Managing Personal, Practice, and Investment Debt

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  • Rob was an Assistant Vice President in the Private Financial Advisory Group of Wachovia
    Established to advise extended-family members in financial planning after $120MM sale of family company to a Fortune 500 company
    Opened in 1999 to non-family members
  • Strategic Individual and Family and Practice Goal Setting
    Life and Career Coaching, Cash Flow Analysis
    Insurance Review, Tax Planning, Estate Planning, Charitable Giving
    Investment Management, Retirement Planning and Retirement Plans and Implementation
    Financing Negotiations – All Types
    Business Real Estate Consulting
    Strategic Practice Planning
    Dental Practice Purchase/Sales Analysis
  • Across Region…data not very helpful
    Gross revenue:
    - Patient/Practitioner Ratios show skew
  • Could Borrow Money for Deals 10% Interest
    High interest rate required better due diligence
    There is no such thing as family default
    You could never borrow for living expenses

Transcript

  • 1. 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.
  • 2. Cambridge Wealth Counsel Counsel. Plan. Prosper. Robert Hockett, CFP robert@cwcounsel.com www.cambridgewealthcounsel.com 801-783-2241 Offices in Atlanta and Salt Lake City - Serving Clients Nationwide - Copyright 2014. All rights reserved.
  • 3. 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
  • 4. Copyright 2014. All rights reserved. Our Dental Clients Licensed 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
  • 5. Copyright 2014. All rights reserved. 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
  • 6. 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
  • 7. Copyright 2014. All rights reserved. Media Coverage
  • 8. 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 Copyright 2014. All rights reserved.
  • 9. 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) Copyright 2014. All rights reserved.
  • 10. 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 Copyright 2014. All rights reserved.
  • 11. 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 Association Copyright 2014. All rights reserved.
  • 12. Regional Income Demographics General Practitioners •Average income: $205-$225k •Average revenue: $775k Specialist Practitioner •Average income: $335-$347k •Average revenue: $945k Copyright 2014. All rights reserved.
  • 13. Copyright 2014. All rights reserved. == 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
  • 14. Copyright 2014. All rights reserved. == Financial Life-Cycle Professional Adolescence Professional Maturity Full Financial Freedom 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
  • 15. Copyright 2014. All rights reserved. == Financial Life-Cycle: Professional Adolescence Professional Maturity Full Financial Freedom 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
  • 16. Copyright 2014. All rights reserved. == Financial Life-Cycle Professional Adolescence Professional Maturity Full Financial Freedom 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
  • 17. The Dental Practitioner’s Scorecard www.cwcounsel.com/UDA Copyright 2014. All rights reserved.
  • 18. 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. Copyright 2014. All rights reserved.
  • 19. Student Loan Notes Based 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 Copyright 2014. All rights reserved.
  • 20. 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. Copyright 2014. All rights reserved.
  • 21. 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 Copyright 2014. All rights reserved.
  • 22. Wide Difference in Offered Rates It Pays to Shop Rates…Again Online Search -as of 3/9/2014 Example: 2014 Mercedes E550 Purchase Price $64,000 While 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 $1,129 Copyright 2014. All rights reserved.
  • 23. 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 Copyright 2014. All rights reserved.
  • 24. Personal Mortgage Notes Strategy 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 Copyright 2014. All rights reserved. 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
  • 25. 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. Copyright 2014. All rights reserved.
  • 26. 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 Copyright 2014. All rights reserved.
  • 27. 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 Copyright 2014. All rights reserved.
  • 28. 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. Copyright 2014. All rights reserved.
  • 29. Practice Financing Notes Loan 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 Copyright 2014. All rights reserved.
  • 30. 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. Copyright 2014. All rights reserved.
  • 31. 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.
  • 32. 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. Copyright 2014. All rights reserved.
  • 33. 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). Copyright 2014. All rights reserved.
  • 34. 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 Copyright 2014. All rights reserved.
  • 35. 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. Copyright 2014. All rights reserved.
  • 36. Building Financing Notes Loan 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 Copyright 2014. All rights reserved.
  • 37. 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 Copyright 2014. All rights reserved.
  • 38. Your Goals are Important Copyright 2014. All rights reserved.
  • 39. DENTAL LIFE CYCLE Personal 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 Copyright 2014. All rights reserved.
  • 40. 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. Copyright 2014. All rights reserved.
  • 41. DENTAL LIFE CYCLE Housing & 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 Copyright 2014. All rights reserved.
  • 42. DENTAL LIFE CYCLE Business 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 time Copyright 2014. All rights reserved.
  • 43. DENTAL LIFE CYCLE Business Structure & Debt • 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) Copyright 2014. All rights reserved.
  • 44. DENTAL LIFE CYCLE Business Structure & Debt • 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 Copyright 2014. All rights reserved.
  • 45. CLIENT CASES #102 Copyright 2014. All rights reserved. • 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.
  • 46. 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 Copyright 2014. All rights reserved.
  • 47. CLIENT CASE # 104 Copyright 2014. All rights reserved. • 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
  • 48. 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. Copyright 2014. All rights reserved.
  • 49. Copyright 2014. All rights reserved. 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
  • 50. Copyright 2014. All rights reserved. Cambridge Wealth Counsel Counsel. Plan. Prosper. Robert Hockett, CFP robert@cwcounsel.com www.cambridgewealthcounsel.com 801-783-2241 Offices in Atlanta and Salt Lake City - Serving Clients Nationwide -
  • 51. The Dental Practitioner’s Scorecard www.cwcounsel.com/UDA Copyright 2014. All rights reserved.
  • 52. Appendix: Examples of Live Loan Docs Copyright 2014. All rights reserved.