Value of a Orthodontic

Practice:
The emotional, financial and
opportunistic value and how to
realize all three in transition

Pacific Coast Society of Orthodontist

Annual Session 2019
Friday, October 4, 2019

Presented by:
Charles Loretto (CWA )
Christy Ratcliff CPA, CVA, (NDP)

Follow along on your mobile device by going to

go.cainwatters.com/pcso-19
DISCLOSURE

Cain Watters is a Registered Investment Advisor. Cain Watters only conducts business in states where
it is properly registered or is excluded from registration requirements. Registration is not an
endorsement of the firm by securities regulators and does not mean the adviser has achieved a
specific level of skill or ability. Request Form ADV Part 2A for a complete description of Cain Watters
investment advisory services. Diversification does not ensure a profit and may not protect against loss
in declining markets. No inference should be drawn that managed accounts will be profitable in the
future or that the Manager will be able to achieve its objectives. Past performance is not an indicator of
future results. All investments and strategies have the potential for profit or loss. Different types of
investments involve higher and lower levels of risk. Historical performance returns for investment
indexes and/or categories, usually do not deduct transaction and/or custodial charges or an advisory
fee, which would decrease historical performance results. There are no assurances that an investor’s
portfolio will match or exceed any specific benchmark.

For additional disclosure, please refer to the Cain Watters & Associates LLC FORM ADV Part 2A. You
may obtain a copy by contacting Cain Watters & Associates LLC at 972-233-3323 ext. 6015, or send a
written request to Kristi Heffron, Chief Compliance Officer.

CWA partners are also owners of NDP and EDA, affiliates of CWA. CWA partners have an economic
interest in the firms. The information presented today may discuss the benefits of engaging both CWA
and it’s affiliates.
 LEARNING OBJECTIVES
BUSINESS VALUE &
PERSONAL
• How are dental practices valued? FINANCES
• When and how does an orthodontic practice value differently?
• How can I increase the value of my business?
• Understand impact profitability and risk
• How does Private Equity or a DSO value your EBITDA
• What do you get when you sell and what do you give up?
• Are you emotionally and financially ready to transition?
• Is your practice financially ready to transition?
• What type of transition makes the most emotional and financial sense for you?
• Walk-away sale, staggered sale, or partnership
• What percentage of the practice do you buy or do you sell?
• What does a buyer (associate, private equity) look for in your practice?
• What team do you need to surround yourself with to execute these decisions?

Follow along on your mobile device by going to

go.cainwatters.com/pcso-19
VALUATIONS
VALUATIONS: MYTH & REALITY

• Valuations are opaque

• Valuations are a made up number
• Valuations are complex
• My practice will value at ___% of Collections or ____x Earnings
• Buyers always think value is too high, sellers always think it’s too low
• Emotional component of this process that will sway your logical brain
• Everyone’s practice is special
• Value = Price …..not so fast.

Value is
what
someone is
willing to
pay.
VALUATIONS: MYTH & REALITY

In the most simplest of terms valuations are……

1. Profitability
2. Risk

Be nice
Episode 16, 21
VALUATION APPROACHES

• Asset Approach
• Market Approach
• Income Approach
• Discounted Cash Flow Method (DCF)
• Capitalization of Earnings Method

We are not so brazen as to believe that we can perfectly calibrate valuation;

determining risk and return for any investment remains an art not an exact science
Seth Klarman
CAPITALIZATION OF EARNINGS

Method focuses on the historical cash flows and profitability of the practice and uses a
calculated risk rate to calculate value.

• Assets of the business are not always indicative of the profitability and opportunity
• Market comps are heavily dependent on information reported, geographic location,
specialty and size of practice
• Utilizing historical cash flows provides consistency in what a potential buyer will
rely on
• Utilizing projections of cash flows could overstate value and misrepresent practice
capabilities
• ADA has supported that this method is often recommended and most common in
the industry

RISK + PROFITABILITY = VALUE

1) PROFITABILITY: NORMALIZATION

Goal is to arrive at net income before discretionary expenses and

doctor compensation to understand the TRUE operating cash flows of
the practice, historically.
Remove/Add Discretionary Expenses:
Q: How many years
• Continuing Education
are considered?
• Dues/Subscriptions
A: A valuation will typically
• Personal Taxes review financials for past
• Auto Expenses 4-5 years and rarely will use
less than 3 in analysis
• Travel/Meals
• Over/Underpaid Working Spouse

• FMV Building Rent

• Non-Recurring or Non - Cash Expenses

• Other Personal Expenses

NORMALIZED P&L EXAMPLE
Actual Adj. Normalized

Collections $ 1,500,000 $ 1,500,000

Expenses:
Salaries $ 600,000 (175,000) $ 425,000
Supplies & Labs 200,000 200,000
Payroll Taxes 48,000 (13,388) 34,613
Rent 75,000 (7,500) 67,500
Insurance 9,500 (1,000) 8,500
Professional Fees 18,000 (9,750) 8,250
Continuing Education 5,000 (5,000) -

Travel & Meals 10,000 (10,000) -

Utilites 12,000 (2,500) 9,500
Office Expense 20,000 20,000
Advertising/Marketing 45,000 45,000
Other Operating Exp 2,000 2,000
Depreciation 27,000 (27,000) -
Total Expenses $ 1,071,500 $ 820,363

Net Income before Taxes $ 428,500 $ 679,638

Overhead % 71% 55%

2) RISK: CAPITALIZATION RATE

Technically, this is a rate applied to an earnings stream to provide an intangible value of

that earnings stream. In layman’s term you can think about this as rate of return!

Capitalization Rate
1) Risk Free Rate (Long Term 11 Bond Rate)
3.50%
2) Equity Risk Premium
5.50%
3) Risk Premium For Size (Small Stocks Risk Premium) 5.22%
4) Subjective Risk Factors Specific to Industry & Practice 9.31%
Discount Rate 23.53%
5) Less: Growth Rate (1.90%)
Capitalization Rate 21.63%

• 1, 2, 3, & 5 – industry standard!

• Component 4 – subjective and based off appraisers knowledge and information gathered from
you
SUBJECTIVE RISK FACTORS

Positive and/or Negative Impact:

• Location (urban v. rural) • Type of Practice

• Patient base (active & new) • Building – Leased/Owned

• Production ratio Dr/Dr/Hygiene • Technology

• Insurance mix For Specialists:

• Transition Plan of Seller • Contract Receivables
• Age/Condition of Equipment • Case Stats (Ph 1, 2, Obs.
• Ability to Expand Debands)

• Tenure of Staff • Competitors

• Stability of Financials & Overhead • Ability to find a replacement

• Referral Distribution
ORTHO VALUATIONS

• Production Vs. Collections

• Contract Receivable Balance – Stable, Relative to Production
• Case Distribution
• Referral Distribution

Cash Flows still matter, BUT have to be viewed in combination with the above for true
value and opportunity.

Sellers
market but
must know
your
numbers.
PRIVATE EQUITY: VALUATION

Considerations:
• Type of dentistry – general or ortho
• EBITDA (cash flow from business)
• Space – prefer 6 chairs minimum
• Selling doctor work back – least we have seen is 2 years but not uncommon to see
3-7 years and increasing currently
• Reducing costs – lab, supplies, staff
• Growth of business – increased marketing based on demographics studies

Profitability and Risk – same focus, similar approach

Be nice
Episode 16, 21

Information provided is illustrative in nature and is based upon NDP’s industry experience. Actual client experience may vary.
EXAMPLE: PE EBITDA CALCULATION

Production: $2,100,000
Collections: $1,900,000
Contracts Receivable $1,000,000
P&L Overhead (first glance): 80%

Profit: $380,000
Officer & Spouse salary: $240,000
Depreciation & Interest: $50,200
Discretionary (CE, car, travel, $174,100
insurance, etc.):
$844,300 EBIDTA before
Real OH: 56% doctor compensation

Information provided is illustrative in nature and is based upon NDP’s industry experience. Actual client experience may vary.
 EXAMPLE: EBITDA CALCULATION → PRICE

$844,300 $250,000 $594,300 5X $2,971,500

EBITDA Doctor EBITDA Multiple Value

Before Salary After

Information provided is illustrative in nature and is based upon NDP’s industry experience. Actual client experience may vary.
HOW DOES THE PE DEAL WORK FOR YOU?
$2,971,500 value
$2,080,050 -- 70% portion upfront in cash using 5X multiplier
$594,300 x 7X x 30% investment into the business with the goal of the 7X multiplier down the road
$1,248,030 target goal
BEST CASE SCENARIO: REMAIN DOCTOR:
Year: Salary: Year: Salary:
1 $2,080,050 1 $844,300
$250,000 2 $844,300
2 $250,000 3 $844,300
3 $250,000 4 $844,300
4 $250,000 5 $844,300
5 $250,000 6 $1,800,000
6 $1,248,030
$250,000

$4,828,080 $6,021,500

Information provided is illustrative in nature and is based upon NDP’s industry experience. Actual client experience may vary.
Giving up vs. Getting – Do the comparison

Personal Financial Considerations:

• Are you and your spouse 1000% sure about your personal
plan
• What tax planning do you have or not have as the
associate
• $30,000-$70,000 discretionary annual expenses
• Auto, Travel, CE (skiing, Hawaii), Family, Costco
• $75,000-$150,000 pension plan contributions

Personal Considerations
• Lack of control
• New lab, new hours, new people, new supplies, new
types of patients, new software, new technology
• Additional Time/Flexibility
GROWTH OF BUSINESS
WHEN BRINGING IN A PARTNER

$1.90M Production $2.75M Production

Marketing
$1.75M Collections $2.5M Collections
60% overhead • New referrals 55% overhead
• Leverage existing referrals
• Return on $ Spent – Track!
• Tout new associate’s greatness

Associate New Collection Amount

Net Owner Benefit: $700K Potential New Value: $2 - 2.5M

Net Owner Benefit: $1.125M

Thinking of opening a practice?
50/50 Benefit: $560K
Listen to our podcast at
cainwatters.com/pts
TRANSITION CONSIDERATIONS

What does a buyer and/or lender look at?

• What does the practice gross? What does it net?
• Can the buyer do the dentistry? What is your transition plan?
• How much would the buyer net after debt service?
• How much do you as the seller need to make after close? Can the practice afford it?
• Is the non-compete a greater distance than the furthest active patient? What are your
plans post close?
• Is the practice consistent, growing, in decline? Why?
• What is the asset allocation of the sale (60% goodwill and 40% FFE)?
• Competing goals of buyer and seller
• What is your sale structure – ASSET or STOCK?
• If partnership – how will you split the money?
• If partnership – how will you deal with the 4 Ds
• Do you like the person – work marriage
• How will you introduce the buyer to your patients, staff?
DEVELOP A PROVEN TRANSITION TEAM

• Personal Financial Plan

• Complete understanding of your personal finances
• Pension planning to minimize the tax from the transition
• Practice Management consultant
• Help assist the team on communication in the office
• Potential marketing changes to help the practice grow
• Dental specific attorney
• Legal agreements that address death, disability, disagreement and disparity
in collections by doctor (retirement)
• Dental CPA that has handled thousands of transactions to guide you through a
very complex tax event
• Dental transition consultant to guide you through this process

How CWA can help……
• CPA Firm
• Tax & Accounting Services
• Person Financial Planning
• Dental Partnerships
• Tax & Pension Planning
• New Doctor Program
www.cainwatters.com
info@cainwatters.com
# (972) 233-3323
Come See
Us at the
Exhibit Hall
Booth # 61
PCSO Attendees:
Unsure about your plan or advisors? Email us and we will
review your last three years business tax returns and
provide you insight into your tax planning, overhead and
potential missed opportunities.
* Include PCSO in the subject line
 Come See Us
at the Exhibit
Hall!
Booth # 61

How NDP can help……

PCSO Attendees:

Unsure about if you are ready about your transition

• Practice Valuations
• Practice Listings
• Associate to Partner Transitions
• Buyers Consulting
• Seller Transition Consulting
plan, practice value or opportunity? Email us and we
will review your transition goals and/or opportunity
details!
* Include PCSO in the subject line

www.nationaldentalplacements.com

info@nationaldentalplacements.com

# (972) 764-6153
LEARNING OBJECTIVES
BUSINESS VALUE &
PERSONAL
• How are dental practices valued? FINANCES
• When and how does an orthodontic practice value differently?
• How can I increase the value of my business?
• Understand impact profitability and risk
• How does Private Equity or a DSO value your EBITDA
• What do you get when you sell and what do you give up?
• Are you emotionally and financially ready to transition?
• Is your practice financially ready to transition?
• What type of transition makes the most emotional and financial sense for you?
• Walk-away sale, staggered sale, or partnership
• What percentage of the practice do you buy or do you sell
• What does a buyer (associate, private equity) look for in your practice
• What team do you need to surround yourself with to execute these decisions