45: DSOs, DPOs, and Other Dental Financial Talk with Drew Phillips CPA

Foreign.

Welcome, everybody. Yet another episode of the Dental Boardroom podcast. Excited for a good show today? We kicked off about a month ago our financial independence series podcasts, which is me interviewing our lead advisors, our cfo, what we call CFO advisors here at Practice cfo. And we did our first one with Paul And Nick, both CPAs, financial planners here in practice CFO. And today I've got one of our most experienced longtime planners, also fellow Boardroom podcast host Drew Phillips. Drew, welcome.

Oh, this is going to be so much fun. Two podcast hosts together in the same room.

This is actually the first time we've done this, right, Drew?

I think so, yeah.

We're actually doing video today, which we're hoping the video turns out we're gonna kick off a more of a YouTube version of our podcast. Right. Trying to go visual and do a little bit more there to get the word out on the dental street about what practice CFO is doing for clients, for dentists, and more than anything, to just to try to disseminate helpful knowledge to dentists to run their practice effectively as a CEO of. Of their business. And there's so much going on in the industry today. Would you agree with that, Drew?

Oh, it's. It's a fun industry.

What are some of the trends you're seeing?

Technology trends, operational clinical trends. You know, sleep apnea and fixing sleep is on the clinical side is becoming increasingly large and important to practice owners as a new revenue line. Equipment is evolving every day to be more digital, have a more comprehensive digital workflow, and really take off and create some efficiencies in the practice for them.

Technology's become significant. And it's my personal opinion, and I did a podcast yesterday with Dr. Bob Marcus. Listen to that one if you have. And I think that'll be one of our top podcasts. He talks about how he used technology. In his case, he talked a lot about the CAD cam. He had two cerecs running to do a lot of his restorative work, of course. And he. I asked him, how are you running? So a 47% profit margin on a $2 million practice with one doctor working four days a week. I think he has four or five ops. I mean, this was phenomenal production. And I thought, okay, if your fee for service, okay, I can see that. But when you're getting 7, 800 bucks for a crown, that's a lot more difficult. And so he talked about six key things that he's done or did in his practice to be able to produce the numbers he produced. And have really satisfied patients, really, really satisfied staff members as well. If you listen to the podcast, you'll hear that he sold his practice. He had some medical limitations in his eyes, and so he sold at age 51. And now he consults a lot of doctors, helping them thrive within the PPO structure for those Doctors who have PPOs, and he helps anybody. But it was really eye opening to me just to see how much technology paved a way for success in what we typically define a very constricted model, I. E. The PPO model. So I think, I think you're right. I love to see what's happening with the dental technology. Dentists need to leverage and build their processes around good technology for efficiency. What are some of the. Let's jump into some of the. The pressures on the industry. You know that you've been working with exclusively dentists for how long now, Drew?

A little over five years.

And you're a cpa. You do a lot of financial planning work. We meet with clients all the time. How many dentists are you working with these days?

Oh, it's. It's hard to say exactly, but probably a little around 70.

Probably. Okay.

Yeah.

And you've got a team. You actually have two, what we call associate CFOs.

Right.

One is a CPA, the other one is soon to be a CPA, has a finance background. So really strong team that you've got. And you're every day handling emails, you're reviewing financial statements, you're. You are in financial planning meetings, which is a huge part of what you do is as their external CFO or chief financial officer, not literally, but in a simulated way. You sit down with them. We have a full agenda and you cover the waterfront, as I say, you cover it all. You cover their financials, their ratios, their budgets, their cash flow, their taxes, their debt, their 401k, their personal budget. And then we have designated meetings in the year where we look at retirement planning. We look about at the personal side, the personal balance sheet called the net worth statement, and we integrate all of that together. So you get a good. We here in the way, in our model, the way we work with dentists, we get a really good panoramic view of the whole ecosystem, financially speaking of a dentist. And so we sort of see a lot of what's happening. And there are definitely trends going on in the industry and there are some pressures on the private practice, which is primarily who we provide service to, is the single, maybe two on occasion, three. Dr. Private practice who have one, maybe one, two on occasion three location. So your very standard practice, this is our bread and butter and what we do every day. So what are some of the pressures you're finding on these dentists today?

I think that you hit on the topic that I think is probably one of the most pressuring trends, which is the evolution and conversion from private practice to corporate practice. And we saw this happen in medical in the 80s and early 90s. And if we look, you know, hindsight being 20 20, of course we look back and we see that doctors are now for the most part outside of, you know, dental and plastic surgery and some of your other still private practice specialties, that they're making less money, right? They are working for an employer as opposed to themselves. So they have less flexibility. The majority of them are W2 only. So they have less tax flexibility and tax planning options available to them. And if you look at who actually won in that conversion, it was the private equity companies and it was the legacy sellers back in the 80s and 90s. And there are still private medical practices that are very rare, right? And it's sort of the last guy holding the bag, so to speak. And they're really tough to sell at these points because you know, these mega shops like Sharp and Kaiser are fully efficient and it's hard to compete. And if I think about the biggest pressure, I think it's lack of education. Because if you think about the actual monetary incentives behind selling to a corporation and you look at the inflated price that you're going to get on the front end, it's really enticing. It's like the best sales tactic that you can get because they're going to get in cash today, you know, probably 25 to 30% more than they're going to get as from a private practice sale. But during the work back period, because every private equity company is going to require you to work back for two, three, four years or more. And during that period you're going to have income loss, right? You're going to have income loss due to being paid on production as opposed to being paid on profits. And you're going to have, you're going to have loss in tax deductions. Because now like the medical practice people that we were just speaking about, most of your income is W2. So there's less flexibility in tax planning. So you lose tax efficiency and you lose gross income. And when you look at the loss of income from both of those sides of the equation across the work back period, it's really a wash. There is really no income benefit to the seller. For from those dynamics by themselves, where people are actually making money on the corporate transition is in that second exit because the majority of them are retaining some form of equity, whether it's you know, 25 or 30% and there may be a dividend that is paid to them during that period for that retained equity, but the majority of the time there's not, it's just, you know, simulated to be rolled over into the future exit. And so depending on the criteria and how well funded that DSO is, really depends, really dictates how beneficial that transition to corporate actually will be for the seller. And there's a lot of variations out there. The, I would say the, the safest plays are the ones that are really well funded that have so much liquidity that when you are done with your required workback period, they will actually cash you out for some sort of multiple in between where, where they are at the holding company level which is probably 10 to 14x on EBITDA, all the way down the private market side which is around 4 to 6 depending on locations and number of doctors in a private practice. In a private practice sale. Exactly. And so in that second exit they're going to say hey, we have all this money to cash you out and we'll find you another replacement doctor, no problem. This is the best case scenario, right? And they will say hey, we're at about a 12 to 14 x EBITDA. You're at 5 to 6 by yourself. We're not going to give you 14 or 12, but we'll give you somewhere like 7 or 8 and they'll do that and they'll facilitate finding that next replacement doctor for you. And in those situations it's really hard to, you know.

Take away that monetary incentive for them. But those opportunities are actually very rare. And having, and that's called a secondary liquidation market. Right? And similar to a stock market, you're buying and trading shares and how freely can you buy and sell those shares?

And then on the other side of the spectrum you've got this really just pure speculative play like we're going to take 30% of your equity and at some point in the future when either another private equity company gobbles us up or we, or we know, maybe we don't sell, maybe we just have a recapitalization event with our current private equity backed partner and that's, you know, if and when that happens is purely speculative and the timeline in which it's going to happen is undefined. And we are still so early in this process that. The other thing that I like to people to keep in mind is that these opportunities, in terms of the value that you can extract from that second exit will be here 15 years from now. Right. And there's. So I guess my point is there isn't necessarily a race to take advantage of that benefit. So my qualm is like, why give up your all of your profitability on being a practice owner and the tax efficiencies when you can capture that for the next 10 to 12 years and then start your corporate exit if that's the route that you want to go?

You know, so summarize all of this, right? I think that the, with the lack of education around the actual monetary incentives that are at play and the risk of these future exits not even happening, right. And if you look back at medical, there was a lot of turbulent years to really get to that fully consolidated place that they are today. And then if you take it one step further and you look at the future generations, that's really where, if I were a practice owner today, that I would be trying to protect the people that's coming after me. It's my sons, it's my daughters, it's their kids that also want to be dentists. And while I may make out like a bandit potentially, right, I put them at risk for lower income and less tax efficiencies in the future and really just turn over our entire industry to the private equity and the big money gobblers, top of this, you know, nation, right? And the truth is, is that if you plan accordingly and you work with a qualified CFO advisor like us, right, that's a plug. Then you really should be able to reach financial independence without corporate buyers right now. For the people that have not planned and they're at the tail end of their career and they need every last dollar that they can get in order to just retire the way that they always envisioned. I understand those people's, you know, places in life and their needs and putting their family first. But because we're still so early and we're hopefully through these podcasts and other know, outreach efforts that we're doing, hopefully we can educate the, you know, the population of dentists about what the true nature of the incentives are and hopefully maybe even save the next generation of private practice owners through that education. Because as I was saying, if you plan accordingly, you should be able to end up in a better place just by being a private practice owner, saving spending, you know, in relation to your earnings, you know, not overspending, essentially. And you will, you'll reach the financial independence goals that you have for yourself. And you can reach them at really early ages in life. You know, I have 29, 30 year old practice owners that bought really great practices and they're on an 8 to 10 year timeline. To have the option now tell a 40 year old to stop working, you probably wouldn't be able to tell me that, but having the option is nice, right? And once you've met those base level needs in financial planning and you have this option to retire, well, you've got two or three strategic directions that you could take. You could go retire and live a comfortable life and play a lot more golf, or you could keep working. And those future earnings you could delegate or delineate between increased lifestyle, budget to an extent, and then you could, you know, even take on, I would say, maybe more risky investment opportunities, things that are, you know, obviously more risk, more reward. Right. But once you've met those base level needs, then those next dollars, while still important because you're working for them, they don't actually carry as significant of a weight to your future outcomes. And so if you wanted to go, you know, take a bet on a real estate adventure with an Airbnb sort of play or, or things that are outside of the box, those are when you have those opportunities. Right. And, and that's really, honestly where some of the more fun and exciting planning happens with, with my clients is when they've met those base level needs and there's still surplus there. But you know, it takes time to, to really build that out.

Yeah, let me comment real quick on the consolidation topic, because that is a, that is something that you and I confront. I would say at least once a week I feel like a client has a question about it. And maybe once every month I have a client. Now, I don't work with as many clients. I only have a handful of clients these days. I focus more on the business side. But I have a client, or I would say in the firm at large, I would say every couple weeks, two, three weeks, we have a client who is seriously evaluating a pitch from a dpo, a dental partnership organization or a dso. Institutional basically, and they're trying to understand if it's something that they want to do. Now almost every time when I take that pitch, which is usually a PowerPoint printout or a PDF, and it shows these big fat numbers that the doctor's gonna get if they sell to that entity. And once you dissect it, you realize that there's a lot of Smoke and mirror going on that's intended to convey something that is much bigger than it really is. And for example, they'll add in the total pay to the doctor over their. Over their career, however many years they're projecting of. They'll take their associate pay. So if they sell, they're gonna be paid as an associate. And they'll take that associate pay every year and add it. And then they'll add that to what is the sale price and, you know, anything else they have on there. And then they say, see, this is how much you're going to get over, you know, over your career. And what you have to do in those is you have to define what's relevant and what's irrelevant. An irrelevant number is one, whether you sell or don't sell, it's still going to be there. Whether you sell or don't sell, it's going to be there. You're going to get income on your production whether you sell or whether you don't sell.

Right?

And so you need to strip that out and you need to just look at the valuation, not future production paid to you as a doctor or an owner of your own corporation. And that number really inflates. What is this apparent value to the doctor? I see this all the time. I've also seen in the fine print that says, hey, within five years you can leave, you can go back to your private practice, totally fine. So you have an exit plan, an eject lever. However, if you look at the fine print, it says, but you can't practice within five miles of your current location, which basically means, no, you can't go back because you have to move your practice five miles away and essentially start over. So there's a lot of things like that that are just. I think they're misleading. I think they're deceptive. And so there's an element of delusion going on in the space of consolidation. That said, I'm finding most of my clients or most of our clients and who I'm seeing doing it, they're actually in their 40s and even early 50s. It's not necessarily the older doctor. Why are they doing it? Here's the place where I say, okay, maybe there's a reason for you to do this, because again, when I look at the financial comparison of retaining your ownership and I do a calculation where I look at all future cash flow and I net present value and I factor in inflation, what is the value of your future future total earnings and sell on your practice today, not selling versus the net present Value of your total future earnings and equity value of selling to institutional. And even when the, even when they might get 1.5 times from the institutional buyer of what they would get, a private buyer, so 50% more on the sale when you net present value, everything, they're actually earning less over their career and there's a lot of strings attached and they're going to lose some level of autonomy in their practice. But there's an appeal of having that sort of bigger number that's 50% more right now that they think, I don't want to miss on this. I don't want to.

This is right here, or this might be my only chance ever. So I'm going to do it. And I have to sort of revise the numbers and present the numbers in a way that helps them understand it now. But where it might make sense is that there is a benefit by aggregating certain operational functions with other private practices to get benefits of scale. And that's what the large, the large guys have is they've got benefits of scale. Much, much lower supply costs, equipment cost. They can centralize hr, marketing, finance, accounting, tax, all of that stuff. And the large groups that actually centralize that, I think are the ones who are providing possibly a real value. It's the ones who just try to buy you and then sell in a few years and play this EBITDA multiplier game, I call it, where they pay you five and a half times your EBITDA and then three years later they sell for 12 times EBITDA. They're just playing a game. It's a finance game, it's a Wall street game, it's a numbers game. It's a, it's an equity valuation game. But there's no substantive improvement to business operations. And therefore it's a house of cards. At some point somebody's going to, the music stops and somebody's going to be out of money 100%. And if you, and if you, if you've retained some of your income or maybe you, you did an equity swap or you own some of the central management company, at some point, you may be out of pocket on that. It may not be all of the blue skies that you thought it would, it would be. And so, but where it may be valuable is centralizing those operations. And the only way that, that works, in my opinion, is you have to do some really hard things. You have to actually change your practice management software, which is one of the most difficult things dentists do. Like you say, hey, Doc, you're Going to have to go from Dentrix to Care Stack, for example, or Open Dental or just some other one. And you might have this legacy system with decades of data in there, and your staff all know it. Everybody knows it. You got your. It's not just changing the software, it's changing your whole processes. And how many staff do you know, Drew, who love to change their processes? Right. Not many. So what I'm saying there is that to actually get the benefits of scale, you have to be willing to go through change. So if a. If an organization is started up, I would love one that started up by. By dentists. And I'm sort of a board member on one. Some clients of mine have recruited me into it. It's called Saving Private Practice Dental Management. And I'm not making a pitch for them right now. I'm just saying that the way they're doing it, they're doctor founded, doctor led, and there's no equity, there's no outside investors like private equity. It's all reinvested. And they've all gone to the same practice management software. They're using Consolidated Marketing, Consolidated accounting attacks, and they have a group thread on their chats and emails, and they're doing a conference where their teams get together and they're actually creating, and yet they're still operating independently. So they're trying to save the private practice SPP while at the same time getting these benefits of being part of something a little bit bigger than their own practice and getting much lower supply costs and equipment costs. And I'm actually seeing that play itself out on the P and L. And there's just like this excitement of, like, producing and, you know, being a good player in the group. And so their collections have gone up from that. So I'm not saying it can't be done. I'm saying it can be done in the right way. I just would say 98% of the time, it's not done the right way. It's a false pitch, and doctors often regret it afterward. Okay, so we spent a good amount of time on that, you know, and that's a podcast Drew, you and I could probably do on its own for two hours. And talking about consolidation, is this the second coming of medical consolidation now happening in dental and how, you know, how many. How much of the. Of the space of the industry is going to remain in private and how much we think will consolidate over time. But let's punt that for another podcast. Let's get back on the subject of what we do as practice CFO advisors And what we're seeing, in other words, and how we can help dentists. So dentists have an ecosystem of finances in their life, as you know. And I always say their business checking account and credit card is like one pocket and their personal, personal checking account, credit card is the other pocket. It's on the same person. They got two hands. They can reach in at any time. They can transfer money from one pocket to the other. There's no one that says they can't do that. They're typically S corporations, which are called flow through entities. And an S corporation just means it's not a flow through means it's not taxed. The S corporation isn't taxed. Instead, it sends its profits out on paper every year through what's called a K1 to the 1040 personal tax return. And you're taxed on it. Whether you move the money from one pocket to the other doesn't matter.

Doesn't matter.

You're taxed on it and therefore you have single taxation you as an individual. There's no corporate taxation, as opposed to say a C corporation like Apple or Exxon or, you know, these big companies. That C corporation is taxed once and then the shareholders through a dividend are taxed a second time. So we avoid double taxation. But that flow through is emphasizes my point, which is it's really one ecosystem of finances for a dentist. And so we need to manage that ecosystem well. Let's talk about tax planning for a sec.

Doctors often come to me asking for a silver bullet. How can I save in taxes? Define how you approach tax planning for a dentist to help them pay less to the IRS and keep more of that in their pockets.

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So much and it really depends on the income level of the client, right? Because there are tax strategies and advantages at certain income levels that go away with thresholds and those thresholds are usually determined by income levels. So it really depends on where they are on that sort of income spectrum and what planning initiatives we have available to us. And then you know, there's always new tax code changes coming out like the pass through entity income tax election for California and then there's I think about 25 or 30 other states that have also adopted this as well. And so anyway, so we'll use maybe a million dollar private practices, an example here and their operating income is going to be roughly 40%, that's 400,000. They're going to have some depreciation and then they're going to have to pay themselves a salary. Right. Well that W2 salary and the K1 income will they have different taxation implications? Right. The W2 portion is going to have some FICA tax pieces to it and how and how much we pay you and how much we subject to FICA tax is ultimately a combination of how well we are able to be efficient from a total operating profit standpoint. And there are, you know, and so there is this, we have qualified Business income deduction. We've got the pass through entity income election. Right. We have 401k planning, we have, you know, kids on payroll. And where is this sweet spot between how much W2 do I pay to minimize FICA while also increasing my K1? So K1 and W2, they are a teeter totter, Right? That's a seesaw.

So that 400,000 in your example million dollar practice, 40% 400,000, it's going to be 400,000 in some ratio between W2 and K1.

Exactly, exactly. And how we break that ratio up depends on that IRS reasonableness test. Right. But what we are doing when we lower that W2 is we're increasing the K1 net income profits for the S.

Corporation for the dollar.

Exactly, for the dollar. Right. So. Well, with the exception of payroll taxes. But the point being is that if I have a qualified business income deduction that is 20% of my net income, Right. Then it behooves us not only to lower FICA taxes by lowering the W2, but then it increases the K1, which then increases the amount that we're eligible for on the qualified business income deduction. Right. And so, and then what other areas can we utilize to lower that K1 income which then simultaneously lowers our need to increase the W2. Right. And where is that sweet spot? And then we have a 401k assumption. Right. And then depending on the 401k plan design, you know, we have to potentially have to increase your salary just to satisfy those 401k.

And when you say salary, to be clear, you're W2 because 401k contributions, if you go past the elective deferral, which this year is 23, 3,000 under 50, 30,000 if you're over 50, if you go past that and you do a profit share element, and if you go past that and add in a defined benefit plan, then you have to get your W2 up higher to allow you to fund more into that without breaking the bank by having to pay too much staff costs.

Exactly, exactly. And depending on your profitability, bumping your W2 salary up to the current year maximum for a profit sharing plan is $330,000. Well, if I pay myself $330,000 with $400,000 of total profits, then I'm only going to have 70,000 on my K1 net income. So now I'm only getting a 20% qualified business income deduction on that 70,000. But if I didn't have a profit sharing plan, my W2 may only be 175,000.

So in this case what you're saying is that the 401k slash defined benefit plan, if you have one profit share plan, we don't recommend sep iris and simple iris hardly ever, ever, ever. There's very rare circumstances. So assuming it's 401k and a DB plan, you're saying that trumps the other potential benefits of a low W2 which are a QBI deduction, lower FICA taxes. Because there we're going for income tax deductions through these large contributions into these retirement plans. And your ordinary income tax rate is much higher than, than the deduction of say lowered payroll taxes.

It can. And when you have new things like the pass through entity income tax election, which is another. Instead of just being 20% of your net income, now there's another 9.3%. Right. And I would, it's, it's hard to say, you know, without my Excel calculator in front of me and doing all of my number crunching. But my point in bringing all these elements up is that there is a vast tax planning web that all are interconnected. They're all a circular reference with one another. And to know truly if you're optimized across all spectrums, you, you have to really be dedicated to the proactive planning side of the equation. Right. If we get to December and you haven't paid yourself a payroll and there's no 401k implemented because we're too late to open, there's just so many things that we have left unattended. Right. And to really finish and really have a great tax planning year, it takes consistent effort during the year. What we're able to do at the end December or January for the, for the previous year, it's, we're very limited, our hands are tied most of the time and what we're able to achieve for them and I think that that's the piece that's so important. And then if we, and that's. That's your annual sort of every single year, how do we keep more money out of the profit from pockets of the irs? With our specific income generator, which is our practice. But then there's tax planning for the future. And really great tax planners aren't they're focused on the current year to save as much as possible? Yes. But they're also having an eye for the future. Right. And how do we save or limit taxes on the second time? Because if we have our after tax income right, we have a few places we can Put it, we can put it in real estate, we can put it in a brokerage account and invest it across a diversified portfolio. We can put it in a 401k, we can, we put in a Roth IRA, we can put it in a whole life policy, if that's something that you were into. And not for most of our clients, but maybe at some points in time. And if you look at all those different vehicles that you could put your money into, well, they, when you take that money out in retirement, it's going to come out and it's going to have a different form of taxation. Brokerage accounts are going to be capital gains, hopefully, because you've left them in there for long term, because we're long term, great passive investors. And they're going to come at capital gains rates 15 to 20%. Right. And then you've got Roth IRAs, which will come out completely tax free. And then you have traditional 401k investments which will be taxed at ordinary income rates. You'll have Social Security. Right. You may even have some rental income from your rental properties, if that was part of your investment strategy. And if we are planning throughout this entire, your entire lifeline of being a practice owner and we have all of these different vehicles tackled, well, we're able to manufacture your taxable situation in retirement by siphoning a little bit from each of these accounts to artificially create a low tax system in retirement. That's ultimately how we're going to capture that true tax rate of savings on those 401k investments and on those other investments throughout your working life. Right. Because Otherwise you pay 30 to, you know, upwards of 50% marginal tax rates. But in retirement, through that manufacturing process, we're only going to pay maybe 20 to 22%. So we're inherently capturing a true 20% rate of return. So we take out all of the guesswork that really does exist. For your normal W2 employees who are trying to play this speculative game of is my tax rate higher now or in the future? Because. And it's really an earnings thing. Right? There's a fixed cost of living in this country and Dave Ramsey's of the world that are speaking to the masses, they'll tell you to save, you know, 40% of your income and spend 60. Right. And that's going to get you a timeline of 65. But for us, because you guys earn more money than the average American, we're able to actually populate these other investment vehicles that most people don't have access to just for the pure cost of living in this country relative to their income levels. And so through that. Right. Because we have that option and we're able to manufacture and capture that true tax savings. That's why we are, you know, having that eye to the future and really having a planning emphasis there. And then last thing I'm going to say on tax planning is that when you have assets, you can draw from those assets to allow for them to continue working for you. You could take and then you could put that money to work in other areas. So you're basically leveraging your own savings. And what are we doing there? We're paying an interest rate of maybe 6 to 7%. Right. As opposed to paying taxable income on those, on those distributions from those investment accounts. Because we're taking a loan against the assets and then we're taking those loans and we're being more productive and increasing our income with those assets while not paying 40 to 50% marginal income tax rates on those distributions. So there's a big world on the tax side, but that's kind of where we're at the majority of the time.

I would say when we have clients, we're probably spending 70% of our time managing the business side, all the cash flows in the business, and maybe the rest of the time is on the personal side. I've always felt if you can manage the heart of the cash flows, which is the practice successfully, financially speaking, then the personal financial planning becomes much, much easier. And the way that I look at this is if I'm doing a research on some subject, like let's say I'm researching. I'm totally thinking of this on the fly. But let's say I'm researching some character in the Civil War, and maybe a lesser known character, but still relevant to the war. And I start gathering information and I find some newspapers clippings here, I find him referenced in different books over there, and I start finding all this stuff. And I know you're like, wes, where are you going with this? Let me try to make my point is that you're gathering if somebody came and said, just tell me right now, in one sense, what is this? Who was this person? You know, I could try to do that, but I'm not giving full context. So when somebody comes to me and says, what's the silver bullet here to save in taxes? Is it doing this big credit thing that's being sold out there at all the CDA conventions?

Right.

You know, there's so much, there's so many law firms out there Selling these tax shelters. That's not it. When I do a good research paper, you're. Which I don't do. But in concept, you're gathering information from all these sources. It's like this puzzle. And you got all these pieces just laid out on the table in front of you, and you start putting them together and you get little blocks over here, you get little blocks over there, and it's starting to come together and you keep working it and finessing it, working it, and then it all comes together. And now you have this clear picture of what you're looking at when it comes to financial planning in the ecosystem of a dentist, which has collections, labor supplies, lab facility, marketing, admin lease costs, debt taxes, 401k, personal budget. They got kids education funding, they've got all of these things. They got their insurance that they need to, to pay for, life insurance, disability insurance, business coverage, insurance. When you've got all those, those elements of this ecosystem, you have to bring them together, put them on the table. They're all out there. And then you have to start putting that together. And that's what. As you know, we have a tool we call the Planner. Very simple, but it's a. It's an Excel spreadsheet, which is sort of our secret sauce. Right, Drew?

I think so.

I started this back in about 2009, and it's evolved over the years to be something that's just really critical. And Drew's added a lot of good features to it and analysis and calculations. But we basically start putting everything in there. We put in the W2, we put in the P and L data, we put in your cash flow projections, we put in your tax details, put in your kids, we put in your spouse who might be on payroll, we put in 401k and DB detail, we put in all of that stuff and it starts to come together. And it's such a fun process for us as kind of numbers guys to not calculate, but to start seeing the numbers and this equation. Produce something that becomes clear and the levers are there then available to move those levers in a way to optimize the output in that whole ecosystem.

Right, Exactly.

To me, that's tax planning. It's optimizing the whole ecosystem so that it all sort of crescendos on or consummates itself on the tax return itself that's submitted to the irs. And the only way to manage that ecosystem well is as you said, and I'm just going to punctuate this point, it's got to be Done during the year, right? Not after the year. It ain't going to happen for two reasons. One, once December 31st comes and goes, there's a lot of things you can no longer do.

Period. It's not a matter of time or resources or meetings. There's things you can no longer do.

Literally.

Literally. And then if you try to have your cpa, who's involved in a lot of this, if they're involved, hopefully they're not going to have time between January 1 and April 15 to do planning for you. And so tax planning out there across standard CPA firms is very insufficient in my opinion, because the model isn't designed to manage that ecosystem and do the analysis correctly ahead of time to have these optimized, productive results. So a great synopsis there, Drew. Let me ask you this question on the subject of accountants. I want to dwell on that just a little bit longer. What do most dentists expect from their accountant? And what do most dentists get from their accountant or their cpa?

I think initially their expectations are somewhat loose and undefined because they don't have much experience. And so they're introduced to a cpa and maybe it takes three or four years. Like, I'm just missing something. And they're talking to their colleagues, and maybe their colleagues are talking about how productive they are in their meetings with their, you know, their cpa, their cfo, and, and then they come and they work with, maybe they take their advice and they start working with them. And maybe that, maybe that's us. And so I'm using my own experiences, right? And when they come over and they see all these comprehensive elements come together into one harmonized plan, the veil is lifted and they start to really realize, wow, you know, you know, hopefully it wasn't too long, but they start to realize how much money and transparency and clarity they gave up by paying someone maybe, you know, $500 less a month for the last three years. And you look at the, you know, the present value savings that what we would have brought them by handling that comp, those comprehensive elements from the beginning, and it would have far surpassed those, that fee differential. But, you know, I think it takes an astute dentist that is, you know, focused not only on clinical but also on the business side and really wants to build a business that is productive and supports their lifestyle. And those people are the ones that really go out, find partners to handle and delegate these very important tasks. And they're the ones that realize that they know what they know and their partners know what they know. And together, they make an amazing team. Right.

You know, I. Adding to that, accountants, and maybe a lot of dentists have heard this statement, but accountants are by training and even the way they view their own role, they are historians. They have primarily one job. It's to aggregate historical numbers, to put them on a report, whether that's a profit and loss statement and a balance sheet, and then to prepare that to be put on a tax return, which is then submitted to the IRS and the state tax agency. That is their primary role. There are some CPAs who will go the extra mile to do a plan, do some form of projection, and give some advice around things like depreciation. Do you take accelerated depreciation through Section 179 deduction? And they might give a few comments about debt and maybe a few comments about things like that. Maybe, maybe a little bit about a 401k. Hey, doctor, you need a 401k to save taxes, you know, but that becomes the extent of it. They're not inside the trenches, in the deep dive design of how that ecosystem should flow. And that is a finance activity, because a finance activity is all about structuring things today with a specific game plan for the future in mind. So you're looking in the future, and that drives your analysis. That drives what you're trying to accomplish today. And so I always, you know, when I'm talking to a dentist who's considering our services, I tell them it's totally a function of model. What model do you want? Do you want the traditional CPA model, accountant model, which is the historian model? Or do you want a CFO model, a chief financial officer? Financial equals finance, which is a prospective analysis. It's looking into the future. That's what CFOs do, and that's what our role is. And our theme is empowering doctors to thrive financially and converting that success in the business over to their personal life to accelerate financial independence. It's all one master plan. It's a beautiful thing to see it working as we work with our dentist from year to year, so a lot of great commentary. All right, let's end off with this. Drew, I just want you to share. What's your trademark style? We have. We have eight advisors, excluding me here at practice, cfo, actually nine now, and four lead advisors. You're one of those lead advisors. What's your trademark style in working with dentists?

Yeah, I'd like to think that I attract a motivated and ambitious dentist that is, you know, ready to be the best on all fronts of Their life, personal, you know, growth, business, everything. And I think that my trademark style is to do all of the elements that we've been talking about, to do them extremely well. But it's to also have an emphasis on more operational and leading indicators. Right? And those leading indicators live in the practice management software system. And it's not that I'm a practice management consultant by any means. I'm not going in your practice, I'm not helping create processes with your staff. But what I am doing is I'm looking out in the future and looking at that clinical operational data to see when are we going to need another hygiene column. Because if we need another hygiene column, you know, tomorrow. Well, we're already six months behind the win the eight ball, right? So it's about. In that, that process of forecasting these clinical and operational components into the future allows you to be, to scale efficiently without hitting a plateau until your inherent capacity limits have been reached. And the more important thing is it helps you lead with profits. Because let's use the hygiene column scenario. If you have a hygienist that you just hired, but you needed them six months ago, right, not only have you lost new patients because you don't have capacity to put them in your chairs because you don't have enough hygiene columns, but you've also lost the treatment planning opportunities on those patients, right? And you have now have to hire a hygienist that is coming into an empty schedule. So we have lost. We have three, three demerits there that have come with this lack of foresight. And then taking it a step further too, you talk about equipment and taking 179, that's great in a, in a, in a sort of a nutshell. But what does it mean to buy that piece of equipment? What is, what value does it really add to the operational side of the business? Is it just really a nice shiny CBCT machine that we're not even using to place implants or sell cases? Or are we. Do we get the Itero first and, you know, have a really great ortho workflow and, you know, measure enamel loss and use that as our case acceptance features like there are so many different variables that if you're looking at it from a pure historian viewpoint, you're going to miss a lot of very important details that ultimately are, in my opinion, what lead to success. So I think that that's what differentiate, differentiates me is that I actually really love the strategic differences between all of the dental business models that exist in.

Our ethos and I share a couple of my anecdotal experiences in working with you and teaming up on some clients and analysis. Here are things that I've seen Drew address. For example when to or the effect of going CAD cam. In a practice we actually have a calculator that will try to calculate based on your supply costs how many crowns you're doing, things like that, what the net benefit is of going CAD cam. I've seen you discuss a build out, is it time to build another operatory or two and what's the financial implications to me if I do that. I've heard you discuss hiring hygiene. I've heard you go over a game plan of when and how to bring on an associate or maybe bring in specialty and do the analysis of what is the effect of that to your bottom line, your taxes, your cash flow, etc. Buying a building, there's a whole analysis there. I think you have done a great job on that. These are all decisions that CEOs of a dental practice, I.e. the doctor need to make and it's so fun for me to step into the ring with them to help give them clarity and education. I think that's one of our big roles is giving education to help them make these decisions in an effective way. That so much of doctors financial growth is often set back by some just terrible decisions. They were sold on something.

They misused depreciation, they took too much out of the practice relative to their profits. There's a lot of these big decisions sometimes that are made that set them back years. It's like the analogy of Sisyphus, if you've heard of that Greek mythology where Sisyphus was punished for chronic deception and he was punished by having to roll a boulder up a hill and he gets up to the hill and the boulder slips out of his hand to go back down, he goes back down and then he has to trek back up, push in that boulder again. And this goes on ad infidaem just indefinitely. And that sometimes is what happens to doctors. They start to build financial success and then they make a mistake and that boulder goes back down. And then they get to 65 and they don't have a whole lot to show sometimes, unfortunately for all the years of hard work. And so a lot of our job is to help them avoid.

Those critical mistakes that cause that boulder to drop back down and have that game plan to keep rolling it and to keep it there and then to achieve that point of financial success. Drew, thanks for being on this podcast. It was exciting and fun and I'm sure we will do more podcasts together in the future.

We invite you back to our own podcast. Podcast. Well, thanks, Wes.

It was.

It was a pleasure.

All right, Drew.