episode 56 – transcript

Dave:  Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old-school business practices and their traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think beyond the suit and tie, while offering you meaningful, modern solutions to help enhance your company’s growth. I’m your host, Dave Cain.

Anybody look at the calendar recently? As the year end approaches, holidays start developing, Christmas shopping, and the BCS poll will be released shortly. Now that another year is coming to an end and 2017’s beginning to start, we’ve got to start talking about business planning, tax planning. Our guest today is Alan Hill from our mentor office of Rea & Associates. Alan is a CPA and he specializes in dental services for Rea & Associates. I’m particularly excited to have Alan on the show today. Alan, welcome to unsuitable on Rea Radio.

Alan:   Thanks for having me, Dave.

Dave:  I want to talk a little bit before we get started on our topic about your famous tag. You’re in charge of dental services at Rea & Associates. Can you share with our audience what that is all about?

Alan:   Well, it’s just taking my 30 years of experience. I started when I was a junior in high school, junior in college, rather. Same job, same desk for 30 years, but my firm originally started with a lot of dentists in the firm, so I’ve actually grown up with them.

Dave:  My understanding is you’re also helping dental practices as they turn over and trying to sell their practice, get their practice ready to sell, and also helping young dentists coming out of college look for a practice.

Alan:   We’ve recently taken that to another program. We’ve purchased a firm called PMAgroup, PMA Practice Transitions. That’s the entity of Rea & Associates that’s going to be helping young dentists purchase practices, help them understand the market. We’re trying to bring integrity, our professionalism to that market along with our other professionals that are doing that. We hired Matt Scherer of Bank of America … He’s had 18 years’ experience there … to come over and head that up as our president.

Dave:  That’s incredible, Alan. You are absolutely famous in every sense of the word. The service offering you guys have developed is unique, not only across the state of Ohio, but across the United States. So, I want to recognize that and congratulate you for putting that together. A lot of hard work and great job on that part.

What I want to talk about more importantly as we shift gears here about tax planning, or better yet, business planning for your clients. Let’s start with your process. I know you have a checklist mentality that you go through. You can do it in your sleep. Let’s start there and talk about how you set up a meeting with a client for business planning.

Alan:   Well, I hate to say it’s everything that I’ve learned. It’s everything I’ve been able to steal in 30 years from people. You steal the best ideas that you can. Out of our office and out of the firm we’ve been able to compile a list of things to do. I think it’s just a waste of the client’s time, or our time, or any other professional’s time if you don’t at least once a year at a minimum sit down and give yourself a complete physical, much like you would go to your doctor for. You’d want your teeth cleaned. You want an annual physical. You want your eyes checked once a year. You have to have a physical on your business, too.

The way I do that is to gather the business owner along with his key advisors. At first a lot of business owners, they don’t want to do all that work, because they know it’s going to be expensive to get an accountant, an attorney, maybe their financial advisor together, maybe their insurance person, maybe their office manager, or office coordinator, whatever their title is, and bring them all together and hit some key issues: financial issues, year-end bonuses, what’s going on in their personal life. I even go over stuff like their retirement plan. Is it properly designed for them to give them the right plan that works best for them?

Dave:  Now, as you start this physical, do you wear gloves?

Alan:   Well, I do work on cars a lot and I do have a lot of gloves at home, but I don’t wear them at these meetings.

Dave:  As you look at a client’s year-end financials or interim financials, what’s the first thing you look at? Is it the profit? Do you do some industry statistics? Do you do benchmarking? Where do you start?

Alan:   Yes, yes, and yes. The reason I say that is because you try to find out what’s important to your client first and then find out what’s happening with them. I have found at any meeting, especially these, clients come with their own problems. This is an opportunity for them to have all their professionals in one room and to express what’s going on in the business. I have an agenda; I go over it, but usually we’ve learned to start with asking, “What’s going on?” just like when you go in anywhere else. You go into your doctor and you have a pain in your side, but you’re in there to have something else looked at. You’re not going to listen until you talk about that pain in your side.

Dave:  When you talk about bringing the advisors together, who would that be? Would that be the attorney? Would that be the banker?

Alan:   I look at it as anybody they deem important. It’s the client’s meeting. It’s not my meeting. It’s not the attorney’s meeting. It’s not the investment advisor. It’s who they trust, who they think is important at that time.

Dave:  How much time would you set aside?

Alan:   It varies. Some of them are for an hour. I sit in some of these meetings with others for up to three hours. It just depends on what’s going on and, of course, how many business owners there are, too. If there’s only one or two, as compared to, maybe, a meeting of 10 owners, that’s going to bring a lot of discussion to the table. It’s important to keep it focused and have things assigned to be followed up on.

Dave:  Obviously you keep a list of maybe the top three or the top five issues that you’re running across. Can you share with us what the top three issues that are presenting themselves this year?

Alan:   Well, depending on the sub-specialty or the business that we’re dealing with, a lot of it still comes back to revenues: generating top line, cost savings, and employees. I think those are the three biggest ones that we run across.

Dave:  I think we’re finding also in other meetings that we’ve heard is this employee issue is maybe being overlooked by a lot of business owners: just the valuations that have to occur, compensation, bonus pool. Are you seeing that in your practice?

Alan:   Yeah, we actually bring that up as part of it, whether it’s done at that meeting … Sometimes they want our opinion on what’s going on in the market … What are other businesses or practices doing? … so that we can be a sounding board for them so that they know what raises are being given; what other benefits people are trying to provide their employees, because in any business, without people it doesn’t run.

Dave:  Are you seeing a uptick in purchases of equipment this year?

Alan:   Well, usually at the end of the year we always see that. Because of the depreciation rules that allow you to expense something the year that you purchase it, we see, especially in the professional practices, a lot of purchases happening this time of the year.

Dave:  How’s the year looking? Are you seeing a lot of profit? Are you seeing good numbers?

Alan:   We’re seeing good numbers-

Dave:  Perfect.

Alan:   … especially compared to what we went through after the recession.

Dave:  Perfect.

Alan:   Things are up again, especially on the dental side, absolutely.

Dave:  That just is the confidence level is probably higher than it has been.

Alan:   It has. It sounds kind of funny to say, but you can only put off going to the dentist for so long. When the recession hit, people put off their appointments. You can’t do that forever.

Dave:  As we wind down 2016 and look at 2017, what tips do you have for 2017? What are some things you are seeing, feeling, experiencing?

Alan:   Well, if I had the crystal ball and I could figure out the tax code for the next five years, that’d be a perfect answer, or be a perfect question, I should say, for you. What’s coming up next year? In healthcare you’ll see a lot of, usually in the first part of the year, businesses slow down, because deductibles start all over again. This is the time of the year that not only are practices trying to wrap up their business for the year, but they’re also exceptionally busy sometimes, because everybody’s trying to get things done before their deductible comes up. That’s a big thing that we see this time of year compared to next year.

If you pay out your bonuses, and you pay your retirement plans, and make purchases, it can make the beginning of the year a little bit thin, because it’s usually a little bit slower; so, we also try to address cash flow in the first few months, especially lines of credit that you’re only going to dip into for a short period of time. You’re in an out of it within a few months.

Dave:  Obviously you have a very specialty practice, but also you cross over into manufacturing construction as well in your years of experience. What are you seeing on the mergers and acquisition front?

Alan:   Well, I guess we know what our rules are now. If somebody says it’s over, that’s a matter of opinion, but we know what rules we’re playing with now. I think many business owners stayed in business a few years longer than they thought they were going to. When the recession hit, they said, “I’m going to stick around a few more years now.” Well, they’ve done their few more years now, so there is a lot of selling out there.

Dave:  I believe that’s probably what you’re talking about, is these baby boomers near retirement. They’ve worked through the last couple of years. That in itself presents a challenge, because you have to find buyers for those practices or for those businesses. Are buyers hard to find?

Alan:   They’re not very hard to find. On the dental side we have two great dental schools, Case Western Reserve and some Buckeye school down here in the south. I can’t remember the name of it.

Dave:  Be careful now.

Alan:   Well. Just because you guys haven’t beat Cleveland State in football yet …

Dave:  Buying and leasing. You touch on that I know in your year-end planning. Is leasing back? Is leasing here to stay?

Alan:   I get that question all the time: Should I buy or lease? It’s all dependent on the cost, the interest rate, and the term. It’s just a comparison. To me, it’s always dependent on what the companies are pushing at that time. So, we go over that a lot to see what makes sense on current pieces of equipment, especially on the dental side. If you’re going to sometimes turnover technology a lot, you might want to consider leasing that piece of equipment. If the technology’s going to be gone or better within two years, then you might be better off leasing.

Dave:  Okay. Growth. You talked a couple of times about the revenue. Again, I think you’re sensing that the growth is here, the growth is going to stabilize over the next 12 months. I sense you feel that that’s a direction.

Alan:   I think it is, yeah.

Dave:  Good. Good. Okay. Now we’ve got a huge tax liability. I know we’re talking about a few different items here, but let’s say you’re in one of these meetings. We’ve got a huge tax liability for whatever reason. What’s your next step? Obviously, you’ve got to take a look at a number of things; but, if we’re sitting in a meeting, and I say, “Look. My tax liability is just out of control this year. Help me find a couple ways to either defer or reduce that liability,” what would you say to me?

Alan:   Well, first I’d tell them to call the Bank of Dave Cain and ask for a loan to pay that tax liability off, but after that we start looking towards the more realistic things, such as, what else can we do? Can we push some income into next year? Is there anything we can buy or pay for this year? Depending what type of entity it is, we look towards the retirement plan realm. Can we accrue a contribution, meaning take the expense this year and pay it in the next year to help our tax situation? We’re always looking for ways to increase that. We’d rather see it going into our clients’ pockets than into the government’s pockets?

Dave:  Is that the Safe Harbor Rules, the things that you’re referring to?

Alan:   Yeah, the safe harbor is usually what you have to do in a retirement plan, what you’re referring to. The safe harbor is a “Here’s what you’ve gotta do if you have a plan and you’ll be in compliance,” but you can always do more. If there’s a large tax bill out there, hopefully that means it’s because there was money made. I’d rather, again, see the client keep more of that.

Dave:  One of the things I like about your checklist that you have introduced is, certainly there’s the flies and the gnats, the usual: “Let’s pay the bonus. Let’s get the bills paid. Let’s make those accruals sharp.” I also see that you take the time to go through life insurance policies, IRA policies, and checking to see if the correct beneficiaries are in place, and that’s a planning technique that I haven’t seen for a while. Maybe you can address that and what you’re finding, that maybe there’s some incorrect beneficiaries on particular documents.

Alan:   Yeah, there can be. A lot of what we’ve accumulated over the years are things that, frankly honest, we don’t get paid to do; but, we are business people and we have seen things go awry. You’re talking about beneficiary designations, especially on the IRAs. If you were to pass away and you have an ex-spouse listed, who maybe was your ex 10 years ago, guess what? The ex gets the money. The current Mr. or Mrs. doesn’t get anything. The companies have no choice in that matter. So, we try to address those.

Dave:  Again, we were kind of talking and joking around earlier about just reducing taxable income. That always seems to go to the forefront. That’s the most popular thing; but, there are other things that in my opinion are far more popular than that. Buyout agreements, buy-sell agreements, do you touch on those? Do you look at those every year?

Alan:   We do. You’re absolutely right. People think because you’re an accountant, you’re only going to come in there and talk about tax things, because they expect us to do that and that’s what we’re good at; but, we’re really good at this other stuff. A buy-sell agreement between two business owners, it’s kind of like the will for the business. What’s going to happen if somebody dies? What’s going to happen when someone wants to get out? How do you do it? We want to make sure those documents are in place, especially when it comes to the buyout part. What’s the business worth?

Dave:  Let’s talk about the value of a business. How often should I have my business valued? How often should I put a number on the value of my practice or the value of my construction company? What’s your suggestion there?

Alan:   Well, I think you’ve got to get a good formal to semi-formal evaluation done at least once. Then, if you and your partners can agree on the change from year to year, that’s absolutely fine, but I like to see one done every five years.

Dave:  Every five years?

Alan:   Yeah.

Dave:  Okay. Then you work with the business then, once you have baseline valuation, to try to increase the value.

Alan:   Exactly.

Dave:  You’ve talked about a lot of the positive things you’re seeing. Let’s reverse that. Obviously, there’s potentially some negative trends that are creeping back into the marketplace and the business. Let’s talk about that for a few moments.

Alan:   I think one of the things that’s negative in the marketplace is the finding of good people. We spend quite a bit of time talking to clients just about the ability to find good employees, and that’s no matter what their specialty is or what the business is. It’s just harder and harder to find good people. I think it’s kind of ironic after the recession and all the job loss, is that it’s just getting so hard to find good people.

Dave:  That trend is ongoing, it seems. Does it seem to be going away any time soon?

Alan:   I don’t think so.

Dave:  This next question I’m going to ask you … You’re a CPA. You have no business looking at this; but, one of the things that you said as part of the year-end is you go into a business, whether it’s a medical practice or manufacturing, and you take a look at their lobby. You draw a first impression of what the waiting room area, the reception area, looks like. I absolutely never have seen that on a year-end checklist.

Alan:   Well, it’s because if I’m a patient or your customer, it’s the first thing I see. I don’t see the back room. I probably don’t see 90% of your staff or your employees. I see your front desk first. If I don’t like it when I walk in, I’m probably not coming back. We’ve had that conversation with clients before. “You’ve got a great business here, great practice; but, you know, the person at the front desk isn’t real friendly to me.”

Dave:  Or they have a big, giant Slurpee on the desk.

Alan:   There you go … or beer.

Dave:  Like I said, I commend you for that. That’s something I had not thought of, but that’s independent review.

Alan:   Pretty much. You’re just giving your opinion on what you see. You present it in a very nice manner, but you try to bring that across to them in a very soft way.

Dave:  Again, our guest today is Alan Hill, CPA, with Rea & Associates, with a strong specialty in the dental practice across the United States. His emphasis today was to talk to us about planning for 2016 and into 2017. I think he did a great job of covering that. Alan has written a number of articles on this topic, and they are listed on Rea & Associates’ website. If you take a look at there, there’s just some fantastic information there that I think will be useful.

Alan, before we wrap up, we’d like to ask a fun question to get a little more insight into the minds of our guest, so here’s what I have to ask you-

Alan:   If you have to.

Dave:  I have to. It’s required. Obviously, I know golf is a tremendous passion of yours. Let’s say you had an opportunity to play Pebble Beach and you could select the foursome that you wanted to play with, from celebrities to friends. What would that foursome look like? Who would they be?

Alan:   That’s a good question. Four people I’d take on a golf outing. Let’s assume I’m going to drive the cart and pay for the beers and the stuff like that. First, it’s got to be my grandfather, because he was a great golfer. I never got to see him play, though. Then I’ve got to take my son, who’s a good golfer also. He never got to meet his great-grandfather. The other two are going to be tough. I’ll just take my two favorite baseball players of all time, ‘Shoeless’ Joe Jackson … I bet you he could hit a golf ball pretty good, too … and then, of course, Pete Rose, just to see how many hits he could get. I think that would be my four.

Dave:  Thanks again for joining us on unsuitable, Alan, and thank you to our listeners for tuning in. Are you wondering how your business is doing? Are you looking for some tips that will help you make 2017 greater than 2016? Check out our website at www.reacpa.com/podcast for some expert insight to help you start the year out on the right foot. If you like listening to unsuitable, let us know. Rate it, review it, or subscribe on iTunes and SoundCloud. Until next time, I’m Dave Cain, encouraging you to loosen up your tie and think outside the box.