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VIDEO - HSP #157 - Mike Bark
You're a dentist. You want to fix teeth. Mike Bark is a CPA. He wants to help you, so you can keep busy being a dentist.
With nearly 20 years of experience I provide accounting and tax services for mostly dentists. As a Certified Valuation Analyst I have done countless practice appraisals and often help people who are purchasing dental practices.
I have published several articles related to tax law and valuation. I am a moderator on Dental Town in the Practice Transition area
I am married with 4 sons (6 to new born) I'm a pretty good home brewer and cyclist
Howard: It is a huge honor today to be interviewing Mike Bark who is a CPA and a CVA. CPA, a certified public accountant. CVA, a certified value analyst.
Mike: Correct. Yes.
Howard: I just read a new book on how to manage people time and money. Business only manages three things. You make something, sell something, watch numbers and dude, you got an uphill climb because I'm a dentist, I'm guilty. Dentists just want to fix teeth and they have to wear a lot of hats. They got to manage people, they got to manage money and they just ... What percent of the dentists you work with just really love to watch their numbers? When you meet with them, you can just sense they know all the numbers, they love to watch numbers or are just totally into numbers as much as they are doing root canals.
Mike: I would say there's about 10-15%. You look at them and you go, "If the dental thing doesn't work out, we got a job for you when this is all over."
Howard: You're saying about 85% of the dentists that this is a task, this is a chore. They really don't want to do this.
Mike: I don't think that's even dental exclusive. I think that's across other medical professions, other businesses. Even in running our business, I don't know that we necessarily like looking at our numbers all that much. Accounting is also, I think, that gets pushed to the background a lot by people.
Howard: You got a hour with about 7,000 dentists today who really would prefer if I was interviewing someone who's going to teach them how to do a root canal, a filling or a crown. Let's just start off with when people think of their accountant, there's three statements. There's a profit and loss or statement of income which is mostly for the IRS and taxes. Then there's a balance sheet. What balances? Your asset, like your house with what you have into it, your equity minus the liability that you wanted, which is mostly used for getting other peoples' money, a loan, a debt or dividing up your money in a divorce. Then the third one's the statement of cash flow.
Most of these dentists think of their accountant as the bearer of bad news at how much I owe the IRS. Let's start off with the first question, how much of your job when you're dealing with dentists is about taxes? Do I just shut up and pay my taxes or are there things that I can do to save money on taxes?
Mike: I would say a big part of what people lean on us for is their taxes. That's a part they're afraid of. They're afraid of the IRS coming in. Yes, there are some things you can do to minimize your taxes that sometimes get overlooked. I think a lot of people think there's a magic bullet that we can fire to get you out of paying taxes and if that was the case I wouldn't be paying taxes myself and I still get to pay taxes, so there's no magic bullet. If you do a lot of little things right along the way, you should be able to save some income taxes.
If we're doing our job as a CPA, depending on the practice, we're looking at trying to save 15, 20, 25,000 a year on taxes by making sure you're incorporated correctly by making sure you have the right retirement plan for you situation, making sure you're taking advantage of income splitting. It could be your spouse, it could be your children. Making sure you're not overlooking deductions, for example, a lot of dentists won't take a deduction for an automobile at all because they don't want to raise this red flag with the IRS or they won't want to write off any means of entertainment whatsoever because they don't want to raise a red flag. We try to educate them on those topics and make sure they're taking advantage of everything they can. We did tell them upfront, "We can't get you out of paying taxes."
Howard: Give them some low-hanging fruit on saving taxes.
Mike: I think the biggest one is entity selection. We see a lot of dentists where we take over their accounting and then might be structured as a C corporation or a sole proprietorship still. Nine times out of ten, they'd be better off as an S corporation and the reason is the S corporation has this concept of W2 income and profit distribution. The nice part of profit distribution is you're not paying FICA and Medicare tax on it. If you look at a established dental practice that's being taxed as a sole proprietor, in many cases, they're spending $5-6,000 a year more in FICA taxes than they need to be. I think that's a big one.
Howard: You think-
Mike: In terms of ...
Howard: Go ahead.
Mike: I think, I mean, just overlooking certain deductions. For example, a lot of dentists won't ... If they're buying a lunch and everything for their entire staff or meeting expense, those lump at into meals and entertainment which is only 50% deductible. If you put it in a meeting account because you're buying if for everybody, it's 100%. I think a lot of dentists are afraid to take the automobile deduction and not that you can write off your entire account or anything like that, but if you think about it, if you're running a business, yes at first could be it's not deductible, but you're running to the bank, you're running to Costco or you're running to continuing education and all that stuff's starts adding up that those are some deductions that should be being taken.
I think a big one that's also overlooked is if a practice, they got to a point where they're successful, they have cash flow and they're saying, "How can I save even more on taxes?" If your spouse isn't working or taking advantage of a retirement plan, there's no reason it can't be in your payroll as well and then that way it can double up your 401K or simple IRA contribution.
Howard: As a CPA, what lessons did you firstly learn from Martha Stewart, Wesley Snipes, Willie Nelson, Nicholas Cage, Mark Anthony and all the other celebrities who have gone to jail for tax evasion?
Mike: I'm too pretty for jail.
Howard: You're too pretty for jail? That's a good one. I love that. You're right. They are afraid of the IRS. Lots of famous people have gone to jail for the IRS. Have you ever seen a dentist go to jail for the IRS?
Mike: No, we've never had that. In 18 years of practicing, I've only had three IRS audits of dental clients, three. That either means I'm being way too conservative with taking deductions, which I don't think were in that realm. I think it means that the IRS has bigger fish to fry or put simply, there's not the red flags that people think there are when it comes to doing this stuff. If you have some amount of meals and entertainment on your financial statement, that's going to be usual and customary if you have a million dollars worth of it. Yeah, they might come and take a look at it, they might come in and audit that particular issue, but usually you have more to worry about from your state income taxes than you do your federal.
Howard: You're in a suburb. You're in Wauwatosa, Wisconsin which is a suburb of Milwaukee.
Howard: Do you mostly do dentists in Milwaukee or do you do dentists in other states too?
Mike: Yeah. Our firm is a comprehensive business advisory firm where we have brokerage, we have marketing, we do accounting. About 65% of our clients are in the Midwest. We've been growing and we've been adding all over the country.
Howard: Someone wants to ask you a ... Most of my audience is commuting to work right now. Your website is edgeadvise.com. Your email is firstname.lastname@example.org. That's edge, E-D-G-E, advise, A-D-V-I-S-E dot com. Tell them why they should contact you.
Mike: I think we offer some unique services that other CPA firms don't offer in terms of marketing, in terms of if they need to hire an associate, we have that service. If they need to sell their practice at some point, we know that. Even if you don't use those services, I always say to a client, "I learn a lot as a CPA firm." Some of the stuff that those people are seeing in real time. If we're talking about practice valuation, I have no better resource than to walk down the hall and talk to my partner Andy about what's really going on in the market right now. What are the DSOs doing? Are they overpaying like the perception is or are they paying fair market value? We've seen marketing plans that work, don't work. I have done well because we've tried all of them. I think that gives us a unique perspective.
I know a lack it's made out of this whole dental CPA or you need a dental CPA versus a generic CPA. I think certainly some of that stuff is true as well. All of our clients are dentists, so we're able to benchmark you against-
Howard: All of your clients are dentists?
Mike: I should say about 80% of our clients are dentists.
Howard: Don't you think that's a huge advantage for you? Wouldn't I rather talk to a guy like you who is looking at a bunch of dentists as opposed to a CPA who when I hang up the phone needs to get to his next client who owns a dry cleaner or a tanning salon or a restaurant or a plumber?
Mike: I think the big advantage is giving you some context on your numbers. For example, if you're saying, "I need to add a hygienist. Can I afford to do that?" We can look at metrics to say, "Yes. We're looking at your production. Yeah, it does seem like based on how your booking, based on what your numbers look like, you can add that hygienist now." Or if you're looking at adding an associate, where do you need to be to get that associate in the door. We're able to establish relationships with banks that will lend to dentists. I think having the context and being able to say, "Here's where your practice is strong. Most practices do 80-85% of this stuff really well, but here's the 15% where you can improve on because we're seeing other dentists do a better job in these areas than you are, so now go do likewise." I think giving the dentist a context in those numbers should be helpful.
Howard: That's what the industry generally refers to as benchmarking, correct?
Mike: Correct. I think that benchmarking and I think having the context within the dental industry. If they're looking at buying equipment or they need a loan, being able to go to those resources and have a good working relationship with them, I think gives up a leg up over an accountant who might not be speaking that language.
Howard: The bank also probably thinks they're in good hands or you're filtering out crazy people or you're advising people you don't need to get a loan right now. Probably, the bank's seeing you as bringing them qualified leads.
Mike: I think the banks, at least the large banks that do dental lending are happy because of the fault rate in dental is microscopic. It's I believe one half of 1% of all dentists default on their loans which is in the scheme of things, nothing. US Bank, Bank of America, Wells Fargo, PNC have recognized that opportunity. I think one of the misconceptions that a lot of young dentists have is, "Okay. I have this overwhelming amount of student loan debt. How am I ever going to buy a dental practice?" The fact of the matter is there's five or six banks that are just waiting to give you 100% financing to go and do that.
Howard: Yeah. I hear it all the time and you're right. That is a huge disconnect in the dental industry. The dental students all believe they have no access to a capital. A lot of the DSO kings are out there claiming that the reason they're so successful is because these kids don't have access to a capital when that's their advantage to say that so everybody will go work for them when the truth of the matter is they have a total access to 100% financing with a one half of 1% default rate. You rattled off ... you said five to six banks. You said US Bank, that's out of what? Charlotte, North Carolina?
Mike: I believe their main office is in the Twin Cities in Minneapolis.
Howard: Minneapolis. Then Wells Fargo, what's that? San Francisco?
Mike: Wells Fargo at California.
Howard: Yeah. What were the other ones you were rattling off?
Mike: PNC Bank which is out of Pennsylvania.
Howard: PNC Bank?
Howard: Oh, PNC.
Mike: I believe Pennsylvania and National or whatever it's ... I'm not sure what it stands for.
Howard: Okay. I haven't heard of that one. PNC Bank out of Pennsylvania. What were some other ones you said?
Mike: I think Bank of America is still right there with most other banks.
Howard: Is it Bank of America or Skank of America?
Mike: It depends on who you talk to.
Howard: That's an old MBA joke for my issue, just only because it rhymes. What's the other one?
Mike: Those are the four big ones that we use for most loans on students.
Howard: US Bank, Wells Fargo, PNC Bank and Bank of America. Is Chase a big player in that area or not really?
Mike: Every now and then you'll see them pop up in a loan.
Howard: They're not the big four.
Mike: They've been inconsistent. Right, they're not one of the big four.
Howard: Okay. You just told these students that they can get access to 100% financing and these four banks are on top of it because they're looking at a half in 1% failure rate. Unbelievable. I want to ask you, I'm always trying to focus on the kids the most because deep down inside I believe the 50 year old guys like me need the littlest amount of help and these kids come out of school. They're coming to forks in the road and if they make the wrong turns, some of those mistakes cost them 5, 10 years.
Tell me if this is true or not because sometimes you don't know if the rumors or what people are saying on the dental town boards, is it actually true? Because we hear this, we hear that dentists pay these young kids out of school as an independent contractor so they don't have to pay FICA matching specifically. I don't have to take out taxes and [inaudible 00:13:57]. It's cheaper for an employer dentist to hire an employee dentist as an independent contractor. I don't have to ... is it correct? Right?
Howard: Is the savings pretty much only the FICA matching, the social security ...
Mike: It's a couple of things. One's the FICA match, one's going to be retirement contribution, if they have a 401K. I don't have to put an independent contractor within my 401K if I'm offering health insurance. I don't have to worry about that person's health insurance at that point and it could probably also make them pay their liability insurance and some of those other things.
Howard: The FICA matching is 7.5% is it?
Mike: On the first $117,000 of wages, it is. Then it goes down to 1.45% after that.
Howard: To 138 or ... ?
Mike: After 117 it goes down to 1.45%.
Howard: For eternity?
Mike: For eternity.
Howard: When you're a young kid and you're going to work for a old fat baldy dentist and the say, "I want you to be an independent contractor." It's because they're trying to save the 7.5% FICA matching on the social security, health insurance, blah, blah, blah, blah. Doc, I have heard several times, maybe three or four times in my 28 years that that employee dentist was not paying his taxes and five years later that employee dentist got audited and they went back to the dentist and said, "You owe him the taxes," and the dentist said "No. He was an independent contractor."
They say, "Really? An independent contractor was basically designed for construction. I need a plumber. The plumber come in and laid all the plumbing. I don't understand plumbing. He brought his own tools, he brought his own equipment, he brought in anything. That's not what this dentist was. This dentist came to your office with your tools and your equipment, with your hours, with your front office doing the interns billing, collecting whatever."
They go through a checklist and they say, "He was not an independent contractor. He did not pay his taxes. Thus, you are liable and he worked for you for five years. Cut me a check right now for $130,000 plus penalties and interest." I know three or four dentists that literally cried when they told me this story. Is an associate dentist doing general dentistry in a general dentist office really an independent contractor? Will that really pass the IRS muster test?
Mike: No, I don't believe it would. Some of the standards, you have to be able to set your own schedule or you're supposed to be working with your own tools and all these things that make it very hard for a general dentist, I think, to pass that smell test. We'll tell our clients that if they want to be aggressive, ultimately, it's their decision to make if they want to do it. There's probably a reasonable chance that you're never going to get audited, but if you do, don't come back to me and say, "Hey. You should've told me that."
Howard: Yeah, so it's rare that you're getting it audited, it's rare that your employee dentist isn't going to not pay his taxes, but you and I both agree and are telling everybody that if everything goes wrong, you get audited and that guy did not pay his taxes, you are going to be liable plus penalties. You're not going to-
Mike: Again, it's-
Howard: I want to add one more thing. When you go to the IRS court, there's no jury. There's only a jury if you do a crime. When you go to the IRS judge, it's you, the IRS judge and you lose. Is that a fair assessment?
Mike: Not necessarily because, I mean, tax payers have made a lot of progress. One of the big ones that affects dentals is concept of personal goodwill. I mean, there's been court cases and one of the court reasons dental practices can by and large sell for capital gain treatment is because a tax payer went in there and won the personal goodwill fight for them. I would tell a doctor who wants to make their associate an independent contractor, unless your associate doesn't have much on the ball, they're going to understand, "Now, I got to pay this 7.5% of tax. Now, I'm not getting a retirement. I'd like to get paid more." I think the little bit you might get in tax savings, I would assume the associate if they have some competent representation on their side is going to want to higher amount of money from you. Doesn't really save any money.
Howard: I think it's bad for us older ... I don't do it. I pay mine as employees. The reason I'll tell you why is let's get real. When a young kid's coming out of school, how organized are they going to be to be taking part of their paycheck and putting it in a IRS savings fund, so when their taxes are due next April, they're going to have the money set aside? What percent of the kids are going to be that organized to do that versus getting their paycheck, depositing it in their savings account, seeing all this money and then running off to Home Depot to buy something? I mean, it just get kids in trouble. You're trying to miserly do this, what's not even legal. The IRS judge, when they go through the independent contractor, did bullets. I think last time I saw, it was like 14 questions. You're going to lose on every one of those questions. I just think the industry should stop doing it. Pay these kids as employees or don't get them.
Mike: I would definitely agree with you. The only case you can really make for independent contractors, in my opinion, is somebody who's going to come in very infrequently into your office or if it's a specialist. Those make sense.
Howard: Like when a dental anesthesiologist comes in my office because they're going to put somebody ... I'm not going to put it to make you sleep, because 28 years of watching dentistry, if anybody ever dies in a dental office and the shit hits the fan, there's usually almost always an IV in their arm. When you go on the witness stand for that and a board certified anesthesiologist comes in and starts asking you anesthesiology questions, you're going to look like the idiot that you are and it's just horrible.
When these dentists and it happens to them, it ruins their personal life, financial life. When that independent contractor comes in, he has a dolly with these tubs and just like a plumber or electrician, he's bringing his own equipment, his own monitors, his own drugs, his own skillset and that is a true independent contractor. If some specialist is coming into your office, they have their knowledge and tools and equipment. They also bring in their own dental assistant if they want one. That is truly an independent contractor.
Howard: Someone working for you Monday through Friday, 8-5, in your hours with your policies, doing what they're told and going through the system, that's just not it. We beat that up enough. Setting up the books. How do you like to see books set up? Furthermore, I got to ask you, for digital, are you a big fan of ... Intuit owns Quicken, QuickBooks Plus, QuickBooks Pro. I think Microsoft, didn't they buy in Great Plains Accounting?
Mike: Mm-hmm (affirmative).
Howard: I am an old guy so I still love Peachtree. Am I an idiot for being on Peachtree? What do you recommend?
Mike: Right now, the vast majority of our clients are in QuickBooks Online. It's the dominant software platform out there and-
Howard: I'm going to put here, QuickBooks Online. Go through the other ones because the big brands are QuickBooks Pro. What about QuickBooks Pro? What are the other QuickBooks? Then tell them why you like QuickBooks.
Mike: QuickBooks has both a desktop version of their software and they also have now an online or a cloud-based version. Our preference is for the cloud-based version because they can work on it from anywhere. If a client who is doing their own books has a question, we're able to look at stuff real time with them and help them, figure stuff out or something's off or fix the problem. We're looking at the same exact screen. We don't have to wait for them to send over a backup or send us a key drive in order for us to look at their books. They could-
Howard: Okay. What do you say, because my job is I know what these guys are asking because I read about through staying on Dental Town all day long, what would you say to the dentist who says, "I'm not putting my information online. Are you crazy? Someones going to hack into that and steal all my money."
Mike: I would think it's in QuickBooks, who's a massive company, it's in their best interest to make sure that this stuff is secure. I'm guessing they're doing a better job than the PC guy that you have coming into your dental office.
Mike: We've seen accountants. We've graduated to using cloud-based tax software, cloud-based and again, I think that security could always be breached, but in our feeling these are massive companies that have a lot to lose if they do get breached. Their system is going to be way more secure than the dentist down the block in your servers.
Howard: You recommend QuickBooks Online. How much is that? Do I have to get a disc and so my computer is totally cloud-based to just go to QuickBooks Online and how much is that a month?
Mike: It depends on your accountant. We actually eat the costs at QuickBooks Online for our clients because we get a wholesale price, so we get it for $10 a month. We tell the client it's convenient enough for us to have you on this platform because I don't have to drive out to make a backup or worry about you sending a backup, we'll just include that in our fee.
Howard: If I-
Mike: We have a flat free billing system and it's just included in that.
Howard: If I was driving to work right now and I want to use you because my accountant only has one dentist client and it's me and I want the benchmarking, I want the value added, I only want someone who sees that my industry and thinks about my industry all the time as opposed to jumping around from cattle farmers to corn farmers to Dairy Queens. I go to edgeadvise.com and I ask for the good-looking handsome bald guy name Mike Bark and you're going to set me up this QuickBooks Online.
I want to ask you specifically, are you mostly just going to give me a statement of income, a PNL and help me in my taxes? What about do I need to see a statement of cash flow? How often will you update my balance sheet? What do I need to know about managerial accounting or financial accounting? How much if this is going to be about just taxes and how much if this is going to be about managerial accounting?
How come I keep reading, every time you read the Wall Street Journal they're talking about ... they show the reports of a company with like say, the PNL, statement of cash flow, the balance sheet, how come all the dentists I know only get a PNL and don't even know what a statement of cash flow is? How come it'd be easier to find a dentist who is abducted by aliens than a dentist who got a statement of cash flow from their CPA?
Mike: It depends to the CPAs on the statement of cash flows. Statement of cash flows is much more important if you have a lot of debt on your practice because you're going to have this money going out to service the debt that you're not necessarily going to get a tax deduction for. You're always looking into, "All right. My income statement is I made $100,000, why do I only have $20,000 of cash?" The other reason for it is, this sounds bad but we can only do what clients are willing to pay for. Statement of cash flows is really designed for an accrual based accounting system meaning we're entering accounts payable, we're accruing expenses and we're doing things that big manufacturers and big accounts will generally do if they're accounting. Most clients will want to pay for that.
Howard: You don't think they need it?
Howard: You don't think they need it?
Mike: I think if they have debt, it's important to understand where the cash flow is going. I think it's important we do a key performance indicator report on top of our financials that analyzes things like collections. It analyzes hygiene efficiency and some other metrics that we put out there. In terms of their core financial statement, yeah, for the most part they're going to be concerned about the profit and loss statement, because a lot of their expense drivers are right on there. The balance sheet in a dental office isn't overly critical and that dental practice valuation and things like that are built off cash flow, they're built off profit and loss. They're not really built off the balance sheet. You're not putting inventory on there and a bunch of other things to create a bunch of long term equity in the balance sheet.
Howard: How many-
Mike: Most are ... Go ahead.
Howard: Okay. What I want to hone in on is there's the income savings, the PNL for taxes, but for managerial accounting, you're saying you don't really need the statement of cash flows, the balance sheet. You give them this dashboard of metrics. Will you go through those dashboards, exactly what those metrics are, what range that you like to see them in and go through that for us?
Mike: Absolutely. If we look at KPIs in our practice, if we look at most profitable practices there's a couple of things they have ...
Mike: Yup. Couple of things they have in common. One is if we look at their production by a provider, hygiene will be making up roughly 30% of the overall production. If that number is much less, there's a good chance that dentist isn't going to hit the 55% overhead because everything's concentrated in dental production. There's a good chance that their year to year income statement may look more like a person having a heart attack because they don't have hygiene patients to sustain production. You also have one year when you hit a bunch of big cases and it looks great, but you have the next year where people aren't accepting it and you don't have enough hygiene there to do it.
In terms of evaluating whether it's associate, whether it's evaluating hygienist, the good news and bad news for those people is we know exactly how much money they're worth. We do individualized production per hour, production wage ratios for those positions because we want hygienist to be producing at minimum three times or, I'm sorry, producing three times what they're being paid at minimum.
We also know if we chart out all of our clients, good hygienists are at 3.75 to 4 times to 1. We know that good hygienists can produce at least $150 an hour and if we're not seeing it, now we can drill down deeper and say, "If you have your hygienist and they're producing $90 an hour, chances are, I would guess if I have 3% pro fee or are not pro fee perio codes and need to be doing a lot more perio and are charting correctly or maybe are missing x-rays or missing any number of things.
Howard: Have you ever dealt with any hygiene consultant that could go into an office and help them improve that hygiene department? If they're using you and you're the one at Edge Advise saying, "Here's a red flag. Your hygienist is only doing 15% in production and it could be 30%." Do you know of any names of people or agencies where a hygiene go in there and help you turn that around?
Mike: One of our partners is Noelle Hill. She's great. She's part of Edge. She goes in and she does back office consulting. If we're seeing hygiene numbers way less than average, we're certainly going to suggest to the client that it might be worth their time to bring Noelle in to go over protocols and go over those things to help increase those numbers and she's seeing great results when she's going in.
Howard: Can you have her do a podcast with me on that question?
Howard: Really? That would be rocking hot. I would love that because that's huge. You're right. A lot of time dentists say, "We'll start paying my hygien-" Like in Arizona, when the hygienist come in, they can get $40 an hour anywhere. If the go in rate is about ... It's so different because in San Francisco and Manhattan, you can't hire one for under $50 an hour. There are some states in the south where you can hire a hygienist for 15 hours. What you're saying is a better way of looking at it is times production, so if you're paying her a dollar an hour, she should be bringing in $3-4 an hour or you should fix that.
Mike: Mm-hmm (affirmative). It's a revenue producing job. Obviously, the good and the bad for the hygienist is if a hygienist wants to make $45, $50 an hour, if you'll be able to produce enough, you can make that much. Everybody wins in that situation if you are to the end where you're happy making $30 an hour, you can probably get away with somebody producing less.
Howard: You've said ...
Mike: It's the same way that accountants are evaluated. It's the same way attorneys are evaluated. They'll look at how much have you produced versus how much are we paying you.
Howard: You flippantly said that hygienists 30% in production should be hygienists and if you don't have hygienists doing 30% in production, you're not going to get to that 55% overhead. Is the ADA still saying that on their numbers? The average overhead is 64%. I think it was the last number I saw.
Mike: It's 64 when I saw, yeah.
Howard: Sixty-four percent would be the mean, the mode, the average. How does a dentist get to 55%?
Mike: I think there's two real big costs that you need to control. One is the labor. Biggest cost is labor firing away and I think you need to have your wages at 24% or less and the all-in staff costs at 27, 28% or less. If you're way higher than that, number one, it's going to be hard to fix.
Mike: You on it?
Howard: I want you to address something because you're so smart and a lot of these guys ... I know the younger kids are missing what you're saying and that is a dentist will sit down at the study club and say, "Yeah. My labor is 25%." You just said, "the all included labor." Does that include uniforms, health insurance, federal and gains? Talk about, you said wage is 24% but all inclusive, 27 and 28. What's difference between wages and all inclusive? Why does that dentist across the street from you when he's telling you his low labor wages, what is the all inclusive things that this guy is not putting in the number?
Mike: He's probably not including the payroll taxes. He's probably not going to include any health insurance or health insurance reimbursement, not including uniforms, not including any retirement contributions that are being made on behalf of the staff, any continuing education that might be a specific benefit for the staff versus an entire office. I also think it comes down to, a lot of offices when they talk about overhead, we're not always looking at apples and oranges.
Howard: Oh, you think?
Mike: In my opinion, I don't know if the [inaudible 00:32:57] or [inaudible 00:32:59] to those guys would necessarily agree, what we look at is this concept called operating income. It's basically everything before the doctors get paid, before any truly discretionary expense. You put your spouse on the payroll, really for purposes for doubling up your 401K, or you got the kids on the payroll because they're "cleaning the office," also before depreciation and interest. Because depending on the life cycle of a practice, some practices have a lot of interest expense, a lot once they're established, they don't have any.
Depreciations, one of those things where depending on what the tax laws are, somebody might buy $150,000 of equipment one year and then the next year they don't buy anything. We look at that operating income and that's what we use to say 55% should be the goal that you're trying to get. If you can have your staff wages in line, I think the other big one occupancy expenses because that's a hard one to fix. If you're in this plant that's way too big for your level of production and you have occupancy expenses at 10%, it's very hard to make up other expenses to get you to the 55% overhead.
Howard: You're saying all inclusive labor is got to be 27 or 28% or under.
Howard: Occupancy expense needs to be what?
Mike: I would say a 5-6% all in.
Howard: Five to six percent.
Mike: Now, if you're a newer practice and you're growing or you did a startup, obviously that metrics' going to be way out of whack. If somebody is doing a startup practice, some of these metrics when we're talking about trying to hit 55%, it's going to take a few years to get there because everything's just going to look goofy for a little while until you get your production ramped up. If you're an established practice, you are kind of what you want to be when you grow up as a dentist, you need to have the staff wages in line and I think you need to have the occupancy expenses in line.
Howard: Okay. Keep going. Labs, supplies, electric, toilet, plumber. Keep going.
Mike: Supplies, anyway we've seen kind of trickle upwards a little bit over the few years is the dollar's been devalued, so I'd say 7%'s the target where historically it was always 6%. Now that more and more dentists are doing implants and kind of changing their production mix a little bit, depending on where they quote things, we can see supplies in a slightly higher level. Lab fees, it depends on the office. A lot of offices have made the move to E4D and CEREC in our area, so we expect to see those drop to 2-3% because they're still supplies that you have to do in order to support that. Both of those will depend a little bit on the nature of the office.
Howard: If you have CAD CAM, you're saying your lab bills should be 3-4%?
Mike: I would say so, whether you have the CAD CAM.
Howard: If you don't have CAD CAM, what would lab bill need to be?
Mike: Usually about 6-7% in most practices.
Howard: One thing I've noticed, one of the reasons I think supplies have been trickling up is because if you get in the CAD CAM big time and you're buying those blocks from your supplier, Henry Schein, Burkhart, Benco, Patterson, if you're putting a $15 block on your supply bill, well, you used to be ... that was your lab bill. I see a lot of supplies that have all those CAD CAM blocks, but you were astute to say, "No. Your lab bill will still be 3-4% because you'll still be doing some lab procedures." I assume were you also saying that all those CAD supplies would be categorized under your lab bill?
Mike: In trying to get the apples to apples with every client, we typically tell them, if you're doing implant or invisalign or CAD CAM, to put those in the lab expense, because if you're doing implants, it's really a replacement to some extent to do a bridge or a crown or something like that. If we're comparing true dental supplies to true dental supplies, you don't want to have those expenses within there, so we'd like to see those over at lab.
Howard: Also for my 20% of viewers who are not from Unites States this is confusing because like in Germany, like in America, when I go to my doctor and he does any lab bills, I pay the lab directly to the lab. When I go to the hospital for my kidney stone and you get the bill, the hospital has a bill, the doctor had a bill, but labs have their bill. In Germany, when you go to the dentist to get a crown, you pay the lab direct. In America, just in dentistry which is only 5% of the healthcare budget, for some weird reason, we pay the lab man and then we bill the patient. It's kind of confusing. I don't think we should. I don't think any patient should pay the doctor's lab bills. I think the patient should pay the lab and the patient should pay the doctor and I don't think you should pay the doctor to pay the lab. Anyway, that's a whole another story.
One last thing, what do you think of the total bomb that just went off in the dental supply business when Amazon.com joined the dental trade manufactures association and their CEO Jeff Bezos saying, "We are going into dental supplies." That was a shockwave. That was an earthquake magnitude 10 if you work for Patterson, Schein, Benco, Burkhart, whatever. Do you think that that's going to have any significance in the next five years or do you think that's something that won't really be a factor for 10 to 20?
Mike: I think it's going to have some significance in it. I think it's going to be a driver to lower prices overall. I think Schein and Patterson are going to continue to have to try to find ways to add value. You can buy these supplies from anywhere. For example, if Schein is going to try to say, "We do business brokerages. We have all these value added services. That's why you should do business with Schein and you get that as a Schein client." Patterson's going to make kind of the same claims where they're trying to do a lot of value added services and to say, "You could probably get your supplies already cheaper directly from somebody," but because the sales guy is dropping in all the time and talking to you and knows the industry, there's some value to having that relationship. It'll be interesting to see if people continue to value that.
Howard: I think it's the same reason they should use you as a CPA firm, that 80% of your clients are dentists, same reason in picking an implant company. There's so many. You got 275 companies, you could buy in from anywhere, any country on earth, tomorrow on price, but the people that have the best implant practices buy from companies simply because they have a broker that's in their city that comes by and can do value added stuff and what I like most about my supply rep Val is she can say, "This doctor's doing this and this doctor tried that. You should call him," or "I'll fix up a lunch for you two to go meet each other." It's having a community connection. I would rather buy an implant company from someone that I have a face to face friend. I'd rather use an accountant that I can pick up the phone and talk dentistry about just not my office but the industry and I think you make the most money when you're buying from people who have the biggest picture.
Just like my first lab man, I'll never forget it. He said that everybody said the best lab was this German guy born in Germany as Wolfgang and man, I went down there and he could just show you more about how to prep a tooth right than any lecture I could've taken at the Arizona State Dental Association. What was so neat is he just walked out and showed me tray after tray and mounted case after mounted case with mine in hand showing me how other people were doing better this or better that and it was just ... I was using my lab man not based on price, but the fact that I had a guy 25 years older than me, taking me under his wing. You know what I mean?
Mike: The funny thing about supplies is and the supply guy will be the first one to tell you is clients will fight tooth and nail to move from 8% to 7% and in the meantime they have staff costs at 33%. They're not even going after the low hanging fruit. They're trying to save this incremental amount on-
Howard: That was one of my oldest jokes from when I started lecturing in 1990. I said back then, "Why are you paying your dental assistant $15 an hour to go shop through a catalog and save 12 cents on gauze?" Does that make any sense to you? It does exactly. You have this high labor and that's the 400 pound gorilla labor cost. If you're sitting there thinking you're going to spend the weekend putting a lock box over the thermostat and put in some thermostat control computerized system to lower your electric bill. Your electric billing, your cost. On that, you talked about all inclusive labor, 27 and 28 under, time and occupancy expense, 5-6% or less. If you have CAD CAM, your lab should be 3 to 4. If you don't, 6 to 7. Supplies, 7%. What's next after that? Go all the way to zero?
Mike: No. Then we look at if all the other general administrative expenses, you have your professional fees, your office supplies, advertising, dues and subscriptions, continuing education, so on and so forth, we like to see the total of that at about 12% or less. If you can have a system whereby and keep your staff costs at around 24%.
Howard: That's a huge number, 12%. Go through those items again. What all equals 12%?
Mike: It's going to be your continuing education, dues and subscriptions, office supplies, professional fees, consultants ... I'm trying to think of a few other off the top of my head. Insurance, your liability insurance and stuff like that. Advertising is usually the biggest one out of that group.
Howard: Yeah. That's what I was keen on. Of that 12%, what of that do you see the most ... The people making the most net income, how much are they spending on advertising? What would you think the advertising range could be?
Mike: What we usually see in our most successful practices when we chart them out, advertising being in about 1.5 to 2% which a lot of people will say it should be higher, but when we've go in to the clients who have done it a higher amount, we've said, "How many patients have you gotten from this advertising that you're spending?" It is that advertising spend translating into, say $350 per patient acquisition, give or take.
Howard: You like to see the advertising get a new patient in the chair at $350 per patient or less?
Mike: Yes because you could on and buy a book of business for about that price. If it's costing you $700 to add a patient through your advertising, you might be better of just going and buying a patient list or buying out a dentist who might be retiring close by and maybe lower hanging fruit.
Howard: You're really showing off your degrees of education because when you look at the Fortune 500, they're always doing mergers and acquisitions. When I look at some of the biggest practices that have ever been built, they're usually small rural towns and the dentist has done some mergers and acquisitions. Old man Frank who is retiring up the street and they went over there and bought that practice. Talk mergers and acquisitions. Does your firm do that?
Mike: My partner Andy Lehmkuhl, he's actually one of the most hated brokers who's out there that are so well respected within Dental Town. His job is if a doctor is selling a practice or they want to merge a partnership together ...
Howard: What did you mean by that comment? You said well respected, hated. I didn't get it. That was a joke or something.
Mike: In Dental Town you usually don't see a lot of love for brokers.
Howard: Oh, okay. Or lawyers.
Mike: [inaudible 00:44:59] or lawyers for that matter.
Howard: Who's this guy?
Mike: His name is Andy Lehmkuhl. He's a broker by trade. He used to buy practices for one of the DSOs in our state. He'll-
Howard: He's in your firm, Edge Advice?
Mike: Mm-hmm (affirmative).
Howard: Will he do a podcast with me too?
Mike: I think we can get him too. Sure.
Howard: What percent of dentists do you think take advantage of a merger and acquisition of a practice retiring in their neighborhood?
Mike: I don't think enough because ...
Howard: Right. Exactly.
Mike: ... it's that whole E Myth kind of thing where we ... We're all professionals. I'm an accountant, you're a dentist, somebody's a lawyer and you spend all your time kind of practicing your skill versus thinking what's in the best interest of my business. In a lot of cases saying, "I'm perfectly content spinning the wrenches here, being a dentist." Yes, it may be a good financial opportunity, but maybe not worth the headache instead of saying, "This might be a great opportunity. I can subcontract or hire the right people to do the stuff that I don't like to do and make a lot more money by taking advantage of that."
Howard: I'm telling you listeners out there. You got to know the word capital comes from Latin for ahead. You got to know how much money it costs you to acquire a new customer. You're saying that 350 and under is a return on investment. Is that correct? That if you can ...
Mike: I think it needs to be at that because if it's not, you're better off buying a practice.
Howard: You get some 73 year old man across the street who says, "I had enough." He's got a thousand charts and you say, "My office, it costs me 250 to get a new patient." He's got a thousand charts, so a thousand times 250. You say, "I'll buy your thousand charts to 250 a piece." He says, "Yes." That's a hell of a smart idea.
Mike: Yeah, absolutely. On those older doctor's patients usually, they always use the term goldmine, but there's usually a lot of deferred maintenance.
Howard: Oh, I know.
Mike: The doctor's taking a ton of time off, so none of the patients can actually get in in the chair. Those tend to be very good buys.
Howard: No offense to the older guys. I know I'm going to get a lot of hate mail in this for them. They seem to have missed a hell of a lot perio too. I mean, my God, when they come in from a 65 to a 70 year old, I mean, every patient's the same. "Oh, yeah. I've got my teeth cleaned every six months." They got like 9mm pockets and they do a lot of patchwork, lots of big almalgams that all break in down the accounts. I want to get back specifically on that practice. He might have 5,000 charts, but what would be your definition of a chart worth $350? Someone who's been in the last 1 year, 2 year, 3 year? What would be your specific countdown?
Mike: I consider an active patient to be in the last 12 months. I know some people who use 18 months or 24 months, but obviously I think once they get past the year, the likelihood of them coming back just drops. We'll help with some-
Howard: What about the distance? How close does this practice need to be to yours before you think, those people will say, "Yeah. I'll go over there."
Mike: It really depends. If you're in a metropolitan area, it could be as few as 2 to 3 miles in a lifetime. If you're in a rural area, 10 miles might not be a big deal. It kind of depends on what your area is and kind of what the demographics of the area are.
Howard: If you had a client who was spending 4% on advertising and you thought the acquisition head costs was maybe 450 or 500 a head, what resource would you point that person for to get a better bang for their buck on dental marketing so they could get bodies in the chair for less than 350?
Mike: I would look at what they're actually doing in terms of marketing. Do they have a robust website that's showing up on SEO? Are they doing some internal marketing? A lot of times most businesses don't have a very good leave-behind piece or like some type of really nice brochure that I can take out of there to go, "I'm coming in to see Dr. Farran for X." I take this leave-behind piece and I was like, I go, "This guy can do this. He can do this. He can do that." I might not need it now, but a year from now or two years from now when I do need that, I understand that you have that capability.
One of the biggest things we've done for our own marketing is a concept of having a really nice leave-behind piece because most people are going to come in because they need accounting services. They get this really nice book that's a little bit too nice for them to throw away. Someday they flip through it and go, "Yeah. You guys can help us with marketing or you can help us with hygiene coaching," or "Yeah. I'm thinking of selling my practice. I forgot your partner does that." I don't think dentists do a very good job of communicating what their skillset really is. I think the public perception is, "My tooth hurts. You fix it." I come in for a pro fee. There's a lot more that you guys can do that I believe if you laid it out to a customer in that fashion, they'd probably buy it at some point.
Howard: I'm going to take this interview completely different. Let's just table that we just did 50 minutes. Let's table everything we just said and let's have a man to man talk about you've been in this industry 20 years. In the last 20 years, out of nowhere has come these big DSO, dental service organizations, Heartland Dental, 1500 locations, Pacific Dental Services, Steve Thorne, all this stuff and you're talking right now to 5,000 kids who just got out of dental school a week ago and they're entering this industry that you've been in 20 years. Truthfully, is there any chance this young kid is going to be able to compete with a DSO? Is the change going to be ... Because I'm old enough where when I was little, every pharmacist owned their own business. Now every pharmacist works for Walgreens or a CVA, is that where dentistry is going? Is dentistry going to be Walgreens or can I still PP?
Mike: Only if the dentist allow it to. I think you're going to see consolidation in a lot of industries. I'm part of an industry of accounting that's seen unprecedented consolidation amongst firms. When I came out of school, there was probably no fewer than 40, 50 options that I would have to go and work. Now there's about 10 firms left. I look at our biggest competitors, our biggest competitors in our state are four of the top 50 biggest firms in the entire country that we're going head to head with every time. We've survived. I think patience is by and large ... We get our generic clients and they get panicked because Midwest Dental or Florida Dental moves across the street from them. Reality is three months later they go, "That was our best referral source." They're turning over their doctors. The doctors aren't staying.
I think consumers like choice. For some it's going to be a corporate dentist and I think they have their role, but there's still too much profit I think, too much opportunity within dental that, for right or wrong, we had edge, it hitched our wagon to ... Our concept is to try to help preserve private practice dentistry. To be honest, if we didn't think that could be done, we need to find another line of work because to some extent, we're dependent on there still being private practice dentists out there that we can provide accounting services for. I don't really know how to do anything else.
Howard: I want to try to put some older spin on this after a half century living on this rock. The greatest investor in the world didn't live in Wall Street and get caught up in all the hype. Warren Buffett stayed in Omaha, Nebraska and taught at Creighton University. I mean, he went and gave a guest lecture at Creighton University when I went there in 1980 and I drove by his house a few times just a down-to-earth guy. Another great book, Peter Lynch Beating the Street, they keep saying to you, "Don't listen to the hype, listen to real people in your backyard."
Every single time, I talked to any earthling in Phoenix, at a restaurant, whatever, whatever, my dental experience. They've always have gone through three or four or five dentists because they're not happy with something this or that. You never hear them saying, "I'm going to the big chain," or this, that. It seems like they're never happy with their dentist and they've had to go to several dentists.
Probably 80% of the people, if they're my age, if they're 50, they've already gone through six dental offices, so why would you think that one chain is going to have the advantage when the five independent dentist didn't help them. If you would just stay focused on that patient and be patient focused and not dentist focused, they're not looking at a chain, they're wanting to know why you went to fix his tooth and they can't chew on it, why you fixed his tooth and it looks funny, and why is there a dark line here, blah, blah, or your dentist talked down to me or he was rude or whatever.
I'm going to ask you this, what advantages does someone like Heartland or Pacific have that an individual dentist doesn't have as far as a competitive advantage that I need to be aware of? If I'm a kid and I'm going to go buy a $400,000 dental prac- What is the average dental practice that you see a client buying? What's about the average price?
Mike: Four to 500,000.
Howard: What would you say are their average student loan debt is?
Mike: Two hundred and seventy-five to 350 depending on ...
Howard: How much is the house that they're living in?
Mike: It could be, depending on their area, 250,000. They're going to have a lot of debt.
Howard: If they're a man-
Mike: I would always tell somebody ...
Howard: If they're a man, what percent of their wives have a job versus to staying home?
Mike: Right now, of our clients at least, about 80%.
Howard: Eighty percent of the wives don't have a job.
Mike: A lot of dentists seem to be marrying dentists, we've noticed, for whatever reason.
Howard: That's my point. If you're a man, 80% of them have a stay-home wife without a job. If you're a woman-
Mike: No, 80% of them have a wife who's out working.
Howard: Oh, okay. 80%. It wasn't that way when I got out of school. If you're a woman dentist, what percent of them have a husband that out there have a job?
Mike: For our clients, actually, surprisingly less than that number.
Howard: Are you serious?
Mike: One of the biggest changes I've seen in the last five to six years, for lack of a better term, is the rise of the female owner. A lot of our new clients right now are female dentists and because they're able to make a very good living, their husband has assumed the traditional role that we had in the past, staying home with the kids or maybe doesn't make as much money because they're being more flexible because their spouse now is owning a business and investing their time in that. We've seen a big change in that. Your question about-
Howard: If you ever meet any women dentist like that that are single, can you refer me their contact information?
Mike: Sure, if they're available.
Howard: I'm just kidding. That is amazing because a lot of the dentists my age, one of the biggest stressful things they have is a spouse that not only doesn't have a job, but spends a hell of a lot of money every month. That is so stressful to a marriage. You just see so many boys and girls getting married in dental school right now and I just think those are ... All the ones I know, when they met their wife in dental school and they're a dentist and they have an office, they just seem to be rich and happy. It just seems like the luckiest dentists out there are the ones who married a girl in their class. That's my main message every time I lecture in a dental school. Don't worry about getting an A in biochemistry, try to marry one of these girls in their class, it'll be the best decision you ever made.
Mike: To your question on Heartland Dental, what advantage they have, to me it's the study clubs and the dental associations out there. Because the older dentists right now are telling anybody who's willing to listen to them that, "Boy, it really stinks to be a dentist these days." That's not every one of them. Some of our clients will go to a study club the first time and go, "It just wasn't for me because it was all woe is me, golden age of dentistry is dead, we're doomed." I think that's why it's great sights like yours are out there that people can freely communicate and say, "You know, it's not all that bad." A lot of opportunities in there if you're willing to go ahead and do it. So many young kids don't think they can own a practice right now. The state associations aren't doing anything about it, their study clubs aren't doing anything about it. To me that's a shame.
Howard: I'm about to get to work. I'm going to be pulling up in my office in three minutes. We're at 58 minutes, three minutes and I have $275,000 of student loans and I thought there's no way I could get a loan and I want to buy a practice, can they call you?
Howard: How should they get a hold of you? Do you prefer a phone call, an email, what do you prefer?
Mike: Whatever is easiest for them.
Howard: Give out whatever you want to give out.
Mike: Our phone number is 414-759-96329 and my email is email@example.com. I guess all we could say is it's a lot easier to service that debt if you're making $250,000 a year than if you're only making 125. You'll make a lot more money as a practice owner than you will as an associate.
Howard: Let me ask you if my walnut brain, if you agree with the way my walnut brain works on buying a practice. A lot of dentists they want to save money on a practice so they want to buy the practice for 200,000 instead of the practice for 400,000. In my walnut brain, I always looked at that as if you buy a house for 200,000 and then hold it for 10 years and sell it, you're selling a house that you bought for 200,000, but if you bought a house that was for 400,000, now you're selling the house for 400,000.
In my walnut brain, I just wanted to buy the biggest cash flow I could buy and why would I buy a practice for 200,000 that's only bringing in so much money when I could have bought a much bigger one. A lot of the dentists, I think they see the much bigger one as too much money when actually you're buying a cash flow and wouldn't you want to use other people's money for leverage debt from US Bank, Wells Fargo, PNC, Bank of America to buy a larger cash flow, especially when you just said it's a lot easier to pay that back if you're making $250,000 a year?
Mike: I think you want to buy a practice that's commensurate with your ability to produce. If you can produce $50,000 a month, to me you need to be looking at practices that between yourself and hygiene are going to be collecting $800,000 because you can handle that workload.
Howard: How much would that $800,000 practice should be selling for?
Mike: Depending on it's profitability it's going to be somewhere between 480 and $600,000. It could be a little bit higher, it could be a little bit lower than that. I can say if it's a well run practice and you're able to get in there and run it well, the owner doctor is going to start making $350-375,000 a year producing what you're producing as an associate, where if you're producing 600,000 as an associate, maybe you're making 150, maybe 200 at the most.
Howard: If this dentist wants to call you, is there a consulting fee? What if some kids listening that someone's asked you a question, is there a fee to talk to you? How does this work?
Mike: We actually have unlimited phone call email access. When people want to ask questions client or not, they can ask away. We don't send them a bill. We just do flat fee billing for our accounting.
Howard: In a nutshell, guys, this guy is hot. I'm a big fan of the firm, the site. You have access to capital despite what everyone tells you. In fact, that's why all rich countries have someone to debt, it's because you have so much access to capital. When people complain about how much student loan debt people have. I remind them one of the reasons they have so much student loan debt is because someone was willing to loan it to them and you spent probably a third of that on shit you didn't need, an apartment that was too nice, a car that was too nice and trips and cruises and all that stuff. This is America, you got access to capital and this dude just told you that you could get 100% financing from four major banks and he'll talk to you about it for free at 414-759-9629. Mike Bark, thank you so much for spending an hour of your day with me.
Mike: Thank you.
Howard: My last go-away question is, what is that hanging on your wall? It's a cow's skull but it's painted green?
Mike: Our wealth advisor has a friend who takes bison skulls and creates art with them. It's actually our logo that's on there.
Howard: Right on. All right, buddy.
Mike: It's a unique piece of art.
Howard: Thank you so much for spending an hour for me. I think my listeners got a hell of a lot of a information in that hour.
Mike: All right. Thanks a lot.
Howard: All right, buddy. Have a great day.
Mike: You too.