Group Case: Parsa Dental Clinic

ACCT 621: ACCOUNTING FOR MANAGERS

GROUP ASSIGNMENT + PRESENTATION 25%

SUBMISSION DEADLINE: DEC 6, 2023: 11:59PM PST
SECTION: 01
Groups 5 & 6

PARSA DENTAL CLINIC

In early 2020, Parsa, a dentist, and his wife, Asia, a digital marketing specialist,
relocated to Vancouver, BC. Shortly after the move, Asia, a digital marketing
specialist, obtained a full-time job with a private company at Burnaby. Parsa, a
dentist, obtained his dentistry degree from the university of his home country
several years ago. He has recently spent a lot of time studying for the reciprocity
examination administered by the Canadian National Dental Examining Board
(NDEB), enabling him to practice dentistry in Canada. Last summer, Parsa passed
all exams. He has now approached you as a financial advisor and seek advice on
establishing his dental practice.

It is October 1st, 2023. You are meeting with Parsa and Asia to discuss their plans.

Parsa: Thank you for your assistance. Now that I am licensed to practice in
Canada, BC province, we aim to establish my dental practice as soon as possible,
hopefully by the beginning of 2024.

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Asia: I plan to assist Parsa with the administrative side, leveraging my prior
experience. My income as a digital marketer covers our basic living expenses,
excluding future mortgage payments. However, we intend to buy a house in North
Vancouver, taking on a substantial mortgage. Parsa’s BC dental certification
allows us a $1 million loan for any type of house. Our goal is to pay it off quickly
to save for our retirement. We turned 45 this year, and both plans to retire by 65,
promoting our desire to start planning and saving promptly.

Parsa: A colleague connected us with an agent in Vancouver helping retiring

dentists sell their practices. The agent has already found a suitable practice, Dr.
Daniel Paredes’ practice located in North Vancouver and he currently runs it.

The agent has given us two years of financial statements for Dr. Paredes’s practice,
as well as highlights of the business (Exhibits I). We have some savings set aside,
and the agent has indicated that Dr. Paredes is willing to offer $800,000 purchase
price. I made some notes from our discussion with the agent (Exhibit II) and some
notes from my personal research (Exhibit III).
Asia: I prefer Parsa set up his own practice and build up his client base. Parsa
already spoke with one of the local dentists in North Vancouver who helped
mentor him through the NDEB exams, and he gave us some estimates of how
much it would cost to start our own practice (Exhibit IV).

Alternatively, Parsa could work as a dental associate in other clinics. I searched

and found that average annul salary for a dental associate is $100,000.
Parsa: I have a specialization in implant and surgery dentistry, an area of
increasing patient demand. If I have my own practice, I would like to offer these
services to my patients. My estimation is 60% of gross margin on implant and
surgery services.

Asia: I’ve heard that professionals these days incorporate to take advantage of
lower tax rates. Average tax rate for small corporation is about 10% in BC. How
should we set up the practice to generate the best tax savings? What are other
benefits of incorporating the business?

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 Group Case: Parsa Dental Clinic

Parsa: The agent wants us to decide about Dr. Paredes’s practice by month-end.
Can you please help us understand our options, and provide a recommendation?
What are advantageous or disadvantageous of each option?
If we start our own practice, could you please tell us what would be our sales and
patients’ numbers at the Break even point? Could you prepare a cash flow
projection for both scenarios over the next 5 years?

Asia: Our plan is to be retired in 25 years. We would like to pay off the clinic and
house mortgages by then, ensuring financial security for at least 20 more years
with an annual expense of $70,000. If we plan to sell the practice for $1 million in
20 years, what should be our retirement saving?

Please let us know if there are any extra common business ideas that you believe
they could be beneficial for us and our new business.

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 Group Case: Parsa Dental Clinic

EXHIBIT I: DR. PAREDES FINANCIAL STATEMENTS

As of December 31($000s)
2021
2022
Cash $12.5
$20
Accounts receivable 25
32.5
Medical supplies 15
18.5
Capital assets (Note 1) 551
509
Total assets $ 603.5
$ 580
Accounts payable and accrued 50
85
Due to Dr. Paderes (Note 2) 300
220
Proprietor's capital 250.5
275
Total liabilities and proprietor's capital $ 603.5 $
580

Dental service revenue $ 785

$832
Advertising 12
15
Licenses and insurance 50
54
Medical supplies 195
210
Internet and software 15
14

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Professional fees (Note 3) 9

10
Rent 84
88
Salaries (Note 4) 248
277
Utilities 15
18
Entertainment and meal (Note 5) 14
15.5
Interest expense 8
6
Depreciation 50
42
Total expenses 700
749.5
Net income $ 85
$ 82.5

DR. Daniel Paderes Inc.

FINANCIAL STATEMENT NOTES

The financial statements are provided each year-end by Dr. Paredes’s accountant
for the filing of his income tax returns.
1. Capital assets are net of accumulated depreciation, and include all dental
equipment, furniture, and fixtures in the office; these assets have an average
useful life of 10 years.
2. Due to Dr Paderes, consist of previous unpaid bonuses and other personal
loan given to the business by Dr Paderes.
3. Professional fees are for legal and accounting services. In 2022, Dr Paredes
has paid his personal legal expense for 3K from the business account as he
has the same lawyer for his personal issues.
4. Dr. Parades draws a salary of $120,000 per year from the practice. Salaries
expense includes the hygienist salary of $65,000 and receptionist for 45,000

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annually plus all government remittances, employee health plan coverage,

and bonuses.
5. Meal and entertainment include three events for all staff. Each year, there is
at least 10k of Dr. Paderes personal expenses that have been paid by the
business account.
6. Dr Paredes usually withdraw 40K annually as his dividend at the year-end.

EXHIBIT II: NOTES FROM DISCUSSION WITH AGENT

 Dr. Paredes founded the practice 25 years ago. He chose not to incorporate
his practice, believing it would only lead to higher fees charges by his
lawyer and tax accountant.
 Dr. Paredes prides himself on his loyal patient base. Most of his adult
patients have been with him since they were children and now, many of
them have their own children who are also patients. He currently has 600
active loyal patients. In today’s market, each active patient is worth $800.
 Dr. Paredes’s receptionist has been with him since he started the practice. He
now also has a dental hygienist, who has worked for him for 12 years. He
has always given them healthy raises every year, along with bonuses. One of
his conditions for selling the business is that the new owner should rehire his
receptionist and hygienist.
 On average, when changing the owner of a dental clinic, the new owner will
experience a 20% customer churn rate. It takes approximately 4 years to
compensate for the lost number of patients with new ones, assuming a 10%
growth rate each year.
 In the dental practice industry, the value of a business is typically
determined by a multiple of 5 to 6 times the average EBITDA or a
combination of net asset and customer list.
EXHIBIT III: PARSA RESEARCH NOTES
 RBC is willing to finance 80% of the sale price. The terms of this loan
would be fixed- term 9% (Prime plus 4%) interest per annum / 10-year term,
due on December 31 each year.

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 TD Bank is willing to finance 75% of the sale price. The terms of this loan
would be fixed- term 7.5% (Prime plus 2.5%) interest per annum / 20-year
term, due on December 31 each year.
 Both banks will secure the loan with the assets of the practice. TD will ask
for a personal guarantee from me and Asia.
 We are going to buy a house in North Vancouver for $1,200,000 and are
carrying a mortgage of $1,000,000 on it. The terms of our mortgage allow us
to draw up to 50% of our equity in the house as a home equity line of credit.
Average mortgage payment would be 6,000 monthly if we payoff the
mortgage in 20 years.
 We have $200,000 in our saving account.

EXHIBIT IV: NEW PRACTICE START-UP ESTIMATES

(Prepared and searched by Asia)
 New furniture and equipment to start up a dental practice costs about
$500,000 and have an estimated useful life of 10 years. There is a leasing
company willing to lease all furniture and equipment for 10 years at a 10%
interest rate.
 For the first few years, while building a client base, a new dentist should
spend about $20,000 annually in advertising and patient referral incentives.
 Average annual revenue per patient is expected to be $1,300.
 A new practice typically attracts about 300 new patients in the first year with
a 10% growth rate for the initial four to five years. One dentist and one
hygienist can comfortably service up to 600 patients per year. After that at
least one hygienist should be added.
 We believe there are more dentists per capita in Vancouver today than there
were 20 years ago, so patient growth will be slower per year than what Dr.
Paderes originally experienced. We will be satisfied if the practice has
positive cash flow by the third year.
 The monthly rent expense for a decent office would be $10,000 with a 3%
annual increase. Medical supplies account for about 25% of total revenue
plus an additional 5% of administrative expenses.

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EXHIBIT IV continued: NEW PRACTICE START-UP ESTIMATES

 We plan to employ a receptionist and hygienist with annual salaries of
$60,000 and $40,000, respectively. Additionally, we are considering an
annual payroll of $120,000 for Parsa as the CEO and Dentist of the Practice.
Any additional dividends or bonuses will be directed to our retirement
savings account (RRSP). I will continue to work voluntarily for the next 5
years.
 By offering implant procedures, we expect that at least 10% of patients will
request this service, generating an additional $2,000 in revenue for the clinic
per patient.

Required:

Prepare a APA-formatted business report analyzing all the accounting, business,

and ethical issues raised in the case with detailed recommendations to advice Parsa
on how he can establish his dental Practice. Please note that your work WILL be
analyzed for similarity and AI use!