Presented by: Chris BentsonAAO Practice Transition Seminar

METRICS THAT MATTER – VALUATION & TRANSITION FUNDAMENTALS FOR BUYERS AND SELLERS

397 South Swing Rd 1-800-621-4664Greensboro, NC 27409 bentsonclark.com

Overview

• Valuation and Transition 101

• Orthodontic Practice Benchmarks

• Practice Overhead

• Trends

Let’s Define Transition

• 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

Current Environment

Visualizing EconomicsSource: visualizingeconomics.com, July 22, 2007

1934

My Dad

CASH

1961

EXPANSION

Me

1992

ENTITLEMENT

My Kids

Median Household Income in Relation to Unemployment Rate

Source: For income data: Sentier Research, LLC estimates of annual household income derived from the monthly Current mmmmmmmmPopulation Survey (CPS) conducted by the U.S. Census Bureau; for the unemployment rate and the CPI‐U: the U.S. Bureau of Labor Statistics.

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

Keep Your Perspective: Best Paying Jobs in America

Source: Forbes Magazine, May 15, 2012

20121. Anesthesiologists2. Surgeons3. Obstetricians &

Gynecologists4. Oral and

Maxillofacial Surgeons

5. Orthodontists

20111. Surgeons 2. Anesthesiologists3. Oral and

Maxillofacial Surgeons

4. Obstetricians &Gynecologists

5. Orthodontists

Source: Forbes Magazine, May 7, 2011

20101. Surgeons 2. Anesthesiologists3. Oral and

Maxillofacial Surgeons

4. Orthodontists5. Obstetricians &

Gynecologists

Source: Forbes Magazine, July 12, 2010

20091. Surgeons 2. Anesthesiologists3. Orthodontists4. Obstetricians &

Gynecologists5. Oral and

Maxillofacial Surgeons

Source: Forbes Magazine, May 4, 2009

Keep Your Perspective: Best Paying Jobs in America

Source: Forbes Magazine, May 15, 2012

20121. Anesthesiologists2. Surgeons3. Obstetricians &

Gynecologists4. Oral and

Maxillofacial Surgeons

5. Orthodontists

20111. Surgeons 2. Anesthesiologists3. Oral and

Maxillofacial Surgeons

4. Obstetricians &Gynecologists

5. Orthodontists

Source: Forbes Magazine, May 7, 2011

20101. Surgeons 2. Anesthesiologists3. Oral and

Maxillofacial Surgeons

4. Orthodontists5. Obstetricians &

Gynecologists

Source: Forbes Magazine, July 12, 2010

20091. Surgeons 2. Anesthesiologists3. Orthodontists4. Obstetricians &

Gynecologists5. Oral and

Maxillofacial Surgeons

Source: Forbes Magazine, May 4, 2009

20131. Anesthesiologists2. Surgeons3. Obstetricians and

Gynecologists4. Oral and Maxillofacial

Surgeons5. General Internists6. OrthodontistsSource: Forbes Magazine, May 13, 2013

Source: Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2012-2013 Edition

Where Do You Fit In?

69%

16%

6%4% 5% Solo Practice

Partnerships

Associateships

InterdisciplinaryPractice

Large CorporatePractice

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

Orthodontic Mentor

CPA

Attorney

Insurance Advisor

Spouse

Practice Consultant/Wealth Manager

Local Banker

Transition Advisor

Who’s on My Team?

Practice Valuation

Transition Negotiations

Information Gathering & Planning

Ownership Transfer

Association Period

Find a Seller

Transition Timeline

Information to Gather

Practice Activity TrendsSource: Journal of Clinical Orthodontists, 2013 Orthodontic Practice Study

1981 1987 1993 1999 2005 2007 2009 2011 2013*

Age 42 44 47 49 50 50 52 54 50

Yrs in Practice 12 15 16 19 19 20 22 23 18

Gross Income

(Rounded)$200K $300K $414K $600K $800K $923K $960K $950K $1,158K

OverheadRate 49% 53% 56% 53% 53% 55% 56% 59% 59%

Case Starts 150 150 160 200 200 222 220 200 245

Adult Case Starts 15.4% 23.8% 20.2% 18.8% 22.2% 20.0% 20.0% 20.0% 23.0%

Active Treatment

Cases300 350 366 450 460 480 495 450 500

Practice Activity Trends

Source: Journal of Clinical Orthodontists, 2013 Orthodontic Practice Study

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 YearFee

Increase15.5% 10.3% 10.0% 8.0% 8.0% 7.0% 6.0% 3.0% 3.5%

Payment Period

(months)24 24 24 24 22 22 21 22 22

Assignmentof

Benefits37.5% 49.5% 68.2% 76.4% 73.7% 77.2% 80.8% 79.7% 88.0%

Patients Per Day 38.4 40.2 40.0 45.0 50.0 50.0 50.0 45.0 50.0

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%

Practice Expense Breakdown

Source: Does Your Practice Overhead Rate Compare? Bentson Clark reSource, 2nd Qtr 2013

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%

Total Staff Expense

Source: Exploring Practice Overhead: Staff & Supply Expenses, Bentson Clark reSource, 3rd Qtr 2013

Practice Expense Average

Orthodontic & Lab Supplies 8.9%

Lab Expenses 2.7%

Total Orthodontic SupplyExpense 11.6%

Total Supply Expense

Source: Exploring Practice Overhead: Staff & Supply Expenses, Bentson Clark reSource, 3rd Qtr 2013

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%

Total Business Management ExpenseSource: Exploring Business & Occupancy Overhead Expenses, Bentson Clark reSource, 4th Qtr 2013

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%

Total Occupancy Expense

Source: Exploring Business & Occupancy Overhead Expenses, Bentson Clark reSource, 4th Qtr 2013

2013 Orthodontic Resident Survey

22%21%

23%

19%

15%

26%

15%

22%

19%18%

26%

17%

23%

14%

20%

22%

14%

24%

18%

22%

0%

5%

10%

15%

20%

25%

30%

Less than $100,000 $100,001 - $200,000 $200,000 - $300,000 $300,000 - $400,000 More than $400,000

Perc

enta

ge o

f Res

iden

ts

Approximately how much student debt will you have accrued at the end of your residency?

2010 2011 2012 2013

Source: Bentson Clark & Copple, LLC Resident Survey, 2010-2013

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

Source: Bentson Clark reSource, 1st Quarter 2014

What’s My Practice Worth?

Source: Looking Back at the Practice Valuations of 2013, Bentson Clark reSource, 1st 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%

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

Merleen (Holman) LeoncePractice Opportunities

Manager(800) 424-2841 Ext. 587mholman@aaortho.org

AAO’s Practice Opportunities Service

Where to Practice?!

Source: Bentson Clark & Copple, LLC Resident Survey, 2013

1. California

2. Texas

3. Pennsylvania

4. Florida

5. Washington

6. New York

7. North Carolina

8. Colorado

9. Virginia

10. Georgia

2012

Source: Bentson Clark & Copple, LLC Resident Survey, 2009-2013

1. California

2. Washington

3. Pennsylvania

4. Colorado

5. New Jersey

6. Arizona

7. New York

8. Oregon

9. Texas

10. Virginia

2009

1. California

2. Texas

3. New York

4. Illinois

5. Pennsylvania

6. Washington

7. Colorado

8. Virginia

9. Georgia

10. Florida

2010

1. California

2. Texas

3. New York

4. Florida

5. Virginia

6. Colorado

7. Georgia

8. Pennsylvania

9. Illinois

10. Utah

2011

1. California

2. Texas

3. New York

4. Florida

5. North Carolina

6. Washington

7. Colorado

8. Michigan

9. Pennsylvania

10. Massachusetts

2013

Popular States for Residents

1. West Virginia

2. Vermont

3. South Dakota

4. New Hampshire

5. Washington, DC

6. Rhode Island

7. Wyoming

8. Nevada

9. Montana

10. Iowa

2012

1. Vermont

2. Montana

3. Arkansas

4. Delaware

5. Maine

6. Hawaii

7. Idaho

8. Iowa

9. North Dakota

10. Wyoming

2010

1. Wyoming

2. West Virginia

3. Wisconsin

4. Vermont

5. North Dakota

6. Oklahoma

7. Minnesota

8. Maine

9. Louisiana

10. Hawaii

2009

1. West Virginia

2. Vermont

3. Rhode Island

4. North Dakota

5. Iowa

6. Arkansas

7. Wyoming

8. South Dakota

9. New Mexico

10. New Hampshire

2011

1. West Virginia

2. Vermont

3. South Dakota

4. Rhode Island

5. New Mexico

6. Minnesota

7. Hawaii

8. Delaware

9. Alaska

10. North Dakota

2013

Source: Bentson Clark & Copple, LLC Resident Survey, 2009-2013

Least Popular States for Residents

• 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

Source: Dr. Bob Scholz’s website, www.drbobsweb.com

Multiple Types of Transitions

THANK YOU!

397 South Swing Rd 1-800-621-4664Greensboro, NC 27409 bentsonclark.com