pension income - he then also gets a $1000 deduction for pension income. SPDAs thus are devices that enable the taxpayer to shelter his investment income while he is in a high tax bracket and pay tax on it when he expects to be in a lower tax bracket. This enables him to accumulate a larger sum for his retirement. Single-premium deferred annuities come in two different forms either the customer buys a specified amount of income to begin at a certain date, or the contract calls for a guaranteed interest rate during the specified accumulation period. SPDAs are quite flexible. They can be for any agreed amount, and the accumulation period and terms under which the annuity is paid are also variable. Most plans can be amended in some way after the contract has been signed. In our example, if the investor decided at age 65 that he wanted to work another 2 years, he would probably be able to defer receiving his an-

nuity - and of course the amount he would receive at age 67 would be greater. One of the more flexible plans is the Canadian medical annuity plan (CMAP) offered through MD Management, the CMA's wholly owned subsidiary. The standard CMAP contract states that the plan will pay a life annuity with a 10-year guarantee (that is, the annuity will be paid for that time to you and your heirs whether you are alive to receive it or not). However you can also take out 40% of the original capital at any time or you can withdraw capital and interest in equal instalments over whatever period you wish, providing it is not less than 5 years. The 5-year provision does not apply to elderly members; starting at age 71 the minimum withdrawal period is reduced a year at a time until at age 75 you can take out everything in a lump sum. The principal and a nominal amount of interest are guaranteed by the National Life Assurance Company. The actual interest paid by the plan is the aver-

age for the period of each contract; current rates are published regularly in CMAJ (see page 501). Canadian tax law allows an investor in an SPDA to use it as collateral for a loan. How much can be borrowed depends on the bank manager's assessment of the liquidity of the plan. Interest paid on money borrowed to invest in an SPDA has not, to now, been considered tax-deductible. The CMAP has the further important advantage that it's a noload plan. This means that, unlike with many plans, no commission is deducted from the initial premium before the investment is made. Some commissions run up to 7% - on the above-quoted example this would mean that the investor would pay over his $65 000 but only $60 450 would be invested for him. CMA members will find investing in CMAP is much easier than dealing with other institutions - all they have to do is get an application form, fill it in, sign it and send it to CMA with a cheque. U

Why you should estimate the value of your practice and why you should do it now M.G. LANDRY

What would your spouse do with your practice if you died suddenly? All too often physicians don't properly prepare their spouses to handle the problems that unexpected deaths bring. For example, if you died right now how would your spouse dispose of your practice? In a group practice you might have a buy-sell agreement that sets out that the surviving partners will pay the physician's estate a fair price for your share of the practice. If you don't have such an agreement or are in solo practice, it won't be quite as simple. Like most things, the medical practice will be worth only what someone else is willing to pay for it - and that may not be very much. It's fair to say that the majority of potential buyers for your practice will be recently certified physi-

cians. You may feel that anyone would be a fool not to consider buying it - after all it took the better part of 5 years to make it the going concern it is today. But potential buyers may have different ideas. Your practice may Mr. Lai.dry is VMA'. .dviset. to *i.octatIoi. meunJ.ers on pi.nfi* siob0l a*I per.uwt business .t-. taiw. Read7.. should aet act en

- ot .b.ut. I.wy.r, ,cco*.t6ai,: be made up of older patients, while the purchaser might prefer a more family-oriented practice. Even if the demographics are right the physical plant may not be. It may not suit their taste; there might be too much space or not enough. And so on.

You might think that your combination office-home setting is perfect. It may be - for you. Most physicians setting up in practice these days want to separate their work from their private life. You may feel you are sitting on a goldmine because there are very few other doctors in your own area. True - but what's to prevent the prospective buyer from moving in across the street to his own spanking new medical office set up exactly the way he or she wants? The message is simple: when calculating how much your spouse will get when you die, don't include the value of your practice. If the value of your estate isn't up to par then add additional insurance. Despite all this, there's still a chance that your survivor will find a buyer. Since your practice will

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quickly lose value as patients move on to other physicians, your spouse will have to move fast. First, it will be necessary to know what the practice is worth and where to find buyers. We suggest that you and your spouse .repare a list of steps to be taken. Note at least two medical journals in which you think a classified ad should be placed. Even better, draw up a sample ad in advance. Be sure to advise how to place the ads as soon as possible, as the lead time for medical journals could be as much as 6 weeks. (For CMAJ it's a minimum of 2½ weeks from receipt of the ad to a maximum of 5 weeks). Also, write down the telephone numbers of several residency program administrators. In the event of your death your spouse could phone to see if any of their former students are still at loose ends. Again, speed is of the essence. Next, prepare and keep an updated estimate of the value of your practice. You might want to use a worksheet similar to that shown in Fig. 1. Accounts receivable for opted-in physicians are not a problem and would not be included in the valuation. Opted-out physicians may want to include outstanding payments for services rendered as part of the valuation. Many widows prefer a cash settlement rather than going through the administrative details associated with collecting and recording accounts receivable. A buyer of the practice may prefer to look after the previous owner's accounts receivable to maintain direct patient contact, which is so important for practice continuity. The amount the buyer is willing to pay for accounts receivable will depend on the nature of the debt. Ordinarily three factors will be considered: collection ratio, long-outstanding accounts and collection costs. For example, let's say that you collect about 90% of all bills that you have sent out. Currently you have outstanding receivables of $15 000 of which $2000 of these accounts have not been acted upon within 3 months. You might place a value of 90% on the $13 000 of active accounts and 60% on the remaining $2000. The 60% figure, which accounts for the slow payers,

FIG. 1-Worksheet to use in calculating value of practice.

is more realistic since the likelihood of collection is lower. The accounts receivable would then be estimated at $12 900. Naturally the purchasing physician will have to pay the administrative costs of collecting these items. Another 12% could be discounted to take this factor into consideration. The net value of your accounts receivable in our example would then be $11 352. If you own the building the value of your office and land will be its fair market value. For now you might ask a commercial real-estate agent to give you a guesstimate. Your spouse, however, faced with selling the practice, should hire the services of a professional real estate appraiser. How much your furnishings or equipment will be worth will depend on each item and its condition and age. In this fast-moving world, medical and office equipment are quickly out-of-date. Some pieces of equipment bought only a year or two ago may not be worth half what you paid for it. Although

equipment and furnishings may yield a higher price, we suggest you list it at book value. Anything more will be a bonus. Inventory such as drugs and medical supplies could be valued at cost. Last year's statement of expenses will help you calculate this figure. Since these items are turned over every 60 days or so in most practices, you could value this amount at say a sixth of last year's drug and medical supply expenditures. Goodwill is the value that might be attached to such intangible items as location, number of patients, continuity of employees, office system, introductory letter etc. Here lies the greatest potential for disagreement between buyer and seller. Many consultants and accountants believe that in today's world goodwill is worthless. Things are changing, though, and it often takes months if not years for physicians in certain types of medicine to develop healthy practices. Personally I feel that a young

CMA JOURNAL/SEPTEMBER 8, 1979/VOL. 121 669 For prescribing information see page 614-k

physician who wants a fast start should consider buying a practice even if the price includes goodwill. Living habits of patients should not be underestimated. Most patients, even if the doctor has changed, will continue to dial that familiar number and beat a path to the same office. In determining goodwill for your practice you may want to use the traditional rules-of-thumb of either 2 months gross or 25% of last year's net income from practice. Be conservative in this regard. These are only rules-of-thumb, and as mentioned above there are many other factors - location, your own style of practice etc. - to be considered. For tax purposes at the time of sale, goodwill should be determined before placing a value on furniture and equipment. Goodwill is not fully depreciable to the purchaser. The tax people consider it to be a capital expenditure, and as such only half the cost can be amortized at 10% a year. For this reason the purchaser might be willing to pay more for furnishings if he could reduce the cost of goodwill. Such

action would be advantageous for ures could prove useful when it the buyer but would have a detri- comes time for you to sell the pracmental effect on the seller's tax tice. One other important point. In position. Make sure that your spouse consults an accountant be- the event that your spouse is unfore establishing the final figures. able to sell or give the practice away there will be more problems Lease valuable than financial ones. The headaches Another item to be considered is associated with medical records the value of the lease. If the cur- have forced more than one widow rent lease is in a good location and to take up residence in a faraway has several years to run at a rent place. From a humane point of much less than that of comparable view, your spouse should make the offices, the difference the purchaser records available for transfer. To would have to pay elsewhere should do this at every patient's or doctor's beck and call can and does create also be considered. Once you have established the problems. Recently we suggested asset value of your practice you that a widow faced with a similar should then add up all liabilities, problem advise other physicians in which would normally include ac- town that the records will be availcounts payable, outstanding mort- able only during certain hours of gages, balances owing on equip- certain days of the month. So far ment and furnishings etc. The dif- this seems to have worked quite ference between the assets and lia- well. How long do the records have bilities will provide you with an approximate value of your practice. to be kept? From a humane point Don't just file the valuation away. of view probably as long as they Keep it up-to-date. Let's hope your might be needed by patients. From spouse won't have to refer to it. a legal point of view, see Dr. F. If this is the case and you live long Norman Brown's article on page enough to retire, the up-to-date fig- 624 of this issue of CMA I.E

Computer-assisted medicine: How soft is software? H. DOMINIC COYVEY, NEIL HARDING MCALISTER, DEREK G. CORNElL

To this point the articles in this series on computer-assisted medicine have looked in detail at computing machinery, or hardware. We have seen that the selection of appropriate hardware for a computer system is not easy. However, the hard part of a computer system is the development of software1 - the programs that tell the computer what to do. Put most simply a computer program is a set of instructions, in the form of numeric codes, that are put into the computer's memory to direct its operation. Programming is the art of creating the in-

structions required to make the computer do what we want it to do. Art and Science It should not be surprising that programming has evolved as an art and as a science. Computer scientists have improved the methods for formulating, generating and testing programs and for avoiding the tedious process of creating the appropriate sequences of numeric codes. At first their job was very difficult. Early computers had to be programmed (coded) using machine

language - the numeric instructions idiosyncratic to the given machine. Computers can only carry out instructions permitting fundamental operations such as "add" or "store". Any particular model is designed to perform a finite number of different instructions: microcomputers generally have less powerful instruction sets than largescale computers. Because computers can execute only a relatively small number of different instructions, it is frequently necessary to combine several instructions in sequence to achieve the desired result.

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Why you should estimate the value of your practice and why you should do it now.

pension income - he then also gets a $1000 deduction for pension income. SPDAs thus are devices that enable the taxpayer to shelter his investment inc...
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