PROFESSIONAL PRACTICE VALUATION. Jane R. Smith, DDS. April 1, Prepared by:

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1 PROFESSIONAL PRACTICE VALUATION Jane R. Smith, DDS April 1, 2015 Prepared by: 101 E. PARK BLVD. SUITE 300 PLANO, TX

2 DEFINITION OF FAIR MARKET VALUE The fair market value f a Dental practice can be defined as the mst prbable amunt r price which will be paid by a willing buyer when the practice is ffered fr sale by a willing seller. This definitin has previusly been utlined in IRS Ruling fr valuing the stck f clsely-held rganizatins where market qutatins are simply nt available. This IRS ruling further states that n general frmula exists which is applicable t the infinite number f different situatins arising in the valuatin f stcks. The definitin f fair market value and the purpse f the Revenue ruling apply equally t prfessinal practice. The IRS ruling lists the fllwing relevant factrs: (1) Nature and histry f the cmpany. (2) Financial cnditin and bk value f the crpratin. (3) Earning capacity f the rganizatin. (4) Gdwill, ging cncern and intangibles. In February 1990, the Tax Curt decided the case f Newhuse vs. Cmmissiner, (94 T.C. N. 14 ((1990)) which was the first time the curts accepted the different classes f willing buyers cncept. The curt reslved in applying the willing buyer fair market value standard that there are fur benchmarks f value which willing buyers may utilize t determine the value f the stck f crpratins. The Benchmarks are: I. The Cntrl Investr II. The Active Investr III. The Passive Investr IV. The Public Investr The appraisal made t determine a value fr ne class f willing buyer will be different frm the appraised value fr anther class f willing buyer. The Cntrl Investr wuld purchase the Dental practice with the gal f acquiring ttal equity wnership. Therefre, I appraised the practice wned by Dr. Jane D. Smith as being apprpriate fr the Cntrl Investr classificatin f willing buyer. Dental-Medical Ecnmics 2

3 Valuatin Methd #1 Earnings Multiple Methd The Earnings Multiple Methd can be used t value Dental Practices by applying a factr, r multiple t the past earnings f the practice. The basis f this calculatin was based n prfits f the practice fr the years 2013, 2012 and Specialty dental practices ften utilize multiples ranging between The multiple used fr the subject practice is This practice was valued arund the average factr due t the perceived gdwill f Dr. Smith, the age f the practice, and the intrinsic value f the prprietary sftware develped by Dr. Smith. The calculatin is illustrated belw. In additin, the reader is reminded the prfits f this practice were nrmalized t remve debt service, vluntary r persnal expenses and the cmpensatin package f the wner. The gal is t arrive at a true prfitability figure based slely n thse required verhead expenses. Valuatin Methd #1 Earnings Multiple Methd Fiscal Year Cllectins Prfit % Prfit 2011 $ 895,372 $ 263, % x 1 $ 263, $ 1,042,336 $ 332, % x 2 $ 665, $ 889,675 $ 279, % x 3 $ 838,410 $2,827,383 $ 875, % 6 $ 1,766,747 Weighted average annual prfit $ 294,458 Selected earnings multiple $294,458 x $ 404,880 Tangible Assets Value $ 94,664 EARNINGS MULTIPLE VALUATION METHOD $ 499,544 Dental-Medical Ecnmics 3

4 Valuatin Methd #2 Discunted Future Cash Flw Methd The discunted future cash flw methd is prbably the mst widely emplyed technique in the valuatin f businesses which are privately wned, and stck prices are subsequently nt available t establish equitable value thrugh the applicatin f price/earnings ratis r market capitalizatin. The real value f a dental practice is its earnings pwer. The discunted cash flw methd relies n specific earnings prjected int the future. This methd will clearly state in current dllars the amunt a willing buyer might pay fr the future earnings f the dental practice ver a reasnable perid f time. Fr dental practices, generally, a reasnable perid f time is five (5) years. There is usually an expectatin f cntinuing future practice grwth and increasing value beynd the five (5) year perid, and the valuatr shuld cnsider and establish a terminal value als knwn as an annuity int perpetuity. The discunted future cash flw methd f valuatin is based n the accepted thery that the value f a prfessinal practice depends n the future benefits r future earnings the practice will prduce discunted back t a present value at an apprpriate discunt rate. This technique is a versin f the capitalizatin f incme methd relying n specific prjectins f earnings fr five (5) years int the future. In cntrast t the capitalizatin rate methd, the discunt rate methd emplys a rate f return t cnvert a series f future incme amunts int a current r present value. This discunt rate shuld be established by utilizing the previusly frmulated capitalizatin rate and then adding a premium because f the additinal risk ver the perid f five (5) years. In this valuatin, cnservative prjectins f 3.0% annual increases in pre-tax net incme were made fr the five (5) year perid. The additinal risk premium fr lng-term frecasting was set at 2.0%, and when added t the 30.0% capitalizatin rate the prjectins were discunted t their present value at the rate f 32.0% fllwing the necessary cnsideratin f annual federal taxes payable. Additinally, a 30% tax base is utilized based n natinal averages fr dental specialists, and based n the expected cmpensatin levels this practice will prduce. The frmula is illustrated n the next page. Dental-Medical Ecnmics 4

5 Valuatin Methd #2 Discunted Future Cash Flw Methd YEAR Prjected Cash Flw $293,000 $301,000 $310,000 $319,000 $328,000 Less: 30.0% $87,000 $90,000 $93,000 $95,000 $98,000 NET PROFIT $206,000 $211,000 $217,000 $224,000 $230,000 Present Value $156,061 $121,097 $94,349 $73,782 $57, % DFCF METHOD VALUE = $502,682 Dental-Medical Ecnmics 5

6 Valuatin Methd #3 Cmparable Sales Methd Additinal external factrs als influence the valuatin f dental practices. Prfitability and cash flw are nt the nly measuring tls fr determining Fair Market Value. Other items t be cnsidered in valuing a dental practice include: practice lcatin and demgraphics, cnditin f physical plant, persnnel and years experience, patient demgraphics, payer matrix, market saturatin, lcal ecnmy and ther varius factrs. Cmparable sales data f dental practices is readily available thrugh varius prfessinal publicatins, scieties f dental cnsultants, and business valuatin rganizatins. Sme f these resurces include the fllwing: MGMA, Natinal Sciety f Healthcare Business Cnsultants and Institute f Business Appraisers. Additinally, the cmparable sales methd is accepted by the Internal Revenue Service under cde sectin 2031(b) which permits this type f valuatin. In reviewing data frm the abve mentined resurces, the mst cmmnly utilized percentage f sales price relative t grss revenues fr similar dental practices is 60%. These percentages usually fall between 45-75%. Cnsidering the lcatin f the practice, the current ecnmy f Dallas, and the extrardinary length f time the practice has prvided quality dental treatment, I applied a realistic rate f 60% t the calculatins f value. These calculatins are illustrated n the next page. Dental-Medical Ecnmics 6

7 Valuatin Methd #3 Cmparable Sales Methd 2012 Patient Revenue $ 1,042,336 x 1 = $ 1,042, Patient Revenue $ 889,675 x 2 = $ 1,779, Patient Revenue* $ 799,008 x 3 = $ 2,397,024 TOTAL 6 $ 5,218,710 Divide ttal by 6 $ 869,785 Weighted Average $ 869,785 x 60% $ 521,871 COMPARABLE SALES METHOD VALUATION $ 521,871 *2014 Annualized Dental-Medical Ecnmics 7

8 SUMMARY OF VALUATION METHODS Valuatin Methd #1 - Multiple f Earnings $ 499,544 x 33% = $ 164,850 Valuatin Methd #2 Discunted Future Cash Flw $ 502,682 x 34% = $ 170,912 Valuatin Methd #3 Cmparable Sales $ 521,871 x 33% = $ 172, % $ 507,979 OPINION OF FAIR MARKET VALUE - ROUNDED $ 508,000 Tangible Assets* $ 93,229 [* Refer t Appendix A ] Intangible Assets $ 414,771 ESTIMATE OF FAIR MARKET VALUE $ 508,000 SPECIAL NOTE: The reader f this reprt is reminded that the abve value DOES NOT include practice assets such as cash n hand r accunts receivables. The abve value als has nt taken int cnsideratin any practice liability that existed as f August 31 st, This appraisal f the Fair Market Value f the practice f Jane R. Smith, DDS is based n the criteria f the assignment; t value the business fr a ptential sale. It is assumed that if a sale tk place, the exiting practitiner wuld prvide the required ingredients fr successful transfer f practice gdwill. If the ingredients f a transitin are nt in place, the Fair market Value fr this practice wuld decrease significantly. Respectfully submitted, Shane DuPree, Cnsultant Dental-Medical Ecnmics Dental-Medical Ecnmics 8

9 ASSUMPTIONS, LIMITATIONS, AND CONTINGENCIES The data cntained in this valuatin reprt has been btained frm telephnic and electrnic crrespndence with Dr. Jane Smith. T the best f my knwledge, there are n significant adverse circumstances nr any substantial cntingent r undisclsed liabilities which culd have a meaningful impact n the future prfitability f the practice. Dental-Medical Ecnmics and its agents are ttally independent frm this practice and have n financial interest whatsever in the dental practice wned by Dr. Smith. This reprt is a limited appraisal analysis designed t prvide a cnclusin f value. It is nt a cmprehensive accunting reprt and shuld nt be relied upn t disclse all assets, all liabilities, r t cmpletely verify financial reprting. The reprted analyses, pinins, and cnclusins are limited by the reprted assumptins and limiting cnditins, and is my persnal, unbiased, prfessinal analyses, pinins, and cnclusins. N respnsibilities are assumed fr matters f a legal nature r as t the title f the prperties described. Had I perfrmed additinal review prcedures r perfrmed examinatins f the underlying financial statements f the practice in accrdance with generally accepted auditing standards, I may have bserved factrs which wuld have alerted the methds and calculatins emplyed and pssibly the final appraisal value. The valuatr is nt required t give testimny nr t appear in curt by reasn f this reprt unless specific arrangements have been made r will be made in the future. N reprductin, publicatin, distributin r ther use f any part f this reprt is authrized fr public release withut the prir written cnsent f Dental-Medical Ecnmics r Dr. Smith. Dental-Medical Ecnmics 9

10 JANE R. SMITH, DDS TANGIBLE ASSET FMV ASSETS THRU DECEMBER 31, 2013 APPENDIX A GREATER OF 7 YEAR * 20% * BASIS OR AST DATE YEAR NO. DESCRIPTION ACQUIRED ACQ COST SL DEPR BASIS SALVAGE SALVAGE 1 COMPUTER EQUIPMENT 2/19/ COMPUTER EQUIPMENT 5/6/ ,585 1, COMPUTER EQUIPMENT 12/22/ ,864 2, COMPUTER EQUIPMENT 1/23/ ,731 19, ,973 1,973 5 COMPUTER EQUIPMENT 2/12/ ,802 9, COMPUTER EQUIPMENT 2/12/ ,588 2, COMPUTER EQUIPMENT 1/23/ PANO/TOMO MACHINE 10/9/ ,000 39, ,800 7,800 9 DENTAL EQUIPMENT 4/25/ ,912 3, DENTAL EQUIPMENT 12/31/ , , ,089 26, DENTAL EQUIPMENT 1/23/ ,592 3, FLASH FOR CAMERA 8/16/ SHEER VISION #1 1/25/ FURNITURE & FIXTURE 11/18/ ,135 3, FURNITURE & FIXTURE 10/20/ ,945 6, ,389 1, REFRIGERATOR 12/19/ ,502 1, FURNITURE & FIXTURE 12/22/ FURNITURE & FIXTURE 12/22/ ,508 2, FURNITURE & FIXTURE 2/12/ ,464 5, ,093 1, FURNITURE & FIXTURE 2/16/ FURNITURE & FIXTURE 3/16/ FISH HEAD FIXTURE 6/17/ ,066 1, FURNITURE & FIXTURE 5/24/ OFFICE EQUIPMENT 10/16/ OFFICE EQUIPMENT 11/19/ ,410 1, OFFICE EQUIPMENT 11/19/ ,230 2, OFFICE EQUIPMENT 12/22/ ,230 2, OFFICE EQUIPMENT 12/31/ ,363 2, OFFICE EQUIPMENT 1/19/ ,118 1, OFFICE EQUIPMENT 3/30/ LASERJET PRINTER 6/2/ ,382 2, TELECHECK TERMINAL 4/15/ TOTAL VALUES 253, , ,792 47,141 * COMPUTERS ARE DEPRECIATED ON A 3 YEAR STRAIGT-LINE BASIS WITH A 10% SALVAGE VALUE PLUS INVENTORY ON HAND 2 MONTHS AVERAGE EXPENSES FOR SUPPLIES 28,693 PLUS INSTRUMENTS AND OTHER SMALL 2% OF REVENUE 17,396 TOTAL VALUE OF TANGIBLE ASSETS 93,229 Dental-Medical Ecnmics 10