METRICS THAT MATTER VALUATION & TRANSITION FUNDAMENTALS FOR BUYERS AND SELLERS

397 South Swing Rd 1-800-621-4664 Greensboro, NC 27409 bentsonclark.com METRICS THAT MATTER VALUATION & TRANSITION FUNDAMENTALS FOR BUYERS AND SELLERS Presented by: Chris Bentson AAO Practice Transition Seminar

Valuation and Transition 101 Orthodontic Practice Benchmarks Practice Overhead Trends Overview

tran si tion (noun) \tran(t)-'si-sh'n, tran-ezi-, chiefly British tran(t)-'si-zhen\ Definition: Passage from one state, stage, subject, or place to another : change Let s Define Transition

Current Environment

ENTITLEMENT EXPANSION CASH 1934 1961 1992 My Dad Me My Kids Source: visualizingeconomics.com, July 22, 2007 Visualizing Economics

Source: For income data: Sentier Research, LLC estimates of annual household income derived from the monthly Current mmmmmmmm Population Survey (CPS) conducted by the U.S. Census Bureau; for the unemployment rate and the CPI U: the U.S. Bureau of Labor Statistics. Median Household Income in Relation to Unemployment Rate

Source: An Amazing Chart About U.S. Finance You Have to See to Believe, July 3, 2013, Stansberryresearch.com Good News: Family Debt Burden at Record Low

Source: Wall Street Journal/Vistage Small Business Survey, August 28, 2013 Good News: Family Debt Burden at Record Low

2009 1. Surgeons 2. Anesthesiologists 3. Orthodontists 4. Obstetricians & Gynecologists 5. Oral and Maxillofacial Surgeons 2010 1. Surgeons 2. Anesthesiologists 3. Oral and Maxillofacial Surgeons 4. Orthodontists 5. Obstetricians & Gynecologists 2011 1. Surgeons 2. Anesthesiologists 3. Oral and Maxillofacial Surgeons 4. Obstetricians & Gynecologists 5. Orthodontists 2012 1. Anesthesiologists 2. Surgeons 3. Obstetricians & Gynecologists 4. Oral and Maxillofacial Surgeons 5. Orthodontists Source: Forbes Magazine, May 4, 2009 Source: Forbes Magazine, July 12, 2010 Source: Forbes Magazine, May 7, 2011 Source: Forbes Magazine, May 15, 2012 Keep Your Perspective: Best Paying Jobs in America

2009 1. Surgeons 2. Anesthesiologists 3. Orthodontists 4. Obstetricians & Gynecologists 5. Oral and Maxillofacial Surgeons Source: Forbes Magazine, May 4, 2009 2013 1. Anesthesiologists 2. Surgeons 3. Obstetricians and Gynecologists 4. Oral and Maxillofacial Surgeons 5. General Internists 6. Orthodontists 2010 1. Surgeons 2. Anesthesiologists 3. Oral and Maxillofacial Surgeons 4. Orthodontists 5. Obstetricians & Gynecologists Source: Forbes Source: Forbes Magazine, Magazine, July 12, 2010 May 13, 2013 2011 1. Surgeons 2. Anesthesiologists 3. Oral and Maxillofacial Surgeons 4. Obstetricians & Gynecologists 5. Orthodontists Source: Forbes Magazine, May 7, 2011 2012 1. Anesthesiologists 2. Surgeons 3. Obstetricians & Gynecologists 4. Oral and Maxillofacial Surgeons 5. Orthodontists Source: Forbes Magazine, May 15, 2012 Keep Your Perspective: Best Paying Jobs in America

Source: Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2012-2013 Edition Where Do You Fit In?

6% 4% 5% Solo Practice 16% Partnerships 69% Associateships Interdisciplinary Practice Large Corporate Practice Source: ADA News, ADA Explores Growth of Large Group Practices April 9, 2012 AAO Membership Breakdown

Oct 08 Apr 09 June 09 Sep 09 Nov 09 Mar 10 Jul 10 Oct 10 Jan 11 Oct 11 Dec 11 May 12 Oct 12 Apr 13 Sept 13 Dec 13 Feb 14 Sellers 165 152 135 144 160 120 132 135 146 153 143 160 155 174 204 222 242 Buyers 564 701 768 900 1008 668 674 530 540 457 464 531 403 452 473 449 587 Source: American Association of Orthodontists, Practice Opportunity Database Current AAO Matching Service

Spouse Orthodontic Mentor Transition Advisor CPA Practice Consultant/ Wealth Manager Attorney Local Banker Insurance Advisor Who s on My Team?

Information Gathering & Planning Practice Valuation Find a Seller Transition Negotiations Association Period Ownership Transfer Transition Timeline

Information to Gather

1981 1987 1993 1999 2005 2007 2009 2011 2013* Age 42 44 47 49 50 50 52 54 50 Yrs in Practice Gross Income (Rounded) Overhead Rate 12 15 16 19 19 20 22 23 18 $200K $300K $414K $600K $800K $923K $960K $950K $1,158K 49% 53% 56% 53% 53% 55% 56% 59% 59% Case Starts 150 150 160 200 200 222 220 200 245 Adult Case Starts Active Treatment Cases 15.4% 23.8% 20.2% 18.8% 22.2% 20.0% 20.0% 20.0% 23.0% 300 350 366 450 460 480 495 450 500 Source: Journal of Clinical Orthodontists, 2013 Orthodontic Practice Study Practice Activity Trends

1981 1987 1993 1999 2005 2007 2009 2011 2013* Child Fee $1,900 $2,500 $3,200 $3,880 $4,700 $4,900 $5,150 $5,200 $5,280 Adult Fee $2,100 $2,700 $3,500 $4,200 $5,000 $5,300 $5,500 $5,550 $5,650 Two Year Fee Increase Payment Period (months) Assignment of Benefits Patients Per Day 15.5% 10.3% 10.0% 8.0% 8.0% 7.0% 6.0% 3.0% 3.5% 24 24 24 24 22 22 21 22 22 37.5% 49.5% 68.2% 76.4% 73.7% 77.2% 80.8% 79.7% 88.0% 38.4 40.2 40.0 45.0 50.0 50.0 50.0 45.0 50.0 Source: Journal of Clinical Orthodontists, 2013 Orthodontic Practice Study Practice Activity Trends

Where is the Data?

Example Profit & Loss Statement

Practice Expense Average Staff Expense 24.2% Orthodontic Supply & Lab Expense 11.6% Business Management Expense 10.3% Occupancy Expense 9.7% Total Practice Expenses 55.8% Practice Income 44.2% Source: Does Your Practice Overhead Rate Compare? Bentson Clark resource, 2 nd Qtr 2013 Practice Expense Breakdown

Practice Expense Average Salary & Wages 20.5% Payroll Taxes 1.6% Uniforms 0.2% Continuing Education/Meetings 0.2% Health, Life & Disability Insurance 0.8% Pension, Profit Sharing 0.8% Other Staff Expenses 0.1% Total Staff Expense 24.2% Source: Exploring Practice Overhead: Staff & Supply Expenses, Bentson Clark resource, 3rd Qtr 2013 Total Staff Expense

Practice Expense Average Orthodontic & Lab Supplies 8.9% Lab Expenses 2.7% Total Orthodontic Supply Expense 11.6% Source: Exploring Practice Overhead: Staff & Supply Expenses, Bentson Clark resource, 3rd Qtr 2013 Total Supply Expense

Practice Expense Average Bank Charges 1.1% Advertising & Promotions 2.4% Automobile 0.0% General Office Supplies 1.9% Computer Expense 0.9% Insurance Liability, General 0.9% Licenses & Taxes 0.8% Outside Services Acct & Legal 0.8% Outside Services Other/Consultants 0.4% Postage & Shipping 0.2% Travel & Entertainment 0.3% Dues & Subscriptions 0.4% Other 0.2% Total Business Management Expense 10.3% Source: Exploring Business & Occupancy Overhead Expenses, Bentson Clark resource, 4 th Qtr 2013 Total Business Management Expense

Practice Expense Average Rent 6.9% Utilities & Telephone 1.6% Janitorial 0.2% Repairs & Maintenance 0.9% Other 0.1% Total Occupancy Expense 9.7% Source: Exploring Business & Occupancy Overhead Expenses, Bentson Clark resource, 4 th Qtr 2013 Total Occupancy Expense

30% Approximately how much student debt will you have accrued at the end of your residency? 26% 26% Percentage of Residents 25% 20% 15% 10% 22% 22% 21% 15% 17% 14% 24% 23% 23% 22% 19% 19% 18% 14% 22% 20% 18% 15% 5% 0% Less than $100,000 $100,001 - $200,000 $200,000 - $300,000 $300,000 - $400,000 More than $400,000 2010 2011 2012 2013 Source: Bentson Clark & Copple, LLC Resident Survey, 2010-2013 2013 Orthodontic Resident Survey

Source: Journal of Clinical Orthodontists, 2013 Orthodontic Practice Study Every Ortho Has a Budget Not!

What s My Practice Worth? Source: Bentson Clark resource, 1 st Quarter 2014

Year Net Collections Overhead Rate Practice Income Value Value as % of Collections 2006 1,130,800 50.4% 550,037 809,480 72.9% 2007 1,366,000 50.6% 690,370 1,056,440 75.3% 2008 1,375,500 55.0% 646,342 1,023,240 71.5% 2009 1,383,680 53.9% 623,568 1,049,280 75.1% 2010 1,326,320 55.4% 580,038 1,020,280 76.1% 2011 1,569,480 55.1% 697,965 1,206,200 75.8% 2012 1,805,360 54.9% 794,756 1,428,640 79.6% 2013 1,549,520 55.6% 702,622 1,260,960 79.0% Source: Looking Back at the Practice Valuations of 2013, Bentson Clark resource, 1 st Quarter 2014 What s My Practice Worth?

Major Factors in Value/Price Profitability Condition of office, equipment, practice management system Contracts receivable balance / PIF Location, location, location Competition Staff Referral Patterns Demand

Today s Orthodontic Residents

Place Yourself in These Shoes

AAO s Practice Opportunities Service Merleen (Holman) Leonce Practice Opportunities Manager (800) 424-2841 Ext. 587 mholman@aaortho.org

Source: Bentson Clark & Copple, LLC Resident Survey, 2013 Where to Practice?!

2013 2012 2011 2010 2009 1. California 1. California 1. California 1. California 1. California 2. Texas 2. Texas 2. Texas 2. Texas 2. Washington 3. New York 3. Pennsylvania 3. New York 3. New York 3. Pennsylvania 4. Florida 4. Florida 4. Florida 4. Illinois 4. Colorado 5. North Carolina 5. Washington 5. Virginia 5. Pennsylvania 5. New Jersey 6. Washington 6. New York 6. Colorado 6. Washington 6. Arizona 7. Colorado 7. North Carolina 7. Georgia 7. Colorado 7. New York 8. Michigan 8. Colorado 8. Pennsylvania 8. Virginia 8. Oregon 9. Pennsylvania 9. Virginia 9. Illinois 9. Georgia 9. Texas 10. Massachusetts 10. Georgia 10. Utah 10. Florida 10. Virginia Source: Bentson Clark & Copple, LLC Resident Survey, 2009-2013 Popular States for Residents

2013 2012 2011 2010 2009 1. West Virginia 1. West Virginia 1. West Virginia 1. Vermont 1. Wyoming 2. Vermont 2. Vermont 2. Vermont 2. Montana 2. West Virginia 3. South Dakota 3. South Dakota 3. Rhode Island 3. Arkansas 3. Wisconsin 4. Rhode Island 4. New Hampshire 4. North Dakota 4. Delaware 4. Vermont 5. New Mexico 5. Washington, DC 5. Iowa 5. Maine 5. North Dakota 6. Minnesota 6. Rhode Island 6. Arkansas 6. Hawaii 6. Oklahoma 7. Hawaii 7. Wyoming 7. Wyoming 7. Idaho 7. Minnesota 8. Delaware 8. Nevada 8. South Dakota 8. Iowa 8. Maine 9. Alaska 9. Montana 9. New Mexico 9. North Dakota 9. Louisiana 10. North Dakota 10. Iowa 10. New Hampshire 10. Wyoming 10. Hawaii Source: Bentson Clark & Copple, LLC Resident Survey, 2009-2013 Least Popular States for Residents

Source: Dr. Bob Scholz s website, www.drbobsweb.com Multiple Types of Transitions Startup Associateship Associateship, leading to buy out Associateship, leading to partnership Solo Group Practice Employee of Corporate Entity The pediatric dentist s orthodontist The general dentist s orthodontist Gypsy orthodontist/an employee for several

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