Dentaltown March 2015 - (Page 62)

ﬁnance feature by Daniel P. Welch, CPA The most common way for a dentist to ascertain value of his or her dental practice is by utilizing a Gross Revenue Multiplier, often referred to as the "Rule of Thumb" method. This method allows for the analysis of actual completed transactions of comparable dental practices and a comparison, in the aggregate, to the subject entity using a historically based multiple. It is the most common because it's easy to calculate and works fairly well for traditional single-provider practices. For general dental practices, we have seen that percentage rising over the past several years. We are now regularly seeing general dental practices sell for 70 percent to 80 percent of gross revenue and higher. The rise relates to the very basic economic principal of supply and demand. The fewer the practices listed for sale, the more they will cost. Why have there been fewer practices for sale over the past several years? As the economy slowed toward the end of 2007, the Dow Jones Industrial Average began a precipitous but extended decline from a little over 14,000 in October of 2007 to just 6,600 in March of 2009. The Dow had lost more than half its value and as a result, signiﬁcantly reduced the balance contained within owner dentist's retirement plans. While markets began to slowly rebound in 2009, it wasn't until 2011 that the Dow Jones exceeded the October 2007 ﬁgure. The market crash coincided with a housing bubble burst and the failures of large ﬁnancial institutions. Many areas in the United States saw real-estate values decline by as much as 40 percent. The combination of these factors persuaded many dentists who were considering a sale of their practice, to instead hold on to generate additional retirement savings and wait for home or business prices to rise. While the simplest, using the gross revenue multiplier approach is also the most problematic. Since "gross" methods do not take 62 MARCH 2015 // dentaltown.com into consideration the actual overhead or differences of individual practices. Nor do they consider revenue generated by unconventional sources such as placing implants, or perhaps by a specialist who provides services in the ofﬁce. They cannot or should not be used for analyzing a practice with multiple providers with one owner. By example, using the gross-revenue-multiplier method would provide that two practices, A and B, each collecting $800,000, would have the same value even if Practice A's overhead is $400,000 and Practice B's overhead is $500,000. Using a multiple of 70 percent to determine value indicates that both Practice A and Practice B each have a value of $560,000 even though Practice A generates annual cash ﬂow to the owner of $400,000, and Practice B only $300,000. Therefore, dental practice valuators and the banks prefer using a "net" or a method based on discretionary cash ﬂow. Doing so allows the valuator to extrapolate the practice value based on the actual cash ﬂow of the business. Using historical actual cash ﬂow provides the ability to more accurately project future available cash ﬂow. Using the above example, a multiple of 1.5x the "net" or income to the owner dictates that Practice A's intangible value would be $600,000 ($400,000 x 1.5) and Practice B, because of the higher expenses, has an intangible value of only $450,000 ($300,000 x 1.5). Dentists should pay more for a practice that generates more cash ﬂow and vice versa. This type of valuation is not quite as quick and easy as multiplying revenue by a percentage. It requires adjustments to the reported ﬁnancial statements in order to obtain "Adjusted Practice Cash Flow." Adjustments are made to ﬁnancial statements for income and expense items not representative or necessary for the ordinary operations of the business. These can also include adjustments for the elimination of discontinued operations, elimination of non-recurring events. Sometimes dentists have an aggressive accountant who http://www.dentaltown.com

Table of Contents for the Digital Edition of Dentaltown March 2015

On Dentaltown.com
Howard Speaks: 20 Feet from Stardom: Delegate like Jagger
Professional Courtesy: Married to My Profession
Continuing Education Update
Help Me Treatment Plan This Case
CBCT Technology: What Will the Future Bring?
New Luting Composite: Variolink Esthetic
Cone Beam 3D—Is It Really for Me?
Four Digital Marketing Mistakes that Impede Practice Growth
New Products
Poll
From Scaling to Therapy: A Day in the Life of a Dental Hygienist
The Value of a Dental Practice: Why Tracking “Attributable” Expenses Matters
I am Seeing a Lot of HPV Lesions in the Mouth Lately; What is the Protocol, Remove Them or What?
Dental Podcasts: What They Are and How They Work
Service Profi le: Garfi eld Refi ning
CE: Posterior Maxilla Implant Rehabilitation: A Challenging Task
Product Profile: Dentsply Caulking
Women in Dentistry: Intro
Women in Dentistry: Work/Life Balance: Flexibility and Creative Scheduling Go a Long Way
Women in Dentistry: The Lucy Hobbs Project
Women in Dentistry: Female Dentists in Conservative Muslim Nations Face Challenges and Threats
Women in Dentistry: The American Association of Women Dentists: Representing Women from Products to Leadership
Ad Index
Women in Dentistry: Q&A
Women in Dentistry: The Sky's the Limit: Hygienist Turned Entrepreneur Shows What's Possible
Product Profi le: SmartBox
Dentally Incorrect

Dentaltown March 2015