Valuation of Dental Practices

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Presented by PYA’s Jim Lloyd (Consulting Principal) and Robert Mundy (Consulting Senior Manager), "Valuation of Dental Practices,” provide valuable insights regarding dental practice operations, merger and acquisition activity, and valuation approaches. The presentation also covers:

Key operating statistics that drive the value of dental practices.
Compensation trends for dentists.
Regulatory constraints and related issues.

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Valuation of Dental Practices

  1. 1. Valuing Dental Practices Robert M. Mundy, CPA/ABV, CVA W. James Lloyd, CPA/ABV, ASA, CFE www.aicpa.org/fvs
  2. 2. Forensic and Valuation Services Section 1 Speaker Biography W. James Lloyd W. James (Jim) Lloyd, CPA/ABV, ASA, CFE is a Principal with Pershing Yoakley & Associates (PYA), an accounting and consulting firm specializing in the healthcare industry. Primary areas of focus include valuation, transaction advisory, and dispute related services. Healthcare industry experience includes: ambulatory surgery centers, cancer centers, dental practices, dialysis facilities, imaging centers, hospice, hospitals, long-term care facilities, managed care, pharmacies, pharmaceutical manufacturers, physician practices, and physician compensation arrangements among others. Frequent speaker at national and regional conferences on valuation and dispute related topics. Past chair: American Institute of CPAs' ABV Credential Committee. Past member: American Society of Appraisers' Board of Examiners.
  3. 3. Forensic and Valuation Services Section 2 Speaker Biography Robert M. Mundy Robert M. Mundy, CPA/ABV, CVA, is a Senior Manager with Pershing Yoakley & Associates (PYA), an accounting and consulting firm specializing in the healthcare industry. Primary areas of focus include valuation, transaction advisory, and dispute-related services. Healthcare industry experience includes: general acute care and specialty hospitals, diagnostic imaging centers, ambulatory surgery centers, skilled nursing facilities, assisted living centers, cancer treatment centers, and a variety of physician practices. Co-authored “The Valuation of Hospitals” chapter in Business Valuation Resources’ Guide to Healthcare Valuation.
  4. 4. Forensic and Valuation Services Section Agenda 1 2 3 4 5 Overview of the dental industry Valuation and compensation trends Current trends affecting dental practices Overview of regulations affecting healthcare and dental industry Key operating benchmarks and data resources www.aicpa.org/fvs 2
  5. 5. Forensic and Valuation Services Section Overview of Dental Industry Over 195,000 professionally active dentists in the U.S. as of 2012 Segments of the dental provider industry: • General dentistry • Oral and maxillofacial surgery • Prosthodontics • Orthodontics • Pediatric dentistry • Endodontics • Periodontics www.aicpa.org/fvs 3
  6. 6. Forensic and Valuation Services Section Overview of Dental Industry General dentists comprise the vast majority of dental providers in the U.S. 80.2% 3.5% 2.5% 5.1% 3.2% 2.8% 2.7% Number of Active Dentists by Specialty General dentist Oral surgeon Endodontist Orthodontist Pediatric dentist Periodontist Other Source: American Dental Association, Dental Data, November 2012 www.aicpa.org/fvs 4
  7. 7. Forensic and Valuation Services Section Overview of Dental Industry Restorative, preventative, and diagnostic services comprised the majority of dental services in 2013 6.90% 22.20% 15.60%8.80% 9.80% 14.90% 5.40% 2013 Services Distribution OMFS Restorative dental services Preventative services Fixed prosthodontics Orthodontics Diagnostic services Non-surgical endodontic services Source: IBISWorld, Dentists in the U.S. Industry Report, December 2013 www.aicpa.org/fvs 5
  8. 8. Forensic and Valuation Services Section Current Trends in Dental Industry Positive Trends for the Dental Industry Aging population Profitability still high for the industry, even during economic downturn Improved economic conditions • Increased access to employer-sponsored health insurance; however, many employer-sponsored plans do not include dental benefits • Increases in disposable income should lead to more dental procedures Greater awareness and focus on oral health Increasing access to coverage through healthcare insurance exchanges Trend toward more cosmetic procedures According to Centers for Medicare & Medicaid Services, dental spending is projected to increase from $110.9 billion in 2012 to $191.3 billion in 2022, representing a 5.6% compound annual growth rate www.aicpa.org/fvs 6
  9. 9. Forensic and Valuation Services Section Current Trends in Dental Industry Challenges Facing the Industry Rapid advancements in technology Rising costs of operations Volatile prices for nonferrous metals Better preventive care by patients leads to fewer patient visits Only 60% of U.S. has some form of dental benefits1 Shift from private insurance to more public coverage and out of pocket payments Potential cuts to Medicaid for adult dental coverage Changing demographics among dental providers 1 2013 National Association of Dental Plans / Delta Dental Plans Association Joint Dental Benefits Report on Enrollment www.aicpa.org/fvs 7
  10. 10. Forensic and Valuation Services Section Current Trends in Dental Industry Trend Toward Consolidation Shift from solo practitioners to group practices • Rising operating costs and capital requirements • Economies of scale • High costs of dental education and student loans make solo practice less attractive Growing interest with private equity and dental practice management companies (DPMCs) • Potential for high-profit margins with sufficient volume www.aicpa.org/fvs 8
  11. 11. Forensic and Valuation Services Section Dental Practice Management Companies Publicly traded company Birner Dental Management Services, Inc. (BDMS) • 66 offices throughout Colorado, New Mexico, and Arizona • Revenues in excess of $64 million in 2013 • Market value of invested capital (MVIC) to Revenue = 0.65x • MVIC to EBITDA = 11.75x www.aicpa.org/fvs 9
  12. 12. Forensic and Valuation Services Section Dental Practice Management Companies Privately held companies American Dental Partners, Inc. • Acquired for $398 million in 2011 by private equity firm JLL Partners InterDent, Inc. • Provides support services to over 150 affiliated dental offices • Employs over 450 dentists Smile Brands Group, Inc. • Provides support services to over 400 dental offices • Employs over 1,300 dentists Pacific Dental Services, Inc. • Provides support services to over 275 dental offices www.aicpa.org/fvs 10
  13. 13. Forensic and Valuation Services Section Dental Practice Key Statistics Practice Gross Billings Gross Billings per Practice Hour by Number of Chairside Assistants Source: American Dental Association, 2010 Survey of Dental Practices, median values All Independent Dentists No Non-Owner Dentists Includes Non-Owner Dentists General Practitioners $700,000 $650,000 $1,163,250 Percent Collected 95.6% 95.9% 94.4% Specialists $1,000,000 $900,000 $1,700,000 Percent Collected 96.0% 96.0% 95.6% 1 Chairside Assistant 2 Chairside Assistants 3+ Chairside Assistants General Practitioners $299 $377 $510 Specialists $326 $430 $624 www.aicpa.org/fvs 11
  14. 14. Forensic and Valuation Services Section Dental Practice Key Statistics Percentage of Practices Employing Non-Dentist Staff Average Number of Non-Dentist Staff per Dentist Source: American Dental Association, 2010 Survey of Dental Practices Dental Hygienists Chairside Assistants General Practitioners 76.0% 94.3% Specialists 28.6% 97.0% Dental Hygienists Chairside Assistants Total Non-Dentist Staff General Practitioners 1.8 1.6 4.5 Specialists 1.6 2.5 5.1 www.aicpa.org/fvs 12
  15. 15. Forensic and Valuation Services Section Dental Practice Key Statistics Staffing Expenses as a % of Gross Billings for General Practitioners Source: American Dental Association, 2009 Survey of Dental Practices 1Q Median 3Q Salaries for shareholder dentists 18.8% 25.6% 35.8% Salaries for employed dentists 3.9% 8.0% 13.7% Salaries for non-dentist staff 17.5% 22.7% 26.8% Payroll taxes for all staff 2.4% 3.5% 6.5% Employee benefits for all staff 2.3% 4.5% 8.4% Total staffing expenses 44.9% 64.3% 91.2% www.aicpa.org/fvs 13
  16. 16. Forensic and Valuation Services Section Dental Practice Key Statistics Staffing Expenses as a % of Gross Billings for Specialists Source: American Dental Association, 2009 Survey of Dental Practices 1Q Median 3Q Salaries for shareholder dentists 21.6% 31.2% 43.8% Salaries for non-dentist staff 14.0% 19.5% 25.7% Payroll taxes for all staff 2.2% 3.1% 6.7% Employee benefits for all staff 2.9% 5.0% 7.9% Total staffing expenses 40.7% 58.8% 84.1% www.aicpa.org/fvs 14
  17. 17. Forensic and Valuation Services Section Dental Practice Benchmark Resources American Dental Association • Survey of Dental Practice Fees • Survey of Dental Practice Expenses • Survey of Dental Practice Employment • Survey of Dental Practice Income Rosen & Associates • “See How You Compare” Survey Dental Economics – www.dentaleconomics.com www.aicpa.org/fvs 15
  18. 18. Forensic and Valuation Services Section Overview of Healthcare Reform Patient Protection and Affordable Care Act of 2010 (PPACA) • Signed into law on March 23, 2010. • Primary goals: - Provide healthcare coverage for many uninsured. - Reform healthcare system to improve quality. - Reduce overall healthcare costs. Health Care and Education Reconciliation Act of 2010 • Signed into law on March 30, 2010. • Includes several amendments to PPACA. www.aicpa.org/fvs 16
  19. 19. Forensic and Valuation Services Section Key Healthcare Reform Provisions Affecting Dental Practices • Individual insurance mandate - Tax penalty for non-compliance beginning in 2014. - Each state must establish healthcare insurance exchange by 2014. - Stand-alone dental plans must offer pediatric oral essential benefits without annual and lifetime limits • Expansion of Medicaid - Expands eligibility to cover individuals up to 138% of the federal poverty level. - Extended funding of Children’s Health Insurance Program (CHIP) - States that provide CHIP coverage through the Medicaid expansion are required to cover basic dental services - Supreme Court ruling allowed states to opt out of expansion. www.aicpa.org/fvs 17
  20. 20. Forensic and Valuation Services Section State Adoption of Medicaid Expansion www.aicpa.org/fvs 18
  21. 21. Forensic and Valuation Services Section Key Healthcare Regulations Healthcare Regulations Stark Law Anti-Kickback Statute Stark Law False Claims Act IRS 501 (c)(3) Anti-Inurement Rules www.aicpa.org/fvs 19
  22. 22. Forensic and Valuation Services Section Stark Law • Also called the “physician self-referral law.” • Prohibits a physician from making referrals for designated health services to entities in which the physician (or a family member) has a financial relationship. • Designated Health Services (DHS): - Currently 12 health services. - Includes hospital inpatient and outpatient services, as well as clinical lab, physical and occupational therapy, radiology, certain imaging, DME, home health, and various other services and supplies. • Is a “strict liability” law. • Contains various “safe harbors.” • Provisions enforced by the Centers for Medicare & Medicaid Services (CMS), although Department of Justice adjudicates false claims arising from violations of the Stark Law. www.aicpa.org/fvs 20
  23. 23. Forensic and Valuation Services Section Stark Law Stark Law Definition of Fair Market Value: The value in arm’s-length transactions, consistent with the general market value. “General market value” means the price that an asset would bring as a result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated referrals. www.aicpa.org/fvs 21
  24. 24. Forensic and Valuation Services Section Anti-Kickback Statute 1 2 3 4 Prohibits the payment or receipt of remuneration to induce or reward referrals for Medicare or Medicaid services. Criminal statute that requires proof of “intent,” i.e., knowingly and willfully paying for referrals. Contains various “safe harbors.” 5 Enforced by the Office of Inspector General (OIG) and the Department of Justice (DOJ). If one purpose of the payment is to induce referrals, then the Anti- Kickback Statute (AKS) is violated, even if there are other legitimate business reasons for the payment. www.aicpa.org/fvs 22
  25. 25. Forensic and Valuation Services Section False Claims Act Imposes liability on any person who submits a claim to the federal government that the person knows (or should know) is false. Civil statute. Often “piggy-backed” with the AKS and Stark. Subject to qui tam (“whistle-blower”) suits. www.aicpa.org/fvs 23
  26. 26. Forensic and Valuation Services Section Penalties for Violations of Stark & AKS Penalties for violation can include: 1. Denial of payments. 2. Refund of payments. 3. Civil monetary penalty up to $15,000 per claim. 4. Civil monetary penalty up to $100,000 for each “scheme” designed to circumvent the law. 5. Civil monetary penalty of up to 3 times the amount of claims. 6. Possible criminal penalties, including jail time. 7. Exclusion from the Medicare or Medicaid program. www.aicpa.org/fvs 24
  27. 27. Forensic and Valuation Services Section IRS 501(c)(3) Anti-Inurement Rules 501(c)(3) tax exempt entities must avoid “excess benefit” transactions. Transactions must be at FMV and be consistent with the entity’s charitable mission. Violations can result in loss of tax exempt status Rules www.aicpa.org/fvs 25
  28. 28. Forensic and Valuation Services Section Valuation Approaches Asset Approach Income Approach Market Approach Provides an indication of value based upon market date derived from other similar businesses. Provides an indication of value based on the anticipated future economic benefits of ownership. Provides an indication of value based on the cost to replace or replicate the tangible and intangible net assets of the business. www.aicpa.org/fvs 26
  29. 29. Forensic and Valuation Services Section Valuation Methods for Each Approach Asset Approach Income Approach Market Approach • Adjusted Net Asset Value Method • Excess Earnings Method • Discounted Cash Flow Method • Capitalized Net Cash Flow Method • Guideline Public Company Method • Comparable Transactions Method www.aicpa.org/fvs 27
  30. 30. Forensic and Valuation Services Section Asset Approach Cash and accounts receivable are often excluded unless the transaction is structured as a stock purchase. Fixed assets (equipment, real estate/improvements), and supplies must be adjusted to their current value. Intangible assets must be identified and valued. Common examples include: • Workforce-in-place • Non-compete agreements • Trade name/trademarks As a general rule, intangible asset values should be supported by an appropriate level of economic benefit (i.e. cash flow). www.aicpa.org/fvs 28
  31. 31. Forensic and Valuation Services Section Income Approach Discounted Cash Flow (DCF) Method or Capitalized Income (CapInc) Method. CapInc Method utilizes a constant growth rate and is normally more appropriate for mature entities with stable operations. DCF Method requires cash flow projections and is normally more appropriate for growth companies. www.aicpa.org/fvs 29
  32. 32. Forensic and Valuation Services Section Discounted Cash Flow Method 3 2 1 Step #3: Develop appropriate discount rate and determine present value of the projected cash flow. Step #2: Prepare or review cash flow projections (revenue, expenses, working capital, cap-ex). Step #1: Analyze historical financials and operations. Make normalization adjustments as necessary to develop baseline for future years. 4 Step #4: Adjust as applicable for any non-operating assets or liabilities. www.aicpa.org/fvs 30
  33. 33. Forensic and Valuation Services Section Normalization of Earnings Historical financials often require some level of normalization to be used as a basis for projecting future cash flow. • Common examples of normalization adjustments for dental practices:  Overstaffing and/or excess salaries to family members  Above or below market rate rent expense  Discretionary/personal expenses  Non-recurring or non-operating income or expenses  Billing or coding issues (past errors anticipated to be corrected) • Purpose is to restate earnings to a level that can be expected to continue in the future and/or improvements that a hypothetical buyer could effectuate • Owner dentist compensation should be normalized to fair market value • Caution regarding synergistic type adjustments that may be applicable to a specific potential buyer (if FMV is the standard of value) www.aicpa.org/fvs 31
  34. 34. Forensic and Valuation Services Section Revenue & Expense Projections Cash flow (i.e. revenue, expenses, working capital, cap-ex, etc.) must be projected until a stabilized level of operations is reached which can then be capitalized (terminal period). For revenue projections, consider the following: • Dentist(s) age and historical productivity • Local demographics • Competition (current and anticipated future) • Capacity issues (dentists and facilities) • Ancillary services • Historical trends and benchmarks Revenue should generally be projected utilizing two growth metrics – patient volume and net revenue per applicable unit. For operating expenses, segregate between fixed and variable. www.aicpa.org/fvs 32
  35. 35. Forensic and Valuation Services Section General Dentist Compensation Trends $156,850 $158,770 $161,750 $163,240 $164,570 $152,000 $154,000 $156,000 $158,000 $160,000 $162,000 $164,000 $166,000 2009 2010 2011 2012 2013 National Annual Mean Compensation Compound Annual Growth Rate = 1.2% Source: Bureau of Labor Statistics www.aicpa.org/fvs 33
  36. 36. Forensic and Valuation Services Section Oral & Maxillofacial Surgeon Compensation Trends $210,710 $214,120 $217,380 $216,440 $218,960 $206,000 $208,000 $210,000 $212,000 $214,000 $216,000 $218,000 $220,000 2009 2010 2011 2012 2013 National Annual Mean Compensation Compound Annual Growth Rate = 1.0% Source: Bureau of Labor Statistics www.aicpa.org/fvs 34
  37. 37. Forensic and Valuation Services Section Orthodontist Compensation Trends $206,190 $200,290 $204,670 $186,320 $196,270 $175,000 $180,000 $185,000 $190,000 $195,000 $200,000 $205,000 $210,000 2009 2010 2011 2012 2013 National Annual Mean Compensation Compound Annual Growth Rate = -1.2% Source: Bureau of Labor Statistics www.aicpa.org/fvs 35
  38. 38. Forensic and Valuation Services Section Discount Rate • Discount rates utilized in connection with the Income Approach should reflect the risk of the projected cash flows. • Most common method for developing an equity discount rate for small- to medium-sized dental practices is the “Build-Up Method”: - Starts with a risk-free rate (usually 20-year U.S. Treasury bond). - Adds various risk premiums: Equity Risk Premium, Small Size Risk Premium, Industry and Company-Specific Risk Premiums. www.aicpa.org/fvs 36
  39. 39. Forensic and Valuation Services Section Market Approach www.aicpa.org/fvs 37 Guideline Public Company Method • Difficult to apply for most small/medium-sized dental practices due to significant size and operating differences Comparable Transactions Method • Multiple databases available that include dental practice transactions such as: Pratt’s Stats and BIZCOMPS® • Often difficult to apply due to lack of transaction details such as: - Dentist’s age, qualifications, and historical productivity - Use of mid-level providers - Competition, demographics, and local economic conditions - Ancillary services, cosmetic procedures/products, etc. - Post-transaction compensation terms Often utilized as a “sanity check” to other valuation approaches
  40. 40. Forensic and Valuation Services Section Market Transactions 0.62 0.63 0.59 0.62 0.30 0.40 0.50 0.60 0.70 2010 2011 2012 2013 Price to Revenue Count=24 Count=27 Count=28 Count=44 Source: Pratt’s Stats and BIZCOMPS® databases (excludes duplicate transactions) www.aicpa.org/fvs 38
  41. 41. Forensic and Valuation Services Section Questions??? 40
  42. 42. Forensic and Valuation Services Section Contact Information Robbie Mundy, CPA/ABV, CVA Senior Manager | PYA RMundy@pyapc.com (404) 266-9876 W. James Lloyd, CPA/ABV, ASA, CFE Principal | PYA JLloyd@pyapc.com (865) 673-0844 www.pyapc.com www.aicpa.org/fvs 39

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