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, CFP
robert@cwcounsel.com
www.cambridgewealthcounsel.com
801-783-2241
Offices in Atlanta and Salt Lake City
- Serving Clients Nationwide -

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 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

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
• Nevada Practitioners: 1,320
Source: 2013 American Dental Association

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
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

==
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

==
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

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 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

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 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

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 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
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 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

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 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

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 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

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.

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

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

DENTAL LIFE CYCLE
• 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)

DENTAL LIFE CYCLE
• 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
• 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
• 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.

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, CFP
robert@cwcounsel.com
www.cambridgewealthcounsel.com
801-783-2241
Offices in Atlanta and Salt Lake City
- Serving Clients Nationwide -

Appendix:
Examples of Live Loan Docs

Managing Personal, Practice, and Investment Debt

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