Valuing Dental Practices

Transcription

1 BVR s Online Symposium on Healthcare Valuation, Part 6 Ron L. Seigneur, MBA, ASA, CPA/ABV/CFF, CVA Seigneur Gustafson James Andersen, ASA, ABV, CFF, MBA Burr Pilger Mayer Dr. Bernard Slota, DDS Cosmetic Dentistry 1 Purpose of Valuing the Practice Transactions: Buying the practice Selling the practice Litigation: Marital dissolution Estate Planning Business Planning/Value Enhancement/Risk Mitigation 2

2 Business Valuation Fundamentals We assume listeners today are all familiar with the fundamental concepts Purpose of BV assignment Premise and Standard of Value BV Approaches and Methodologies Levels of Value and the need for discounts and premiums Reporting alternatives 3 Industry Overview Roughly 170,000 dental offices nationwide, generating annual revenues of over $100 billion Large majority are sole practitioners, focused on general dentistry Smaller portion focused on orthodontics, oral surgery, periodontics, and pediatric dentistry Demand for services driven largely by demographics Slowing growth in number of children Baby boomer generation impacts demand Americans are generally healthier, reducing demand 4

3 Industry Overview (cont d) Labor intensive Hygienists and staff Rapid technological changes Laser drills, improved analgesics, computer imaging, laser bleaching Computerized management systems Patient scheduling and charts Third party billing Continued increase in dental insurance coverage Least Expensive Alternative Treatment (LEAT) 5 Industry Overview (cont d) Pricing ~ $100 - $200 for normal check up and cleaning ~ $1,500 - $3,000 for implants ~ $400 to $600 for root canal ~ $500 for laser teeth whitening Per capita spending ~ $330 national average ~ $175 Louisiana to $400 Washington State 6

4 Industry Overview (cont d) Challenges Heavy competition, particularly in urban markets Larger practices have marketing advantage Regulatory issues Disease transmission issues Mercury in fillings Exposure to Nitrous Oxide ~ 4,000 new dentists entering market, with roughly 6,000 retiring annually 7 General vs. Specialty Practices General Practices Repeat business Patient list is a commodity Specialty Practices Oral Surgeons, Endodontists, Periodontists, etc. Rely on referrals Doctor of Dental Surgery(DDS)/Doctor of Dental Medicine(DMD) 8

5 ASA 9 Recognized Specialties Dental Public Health Endodontics Oral and Maxillofacial Pathology Oral and Maxillofacial Radiology Oral and Maxillofacial Surgery Orthodontics and Dentofacial Orthopedics Pediatric Dentistry Periodontics Prosthodontics 9 Valuation for Buy/Sell Purposes Typically, valuation based on multiple of gross revenue: Includes fixed assets and leasehold improvements Multiple will change with: Profitability Patient demographics Service mix Desirability of location Multiples range from 45% - 70% 10

6 Valuation for Litigation/Divorce Purposes General Practices: Similar to buy/sell Specialty Practices: Possible goodwill issues: Lack of repeat client base Greater earnings than median 11 Sources of Industry Benchmarking Data IBIS: Dentists in the U.S. ( Rosen & Associates: See How You Compare 2011 (rosencpagroup.com) 12

7 Sources of Valuation Information Business brokers Goodwill Registry ~ $500 Pratt s Stats ~ $770 BizComps ~ $ Sources of Valuation Information (cont d) Done Deals ~ $400 Tom West s Business Reference Guide ~ $229 Dental Economics free surveys on website American Dental Association ~ $300 per survey BVR s Guide to Dr. Stanley Pollock, 2011, BVResources.com 14

8 Sources of Compensation Information (cont d) Economic Research Institute Dental Economics Practice Survey (free) A.D.A. Reasonable Compensation: Applications and Models for Taxation, Appraisal and Management Planning BVResrouces.com 15 Case Study Valuation for marital dissolution purposes Valuation methodologies used Asset Approach Excess Earnings Method Market Approach Transaction Method 16

9 Case Study: Asset Approach Determine value of net tangible assets Balance sheet is adjusted for accounts receivable, depreciation, and other items as appropriate The net adjustments flow through to owner s equity 17 Balance Sheet Estimated Fair Market (a) Value 05/02/07 Dr Cr 05/02/07 CURRENT ASSETS Cash $ 25, [1] $ 25,078 Accounts Receivable - 21,430 [2] 21,430 TOTAL CURRENT ASSETS 25,145 46,508 FIXED ASSETS (and year purchased) Furniture & Fixtures (12/1999) 23,624 23,624 [3] - Leasehold Improvements (12/1999) 10,813 10,813 [3] - Furniture & Fixtures (7/2000) 14,730 14,730 [3] - Toyota Sequoia (12/01) 42,114 42,114 [3] - Office Equipment (12/2002) 14,801 14,801 [3] - Hand Pieces & Autoclave (11/2003) 8,695 8,695 [3] - Dentrix Dental System (7/2004) 1,071 1,071 [3] - Dental Equipment (2004) 9,806 9,806 [3] - Office Equipment (11/2004) 1,005 1,005 [3] - Adjust to Estimated Fair Market Vallue - 36,130 [3] 36,130 Gross Fixed Assets 126,659 36,130 Less adjustments & accumulated depreciation (96,315) 96,315 [3] - NET FIXED ASSETS 30,344 36,130 OTHER NON-CURRENT ASSETS - - TOTAL ASSETS $ 55,489 $ 82,638 18

10 Balance Sheet Balance Sheet (cont d) CURRENT LIABILITIES Accounts Payable $ - $ - Accrued Liabilities and Payables - - Est taxes on Net A/R & A/P - 7,500 [4] 7,500 TOTAL CURRENT LIABILITIES - 7,500 TOTAL LONG-TERM LIABILITIES - - TOTAL LIABILITIES - 7,500 TOTAL OWNER'S EQUITY 55,489 19,649 [5] 75,138 $ 75,100 (rounded) TOTAL LIABILITIES & EQUITY $ 55,489 $ 82, Case Study: Excess Earnings Determine value of intangible assets, or goodwill Net income is adjusted for reasonable compensation, resulting in a normalized earnings stream Since normalized earnings are zero, there is deemed to be no goodwill Calculated value is equal to the value of the tangible assets 20

11 Normalized Earnings Normalized Earning For the Year Ending 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 TOTAL SALES [1] $ 279,890 $ 309,176 $ 339,064 $ 330,881 $ 338,866 $ 318,182 BOOK INCOME [1] $ 75,857 $ 91,106 $ 93,291 $ 97,757 $ 101,151 $ 90,655 NORMALIZATION ADJUSTMENTS: [2] Other Adjustments Total NORMALIZED EARNINGS BEFORE COMP ADJ. 75,857 91,106 93,291 97, ,151 90,655 Adjustment for Owner's Compensation [3] (75,857) (91,106) (93,291) (97,757) (101,151) (90,655) NORMALIZED EARNINGS Weight Factors [4] Weighted Net Income TOTAL WEIGHTED NET INCOME - Divided by Total Weight - NORMALIZED EARNINGS $ - 21 Case Study Case Study (cont d) Asset Approach / Excess Earnings Conclusion Excess Earnings [1] - Goodwill Value of Excess Earnings [1] $ - Fair Market Value of Net Tangible Assets Sch VI 75,100 Estimated Equity Value under the Excess Earnings Approach (rounded) $ 75,000 22

12 Case Study: Market Approach Transaction Method Analyze databases for sales transactions of similar companies Pratt s Stats BizComps Done Deals 23 Case Study: Market Approach (cont d) Transaction Method Determine appropriate multiples to apply to subject company Price to sales Price to seller s discretionary cash flow 24

13 Market Approach Market Approach Average Seller's Discretionary Sales [2] Cash Flows Measure of Earnings - Susan Allen, DDS $ 329,000 $ 98,000 Market multiple - Pratt's Stats Furniture, Fixtures, Equipment & Goodwill 184, ,360 Plus: Cash 25,078 25,078 A/R 21,430 21,430 Other Assets , ,868 Less: Current Liabilities (7,500) (7,500) Long-term Debt - - Estimated Equity Value Under the Market Approach $ 223,000 $ 168, Differentiation Elements: The Tale of Two Practices Practice #1 Gross Revenues = $1,000,000 Sole Practitioner/DDS Net to DDS = $350,000 Practice #2 Gross Revenues = $1,000,000 Sole Practitioner/DDS Net to DDS = $350,000 Both practices would sell for the same price..right? Well.lets look under the covers 26

14 Differentiation Elements: The Tale of Two Practices Practice #1 Urban location Two part time hygienists Modern office space in lobby of A office bldg Computerized patient records Laser technology Marketing savvy DDS works 3.5 days a week Practice #2 Rural location One full time hygienist Average space in middle income neighborhood Traditional patient records Dated technology Second generation practice DDS works 5 days a week 27 Differentiation Elements : The Tale of Two Practices Practice #1 Younger more affluent patient mix Increasing revenues from teeth bleaching, cosmetic electives, Invisalign, etc. Experiencing drop off in cleanings and check ups Practice #2 Many of the patients are same age or older than DDS Most revenues come from traditional services Experiencing drop off in cleanings and check ups 28

15 Case Study: Value Conclusion Weight the various methodologies based on Valuator s experience Accuracy of information provided 29 Case Study Case Study (cont d) Value Conclusion Weighted Values Weight Values Excess Earnings Value Sch II $ 75, % $ 15,000 Market Approach Value - MVIC to Sales Sch IV $ 223, % $ 111,500 Market Approach Value - MVIC to Discretionary Earnings Sch IV $ 168, % $ 50,400 Value Conclusion: Estimated Fair Value for Marital Dissolution Purposes of 100% of the Owner's Equity in Susan Allen, DDS Sole Proprietorship at June 30, 2007 (rounded) 100.0% $ 177,000 30

16 Practice and Professional Goodwill Wide variations in how goodwill is handled in marital dissolution matters between jurisdictions: Colorado IRM Nichols (606 P2d 1314, 1979) Practice goodwill and personal/professional goodwill are marital assets Tennessee McKee v McKee (WL , 2010) Neither practice nor personal/professional goodwill is a marital asset Wisconsin McReath v McReath (WL , 2010) Practice goodwill is a marital asset; personal/professional goodwill is not 31