Managing Personal, Practice, and Investment Debt

Managing Personal, Practice and Investment Debt

Strategies for Dental Professionals

Presentation for

Utah Dental Association Annual Meeting - 2014

March 13/14 2014

Copyright 2014. All rights reserved.

Cambridge Wealth Counsel

Counsel. Plan. Prosper.

Robert Hockett, [email protected]

www.cambridgewealthcounsel.com

801-783-2241Offices in Atlanta and Salt Lake City

- Serving Clients Nationwide -Copyright 2014. All rights

reserved.


Our Firm• Fee-Only® Fiduciary – Comprehensive Wealth

Management• Founded in 1996 • Clients in 15 states – over 50% are licensed

professionals• Advisors have ~16 years of experience


Our Dental ClientsLicensed professionals who desire to work with trusted experts to accomplish their most important personal, family and business goals—without conflicts of interest.•Practice Types• General dentists• Specialists: Ortho, Endo, Pedo, Perio, Pros, Oral

Surgery

•Financial Ranges• Income: $225K to $1.25MM• Total Net Worth: Generally $500K to $12MM


Our Wealth Services• Goal setting• Life and career

coaching• Cash flow analysis• Insurance review• Tax planning• Estate planning• Charitable giving

• Investment management

• Retirement planning

• Financing negotiation

• Business real estate consulting

• Strategic practice planning

• Dental practice purchase/sales anaysis

Recognition“Best Advisors for Dentists in US”

Dental Products Report, 2011-2014

“Top 150 Advisors for Physicians in US” Medical Economics, 2006 – 2013

“Top Fee-Only Firms” Utah Business , 2011

“ Top 10 Fee-Only Firms” Atlanta Business Chronicle. 2004 - 2012


Media Coverage

Presentation Overview• Personal, Practice, and Investment

Debt• Dental Trends• 3 Stages of Dental Financial Life-Cycle• Income and Cash Flow • Personal Debt• Practice Structure/Debt • Investments/ Buildings

• Client Case Studies• Audience Questions


Dental Trends• Retirement Age Extends (61/68/75)• Student Debt Profile 250/400/800K• Solo vs. Group Practice (25-30% Group Now)• Technology War –Expensive –Narrows Gap GP/SP• Perceptions of Retirement Spending too Low 50%• Govt Regs – 2013 HIPPA Omnibus Final Rule

• Must Have Compliant Agreements w/Vendors• Mandatory Disclosure for Cybersecurity breach(lost iPad)• Fines levied 250-500K up to Maximum of $1,500,000.• Be Very Careful and Become Compliant(1/24/2013)


Dental Trends … continued

• Great Recession – Dental Borrowing and Lending• Older Dentists delaying retirement (75% plan to work pt in

Retirement)• Delay on Sales of Practices =Lower Supply =Increase

Prices for practices• Inflationary Interest Rate Environment – Rates Moving Up

• Mortgages up +-1% in last 12 months

• More Stringent Lending Guidelines in all areas (than pre-2008)

• Good News – Fragmented Lending market =competition• Largest Lender only has 8,500 dentists as clients (13%of Market)

• Dentists are desirable borrowers –low default ratios


Local Demographics

• Utah Practitioners: 1,804• 1562 Patients per Dentist

• Arizona Practitioners: 3,275• 1,979 Patients per Dentist

• Idaho Practitioners: 904• 1753 Patients per Dentist

• Nevada Practitioners: 1,320• 2063 Patients per Dentist

Source: 2013 American Dental AssociationCopyright 2014. All rights

reserved.

Regional Income Demographics

General Practitioners•Average income: $205-$225k•Average revenue: $775k

Specialist Practitioner •Average income: $335-$347k•Average revenue: $945k



==

Financial Life-Cycle: Stages

Professional Adolescence

Professional Maturity

Full Financial Freedom

Target Ages 28-40 35-60 55-90

Milestones Build financial foundations

Wealth accumulation and advanced planning

Wealth harvest and preservation

Timeline


==

Financial Life-Cycle




Associate Income

$136K – $300K $150K – $350K $150K - $350K

GP Owner Income

$250K $350K - $550K Final 5-7 Retirement

SP Owner Income

$400K $400K - $750K Final 5-7Retirement

GP 401k Max year 8 Roth 401k + cash balance x2

Creditor protected

SP 401k Max year 3 Roth 401k + cash balance x2

Creditor protected

Additional savings

Begin to fund investment accounts

Funding min. $75k / year

Tax strategies for distribution

Income & Investments


==

Financial Life-Cycle:




Housing Careful, start modest

Move to dream home & pay it down

Mortgage paid off

Student Loans Student loan interest non-deductible

Debt paid off Student loans paid off

Personal Debt


==

Financial Life-Cycle




Business: Startup

10-15 year amort.

Debt paid off 5-7 years - prep sale

Business: Buy-in

10-15 year amort.

Debt paid off Prepare for sale to partners

Business: Purchase

10-15 year amort.

Debt paid off 5-7 years - prep sale

Commercial Property

Save down payment

Pay down building

Building paid off – rent to buyer

Business Debt

The Dental Practitioner’s Scorecard

www.cwcounsel.com/UDA


Personal Debt-Student Borrowings

• Trends toward private dental schools and price increases have seen the highest student loan balances among graduates in history.

• Student loan amounts of $250K are common with $400K not unusual. The highest I have seen was $1,000,000. Husband wife dental team.

• The problem is there is no way to get them any financing for either a cold-start or a practice purchase…most of math does not work at those levels. Recently saw an $800K couple turned down.

• With trend towards 30% of practitioners in a non-equity permanent role(Large Group Practice)…this trend picture provides employment.


Student Loan NotesBased on significant interest amounts and limited/disallowed deductibility(130K-160K

phase out range) the strategy is to pay this off sooner rather than later.

Loan Amount

Loan Term Interest Rate

Monthly Payment

Total Interest

$250,000 20 5.5% $1,719.72 $162,732

$400,000 20 5.5% $2,751.55 $260,372

$800,000 20 5.5% $5,503.10 $520,743

$1,000,000 20 5.5% $6,878.88 $650,930


Student Loans –Interviews with Several Bankers

• CASH FLOW. “If the underwriting cash flow that we create for the selling practice allows the Buyer to comfortably pay their personal debt through historic compensation being taken out of the practice, we’re ok with various amounts of student debt”(BOA Lender)

• There is however a practical limitation. Debt Service when each individual piece of debt is added together may just be too high. Result…Associates may need to work their debt down before being able to buy their target practice.


Personal Debt - Car Loans• 2008-2011 lenders pulled back from new car

loans.• Lower supply of HQ used cars-increased

prices• First time in 40 years no “drive off the lot”

premium for new cars. • Equilibrium is almost back, prices have

settled.• Auto makers have near record profits.• Mispricing of loan rates


Wide Difference in Offered RatesIt Pays to Shop Rates…Again

Online Search -as of 3/9/2014Example: 2014 Mercedes E550 Purchase Price $64,000While the amounts look similar. The higher rate pays

$10,399 in interest over term. Three times the $3,138 paid on the lower rate.

Bank Rate Term Monthly Payment

Zions Bank 6.09% - Highest (4.2-7.4)

60 Months $1,240

Pentagon FCU 1.99% - Lowest 60 Months $1,119

Key Bank 3.99 60 Months $1,178

Nationwide 3.90% 60 Months $1,176

Lightstream 2.29% 60 Months $1,129Copyright 2014. All rights

reserved.

Special DR. Mortgages…Alive Again

• Our doctor program highlights for dentists and doctors: • 5% down up to 850,000 loan amount several still depressed RE markets

require 10% down… • Very competitive rate, our jumbo rates are extremely competitive, and same

with the lender fee on this program.• No monthly private mortgage insurance if less than 20% down BUT, if less

than 20% down, there is a rate bump based on credit score, down payment, etc…still the doctor loan allows for a very competitive rate

• If the client is not self employed, we can close on the house 60 days prior to starting their new job at a clinic or hospital or practice, etc.. IF they are self employed, they only have to be in business for one complete year.. now that can create income issues if they don’t show any income on the partial year they were self employed.. so this can be an issue at times.

• We don’t have to count the typical minimum payment on student loans on our doctor program in their debt to income ratios, IF the student loans are deferred for 12 months from the first payment on the new home.” Banker Interviewed


Personal Mortgage NotesStrategy for Mortgage is stay with 15 year unless there is no way to pay the difference in payment. 30 year mortgage interest is 280% higher than

15 year cost. Rates as of 3/9/2014


Loan Amount

Term Rate Monthly Payment

Total Interest

$417,000

15 years 3.375% 2,956 $114,995

$417,000

30 years 4.25% 2,051 $321,500

$750,000

15 years 3.375% 5,316 $206,826

$750,000

30 years 4.25% $3,690 $578,237

Good Debt

• Money is used to buy things/experiences.• OPM (Debt) is used to buy things we cannot

afford to pay cash for now with the expectation we will be able to in the future.

• Good Debt is debt that maintains, generates or increases income: Necessary Car, Student Loans, Necessary Home, Practice, Equipment, Building, Investments, etc.


Bad Debt

• Bad Debt is debt that generates or enhances ego but does not generate any incremental additional income with which to pay itself off. Incrementally unsustainable.• Unnecessary Cars, Unnecessary Homes,

Building, “Ego” Investments.• Example: Canyon Ranch –PPM $500K


Investment Assets Vs. Use Assets

• Investment Assets: Have a realistic expectation of appreciation or income generation more than sufficient to reward for risk of loss:• Business Real Estate/Practice Purchase/Equipment/Rental

Real Estate/Mutual Funds/Public Stocks/ Bonds

• Use Assets: Assets Purchased for Enjoyment• Second Home/Luxury Cars/Timeshare/Luxury Home/Boats• “Repayment is through psychic benefits”• 16 week rule

• Purchase Honesty


Cash vs. Debt

• We are very often asked, “Should I pay cash or finance something?”

• “Is this for a use asset or and investment asset”?

• Use assets – LARGER cash component(30-100%)• Behavior changes -cash vs. debt. • We assign more value to our cash than to our

borrowing. • Must be careful … 17% phenomenon.


Practice Financing NotesLoan Amount

Term Rate Monthly Payment

Total Interest

$450,000 7 4.8 $6,318 $80,717

$450,000 10 5.0 $4,772 $122,754

$450,000 15 5.5 $3,676 $211,837

$750,000 7 4.8 $10,530 $134,528

$750,000 10 5.0 $7,955 $204,590

$750,000 15 5.5 $6,128 $353,062


Practice Financing Notes

• Generally Spread Acquisition debt over 10-15 years• You will be able to manage business growth and

cycles better• You will be able to start investment/savings habits

early• You will be able to meet needs for pent up demand• Match Life Cycle of Practice(long) with cash

cycle(slower but building)• Make sure you have no prepayment penalty after 3-

5 years.


Building Loan Options• Building/Practice Loans are financed from 1 of

4 sources or combination of them• #1 Seller Carry-Back Financing/Guarantees• #2-4 Local Bank/National Practice Lender/SBA

Loan• Each has Pro’s and Con’s• Each has differing terms and rates• Focus more on comparing terms and making them

custom for your situation rater than just lowest rate.• You can have the lowest rate and the worst loan.• Understand your “lendability” to be able to negotiate

a reasonable deal.Copyright 2014. All rights

reserved.

Building/Practice Lenders

• #1 Seller – Loans/Guarantees• Often bad idea, seller becomes “stale” wants out• Exercises control over staff, buyer. “still mine”• Alternately, Seller stays to long. • Overshadows the new practitioner. Alpha

Male/Female. This is “old school” way of 25 years ago. Ideal:6-12 mths then OUT.

• 80% of practice purchases do not need seller carry-back if borrower has good credit scores.


Building/Practice Lenders … continued

• #2 Local Banks• Historically only alternative to Seller carry-back• Pros: Shorter amortization = lower rate• Often only lender for construction loans• Sometimes relationship matters in community• Sometimes easier to work with than “Big Bank”.• Cons: Sometimes rigid, short rate lock periods do

not protect borrower from interest rate risk for longer than 3-7 years typically, rarely can fix rate for 10 years. Can’t give longer term rate guarantees(15-25 years).


Building/Practice Lenders … continued

• #3 National Practice Lenders• Pro: Faster closings, specialty area to process similar

loans, very clear underwriting. Lower down payments, often 100% financing on practice purchase loans. Short term prepayment penalties 1-5 years depending on loan type. More creative often.

• Can do 100% building finance loans• Instead of seller carry-back loans or having to come

up with cash down payment …will place #2 loan on practice for the buyers portion of down payment on building.

Cons: Rates are often .25%-.50% higher


Building /Practice Lenders … continued

• # 4 SBA Loans• Origination is through “Direct Lender”

• Often is a local bank that cannot take risk without govt. guarantee.

• Similar rates to the local bank, longer terms of fixed rates

• But…some programs require LOTS of additional collateral to be pledged. Some have high fees(7A-program).

• But …have longer prepayment penalties(10 years etc) or prohibits prepayment…requires most often 10% down bank holds 50% and SBA holds 40% client 10%, Hybrid structure is appropriate for the right need.


Building Financing NotesLoan Amount

Term -Years Rate Monthly Payment

Total Interest

$400,000 15 5.5 $3,268 $188,300

$400,000 20 6.0 $2,866 $287,774

$400,000 25 6.50 $2,701 $410,247

$1,000,000 15 5.5 $8,171 $470,750

$1,000,000 20 6.0 $7,164 $719,434

$1,000,000 25 6.5 $6,752 $1,025,621


Problem: Debt is Cumulative

Type of Debt

Loan Amount

Term -Years

Rate Monthly Payment

Total Interest

Student Loans

$250,000 20 5.5 $1,719.72 $162,732

Luxury Car

$64,000 5 1.9 $1,119 $3,138

Home $417,000 30 years 4.25 2,051 $321,500

Practice $450,000 15 5.5 $3,676 $211,837

Building $400,000 25 6.50 $2,701 $410,247

Totals $1,581,000

$11,267 $1,109,454


Your Goals are Important


DENTAL LIFE CYCLEPersonal Cash Flow

• Personal Cash Flow & Spending are Key• Pent up demand of dentist & spouse IS REAL• Working from a written spending plan key to

success• Remember, the 1st 2-5 years are always the tightest• Be careful not to over buy on the 1st house out of

school…one of the biggest mistakes made

• 4 Key Areas of Focus in 1st 7 Years• Manage spending• Avoid non-productive debt (bad debt)• Focus on optimizing business / learning the ropes• Save and invest aggressively from early on


Where do you fit in?

• Lack of knowledge can often be a hurdle in reaching our hard fought goals. The old adage…we do not know what we don’t know rings true.

• By helping our clients through the 3 Stages we have developed tools, techniques and strategies to speed up the transition process.

• Would you like to know how you compare?• Visit www.cwcounsel.com for a free scorecard

assessment.


http://www.cwcounsel.com/

DENTAL LIFE CYCLEHousing & Personal Debt

• Housing• 1st home: $350k to $550k for 5-8yrs +/-• 2nd home: $450k to $650k for 8-10 yrs +/-• 3rd home: $600k to $1 million

• Student Loans• Range from $250K-$400K –Sharp Increase• Pay off in 10-15 years, pay off more

aggressively a few years into practice


DENTAL LIFE CYCLEBusiness Structure & Debt

• Associate• No debt, Employee, mobile

• Start Up (More Risk) – More Risky• Capital/Debt - $400k to $565k• Pay off debt within 10-15 years• Most difficult (no cash flow built in)• Lowest income for the longest period

of timeCopyright 2014. All rights

reserved.


• Buy In (to existing practice)• Capital / Debt: $450k to $700k• Pay off debt within 10-15 years• Stable income from day 1• Frequently Partner problems

• Purchase (existing practice 100%)• Capital / Debt: $500k to $900k• Pay of debt within 7 years• Stable income from day 1• Management is key (business systems, etc)



• Commercial Property• 50-60% own their own space/building• Capital / Debt: $500k to $1 million• 5 + years into practice: pay off within 10-15+ years

• Business Value• Multiples range from 0.60 to 1.0+ times gross

revenues• The stronger / more profitable the practice the

higher the multiple• Location, stable patient base, and cash flow are key


CLIENT CASES #102


• 15 YEARS IN PRACTICE – INCOME $125k/yr.• Single, male, early 40s, Southeast• Associate for 1st 10 years of practice• Poor location• Management issues

• Overhead / Staff too high• Very average marketing• Scheduling not optimized

• We released him … unable to help him—indecisive.

CLIENT CASE # 103

• 24 YEARS IN PRACTICE – INCOME $500k/yr.• Married, age 56, West Coast - $1.150M Collections• Building Ownership (paid off by retirement date)• Purchased practice 21 years ago• Tax optimized – 401K $52k+$5.5k catch up +$23k

spouse• Saves / Invests $84K per year Taxable Accounts• Vacation 6 weeks per year (1European vacation)• Ends work day at 4:30pm-will retire at 62


CLIENT CASE # 104


• 14 YEARS IN PRACTICE – INCOME $430k/yr.• Married, age 43, 3 kids, Southeast - $1.1M

Collections• Associated for 4-5 years – (10 years on own)• Business / Marketing undergraduate degree• Cold start up (most successful GP start up I have

seen)• $1 million gross practice revenue by year 4• 401k plan: $52k/yr.• Purchased $1 million building• Works 4 days / week

Conclusion

• Dental Practice - rewarding and challenging• Working with the right Expert Team

• Accelerate your progress through 3 Stages• Saving you time, frustration and money • Peace of Mind

• If you are interested in exploring a deeper working relationship with our Firm –visit www.cwcounsel/uda sign up and take our self-assessment.


http://www.cwcounsel/uda


Persistence

“Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent.

Genius will not; unrewarded genius is almost a proverb.Education will not; the world is full of educated derelicts.Persistence and determination alone are omnipotent.”

– Calvin Coolidge


Cambridge Wealth Counsel

Counsel. Plan. Prosper.

Robert Hockett, [email protected]

www.cambridgewealthcounsel.com

801-783-2241Offices in Atlanta and Salt Lake City

- Serving Clients Nationwide -

The Dental Practitioner’s Scorecard

www.cwcounsel.com/UDA


Appendix: Examples of Live Loan

Docs


Economy & Finance

Managing Personal, Practice, and Investment Debt