Introduction

It is necessary to define the term "Asset" so that we have a clear understanding about what we are talking and to what we are referring. An asset is defined as "a useful or valuable thing." In this case, the "asset" is the "business" in which each of us are engaged, albeit for differing periods and with differing degrees of success. But, regardless of the period of time or the degree of success, the business or practice has a monetary value and thus qualifies as being an asset. And this is especially important in these unusual times for our profession.

Reason for increased importance of asset

Documented decreases in dental caries, questions concerning previous assumptions regarding the statistical extent and continuing chronicity of periodontal disease, the over abundance of dentists, the enormous "start up costs" - they are but a few among the many reasons for the relatively recent realization that an existing practice/business has a monetary value. Because it has monetary value, it is an "asset" and an important one.

There is another rather compelling reason to give serious thought to this asset we call our business/practice. We're living in a very volatile tax environment whereby the effectiveness of pension plans are being severely diminished; for example, a "success tax" of 15 percent on pension funds with balances of over $1.5 million. Marginal tax rates, increased staff expenses, and increased administrative cost all tend to discourage pension plans. The corporate tax increases have reduced the attractiveness of retaining funds in a corporate entity as an additional, tax-advantage retirement fund. All of these factors lead one to

believe that corporate and/or pension plans will cease to be an attractive means of wealth building. With the demise of corporate means and pension opportunities, it means the doctor must pay taxes, and buy and hold assets as an individual. Further, with the existence of turbulent financial markets worldwide, he or she must be prudent in the selection, distribution, and care of their assets. And, I feel, individuals should control their assets as they represent "congealed sweat" and no one will care for them with greater attention and fondness than the producer of the "congealed seat."

Can you think of anything that you've nurtured more, worked longer for, worried about more, cared more about, or were more depressed over than this thing we call our business/practice? Even our children grow up, get married, and have their own problems. But our practice permeates our very being 24 hours per day, 365 days a year, for every year we earn our daily bread. If you agree with me that this business/practice has taken the greatest toll on your heart muscle and stomach lining than anything in your life, shouldn't it have the great value? In fact, it does.

Once we realize that our business/practice has value, we need to consider the utilization of such value. I would argue that most dentists in the not too distant past, in receiving a net worth statement from their account, would not find the value of their business/practice listed. Simplistically, your net worth is the number of dollars you heirs would be left with if you died tomorrow and they sold everything you owned the following day and satisfied all your debts. Probably, not only would you not find the value of your business/practice listed, they would probably have no idea as to how to value it if you so request it.

Let's review some instances where the realistic value of your practice might be important. If you were to go to a bank to secure a loan, a net worth statement is almost always a necessary part of a loan application. A realistic evaluation of an inclusion of the value of your business/practice on your net worth statement would enhance your opportunity to obtain a loan. In my financial planning work, I explain to some of my clients that, as of now, only two fates can befall them:

1. They'll die before they retire.
2. They'll live to retire.

In either scenario, the monetary value of a business/practice must be taken into consideration. If rational planning is to be undertaken, it needs to be considered in your death/estate plan. The structure and terms of your will need to reflect and consider this asset we refer to as the business/practice.

A nest egg of a million dollars is possible

In your living plan, the plan that permits you a life choice, not chance, the value of your business looms longer. For example, a 50 year-old dentist with a successful business/practice, can formulate a scenario whereby imaginatively utilizing the value inherent in his business/practice, he can enjoy a lump sum of three quarters of a million to a million dollars (or more) at retirement at age 65, assuming an 8 percent tax-free growth of this money. If he continues to remain in active practice, this "hidden asset" will grow virtually unattended to approximately $1,000,000 cash at age 65.

Are you beginning to see that this "thing" we'll call the "hidden asset" is a powerful planning tool that should be utilized by every thinking dentist? Can you visualize the freedom you'd enjoy knowing that in addition to all your other assets, you'd have almost a million dollars at age 65? Statistics I've read indicate that fewer than 4 percent of all dentists retire with a net worth sufficient to maintain them comfortably in retirement. I'm suggesting it's a very realistic goal to have a million dollars for those who are prepared to plan and act on the plan.

If this asset is so valuable, how is its value determined? Surely, there are a few "rules of thumb" but, like most rules of thumb, they are not especially valuable. You'll hear such phrases as "one year's gross," or "one year's net," or a variation of one or both of these themes. This is, in my opinion, a gross over simplification and bears no relationship to reality. What does? A very sophisticated examination and consideration of such quantifiable, tangible things are:

• Gross/net:
  • not only the dollar amounts, but also the ratio of gross to net
    
• Leasehold improvements:
  • how recent
  • what kind
  • need to be redone, how soon
    
• Equipment:

• what age
• what condition
• need for replacement, additional
  

• Real estate:
  • is the location viable, changing, changed
  • is the lease assumable, renewable, reasonable
    
• Demographics:
  • is the area growing, shrinking
  • inundated with new dentists in the past 10 years
  • ethnically changing
  • aging or youthful
  • low, middle, or high income
    
• Fees:
  • low, medium, or high

And such qualitative intangibles as:

• Staff:
  • are they motivated, well trained, experienced
  • well paid, satisfied
    
• New patient flow:
  • not only how many, but what kind, from a fee or service philosophy or from a capitation group
    
• Recall system:
  • is it modern and does it reflect the current literature's mandate and discoveries
  • is it effective
  • does it continually upgrade the patient's dental IQ
    
• Growth/decline curve:
  • is your practice in an ascending mode or a descending mode
    
• Quantity/quality/mode of care triad:
  • generally speaking, as quality decreases, quantity increases and mode declines - where are you
    
• Your appointment book:
  • it's truly the "diary of your life," it tells everyone who looks at it the quality of your life you've chosen and the kind of practice that you've allowed to govern your choice
  • is the "quality of your life" marketable

Summary

In summary, I've attempted to alert the individual practitioner that he or she is potentially creating a substantial asset with enormous value for those willing to pay the price and evaluate the opportunities.

Further, I have tried to introduce a few very significant ways that the value of a business or practice can be utilized and considered.

We discussed the changing tax, corporate, pension environment that argues eloquently for the careful nurturing and imaginative utilization of the business.

I have not attempted to discuss all the necessary nuances of evaluation, but rather to provide some food for thought as to what one might consider in the evaluation process.

Dentists indeed do have a "hidden asset." it need not remain hidden, however, for those who can recognize and act on its potential.