20s, that is a huge piece of awareness. That is a huge thing. That is a hugely. That’s a revelation or an epiphany, because then all of a sudden it kind of shifts your mindset a little bit, because I feel like there’s almost something comforting about retirement. What we say to ourselves actually whenever I get to that point, then I give myself permission to be happy. It’s a lot of accountability to say actually I’m gonna decide that I’m gonna be happy in the moment, and it’s easy to use retirement as a crutch and then when you get there, you just revert back to the life that you had anyway. Wouldn’t it be cooler to just realize that?
David:
a little earlier. Like you say, enjoy the journey, not the destination. I think that’s the truth in that.
Dr James:
Don’t sacrifice the journey for the destination as well.
David:
That’s even better.
Dr James:
It’s cool, isn’t it Right? Because you can have both. You can who the heck made retirement up. Anyway, we’re going off on the tangent again. David, thanks so much for your wisdom today. Anything else that we should consider when it comes to our journey as a dentist? Financial milestones?
David:
or have we nailed it Well? Have a good team, have people to talk to, have existing, have people who’ve done it well as friends and people. You can bounce ideas off and talk to people who’ve been through it before.
Dr James:
Very cool. Good wisdom, good knowledge. David, thank you so much as ever for coming on the Dentist Invest Podcast. We will, of course, get you back soon. You still got that ebook right that we were talking about from last time. What was it called?
David:
Yeah, the tax saving for dentists. The PDF yeah.
Dr James:
Yeah, that’s with relevance to the associates. Well, it really is, with relevance to anybody at any stage in their journey, but particularly, you know, those associates that we were referring to at the start who just really need a little bit of guidance to understand how they can be tax efficient. Of course that will be particularly useful for people who are at that stage of the career, but of course it’ll be useful to anybody at any stage of the career. It’s just that, with relevance to what we were talking about earlier. It popped into my head when we mentioned the associates.
David:
Yes, no, and people can reach out to you for that.
Dr James:
Wunderbar. David. As I say, thanks so much for your time. I’m sure we’ll get you on the podcast again very soon. Much love, See you later.
David:
Yeah, see you, thank you.
