No Images? Click here November 2018 A Big Dental Practice Con – a true storySome years ago I was approached by a dentist working in a large Melbourne dental practice spread over three locations. The practice was owned by, let’s call him, “Dr Greedy”, and let’s call the dentist that came to me “Dr Sceptic”. Sceptic had been proffered a valuation conducted by a partner in a long established Melbourne accounting practice which about 30 years ago had been known for providing accounting services to dentists but had in the years since become more of a general accounting practice. As became clear as events progressed, Greedy had a network of properties and businesses but was heavily geared and in an attempt to clear a significant amount of his debt had had the separate practice companies at the three locations consolidated into one company by a firm of lawyers. This had future capital gains tax liability problems for any dental buyers but that had not been apparent when Greedy decided to sell down shares of the practice. He had first of all managed to sell a portion of the practice to another dentist working in the practice, “Dr Credulous”. He then approached Sceptic and indicated that your mate Credulous has already bought into the practice using this valuation, so if you take the valuation to a particular branch of a major bank and speak to a particular bank lender they will lend you the money to likewise buy in. Sceptic was not as naive as Credulous had been, and came to Synstrat looking for advice. Examining the valuation On close examination the only two explanations possible were that the accounting partner who had signed off on that valuation:- 1. Was grossly incompetent, or 2. He had deliberately and massively overvalued. The numbers did not connect and were camouflaged by an array of irrelevant, to the valuation process, dental statistics and observations. The banker who had lent to Credulous had not concerned himself with examining the figures in detail. It quickly became obvious that Credulous had been “stitched up” by Greedy who was hoping to do the same to Sceptic. As later became apparent, Greedy was in a tight financial situation. As a proper valuation was likely to be explosive in nature, extraordinary care was taken in Synstrat’s valuing the practice on behalf of Sceptic. Due to its size, the practice had a full time internal accountant who also looked after Greedy’s various business interests. Step by step the entries on the balance sheet were checked off with that accountant and exchanges of emails occurred which were cross noted to the balance sheet appended to Synstrat’s valuation. The dental proprietorship was valued using Synstrat’s long standing technique and imputed into the balance sheet together with financial liabilities, practice staff accrued entitlements and the value of stock on hand. The result was that when the assets and liabilities of the practice were netted out the net value of the entire practice was significantly less than what Greedy had persuaded Credulous to pay for a portion of the practice with the assistance of a dodgy valuation and a banker who was prepared to lend on that valuation without asking awkward questions. Inevitably Sceptic showed the Synstrat valuation to his friend Credulous who confronted Greedy . Credulous was referred to a barrister specialising in commercial matters. Subsequently Greedy died of a heart attack and legal action was taken by Credulous against his estate. That case settled recently out of court on a confidential basis, which my barrister friend, now a QC, is unable to disclose. As a sideshow, a company belonging to Credulous has been involved in a peculiar case involving some bizzarre transactions in Dubai and Africa involving loans from a Greek solicitor whom the court found was cheating his Belgian bank apparantly to the knowledge of Credulous! Credulous’s company fell into liquidation but $1.3 million was still payable by way of restitution albeit that there was a forgiveness of interest payment. The Judge was scathing about the truthfulness of the witnesses indicating that:- “Before the Court will lend its processes to enforcing such an unusual and uncommercial transaction, it must be satisfied that its processes are not being used for an unlawful and improper process.” There is more. The Judge was scathing in his belief that elements of the transaction(s) were illegal in character. Some lessons 1. If paying a large sum to buy in to a practice be very careful on whose valuation you rely upon. 2. Dentists are good at dentistry but most are not good at complicated commercial arrangements outside of dentistry. If Greedy had not got into financial difficulties in commercial matters which had nothing to do with the dental practice, he probably would not have been tempted down the road of seeking to persuade dentists working in his practice to buy into it at a price several times its true value, and 3. It is unclear what caused Credulous to become involved in transactions in Dubai and Africa but he may have hoped to recover losses and legal fees involved in his dealings with Greedy and Greedy’s estate. He no doubt now wishes he had not embroiled himself in pursuit of riches in distant lands. Best wishes to all dentists, Graham Middleton Dentists who belong to chatline forums are welcome to pass on Synstrat news items to their emails list – dentists receiving information by secondary means should add their names to Synstrat’s dental email list – to do this visit our website or email cheryl@synstrat.com.au with your request, so you can start receiving information. The Synstrat Group are Australia's most experienced Dental practice business advisers, accountants, practice valuers and licensed financial advisers. The information contained herein is of a general nature and no specific action should be taken without individual advice. Synstrat Management Pty Ltd P. 03 9843 7777 ABN 57 006 295 325 If you are not the intended recipient of this communication please delete and destroy all copies of this message and telephone Synstrat on +61 3 9843 7777 immediately. 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