Dental Practices

Summary of Valuation Approaches

There are four different types of valuation methods that can be used to value dry cleaning businesses, these methods are:

1. Asset-based valuation
   The basic formula to use for this method is: The fair market value of a company’s assets less the fair market value of its liabilities = the fair market value of a company’s equity. This is approach also sometimes referred to as a cost based approach where the value of the business is equal to the cost of acquiring its assets with the same utility. This approach is seldom used for a viable dental practice because the value of a dental practice is more closely related to its list of patients than its physical assets.
2. Income approach to value (capitalization of earnings)
   This method is most the accurate dental practices that have a constant growth of earnings and have a long history of operations. This method is equal to the cash flow projection for one year divided by the capitalization rate.
3. Income approach to value (discounted cash flow)
   The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established dental practices with low growth rates as well as new dental practices higher rates of growth.
4. Market approach to value
   This method utilizes market indications of value such as publicly traded comparable company stock as well as acquisitions of privately held dental practices.

Description of the Industry

The dental industry is generally defined as the professional and licensed practice of preventing, diagnosing and treating diseases, injuries and malformations of the teeth jaw and mouth. The largest segment of the dental industry is made up of sole practitioners that practice general dentistry. Specialty dental practices include orthodontics, oral surgery, periodontics, and pediatric dentistry. The dental industry is highly fragmented. This industry falls into SIC code 8021 and NAICS code of 621210. There are approximately 120,000 dental offices in the United States with average revenue of nearly $600,000. A typical dental office that practices general dentistry will have a single dentist, 2 oral hygienists and one office staff. The entire dental industry generates nearly $80 billion in revenue per year.

Patient growth rates for the dental industry are driven by demographics. As one would expect, the number of new patients within the industry is growing in line with population increases. Despite its maturity, the dental industry has recently experienced double digit growth fueled by cosmetic dental procedures such as teeth whitening and veneers. Not many years ago these elective cosmetic dental procedures were only a small percentage of dental practice revenue; however these procedures have become quite common today and are often well over 20% of annual revenue for dental practices. While the total number of patients requiring dental work is only growing slowly, the aging baby boomer demographic has impacted the dental industry by increasing the number of costly restorative procedures performed. This increase in necessary costly dental procedures performed coupled with the increased demand for cosmetic elective dental procedures noted above has helped to fuel the strong revenue growth the industry has recently enjoyed.

Surprisingly the dental industry has continued to perform well despite the current economic recession in the U.S. Reasons for this include:

1. The increase of layoffs in the U.S has caused people to make use of their dental insurance before they lose it.
2. Preventive dental care that has been put off for financial reasons will increase the cost of restorative procedures in the future.

Industry Trends

The following are some trends within the dental industry:

1. Dentists are moving patients away from traditional silver amalgam fillings because of mercury content and increasingly are recommending mercury free options. Dentists are deciding to do this for their own safety as much as the safety of their patients. Currently 20% of dentists practice “mercury-free” dentistry. This percentage is expected to increase in the future.
2. Digital imaging has improved diagnostics and has reduced the amount of radiation patients are exposed to and has improved the early diagnosis of dental problems. Computer imaging has also helped dentists to sell cosmetic procedures by showing the patient what they would actually look like after the procedure or treatment was completed.
3. With the improved diagnosis of early stage cavities dentists also are using a technique called Air Abrasion which removes decay with a powerful air stream of fine aluminum oxide powder. This process removes less of the decayed tooth and allows the dentist to drill and fill cavities in seconds often without anesthesia.
4. Implant technology has greatly improved and is now a more viable option as an alternative to bridges or dentures.

Financial Benchmark Statistics

The following benchmarking data is based on a study of approximately 800 dental practices in the U.S.

Industry Organizations and Publications

1. Dental Economics
2. American Dental Association

Availability of Publicly Traded Guideline Firms

Birner Dental Management Services Inc. (“BDMS”) is the only publicly traded dental practice company in the U.S. BDMS trading volume is quite low and therefore, valuation indications derived from an analysis of its public prices will be somewhat unreliable. However, as a point of reference BDMS has a Price to Earnings multiple of 13.3 and a Price to Cash Flow multiple of 4.1. as of the date of this report.

Availability of Purchase Transactions

Since there are few publicly traded dental practices in the U.S., a valuation professional would need to place greater reliance on acquisition data for privately held dental practices when performing an appraisal. One database that tracks acquisitions records 188 purchases dental practices in the U.S. since 2002. The size of these acquired companies range from $73,000 to $71,900,000 in annual sales. From 2002 to the present, the multiple of:

1. Market value of invested capital to Net Sales (MVIC/Sales)valuation multiples ranged from 0.2 to 2.2 times
2. MVIC to earnings before interest, taxes and depreciation (MVIC/EBITDA) valuation multiples ranged from 2.2 to 20.0 times.

This range of market multiples is too variant to be useful without further analysis. A proper value for the company that is being assessed should be based on the performance of the subject enterprise, compared to the performance of others in the same industry. Industry economic conditions also vary at different times, which obviously affect dental practices as investment opportunities. Specific factors that are unique for each dental practice must be considered. Some of these factors include:

1. The duration of the lease and landlord/tenant relations
2. The proximity of the facility to highly populated areas
3. The median household incomes of the neighborhoods within close proximity to the facility
4. The condition of the equipment
5. This history of the operation
6. The competitive environment of the local area
7. The established patient list and demographics

Fulcrum Inquiry performs business appraisals for dental practices as well as other businesses.