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ADAPT Coffee Talk featuring Baker Tilly
Selling your practice in the COVID-19 era: advice from accounting experts
May 15, 2020
Agenda
2 Office and procedural policies to evaluate and update
3 Documents to prepare for prospective buyers
4 Valuation concepts and methodology
1 Introduction
5 Financing and other considerations
ABOUT BAKER TILLY
Members of the world’s 10th largest network of
accounting and business advisory firms
Major offices in Janesville, Milwaukee, Madison, Appleton and
Minneapolis
TOP
15
One of the 15 largest accounting and advisory firms
in the U.S. according to Accounting Today
3,800+ employees405 partners / 1,200+ CPAs
Recipient of several national and regional awards including 2018 Best
Workplaces in Chicago
Dental specializationABOUT BAKER TILLY
With a dedicated dental services team, Baker Tilly Advantage leverages our large firm capabilities combined with our personalized service approach to provide more than 350 dental practices with industry insights, technology solutions and outsourcing and advisory services including tax, accounting, payroll, valuation, transition planning, projections, operating effectiveness and consulting.
We often work with dental practices to:
- Provide valuations, transition consulting for buy-in / buy-outs, buy – sell agreement negotiation and advisory
- Provide bookkeeping and accounting services driven with best practice technologies
- Provide proactive tax planning that minimizes tax exposure at the federal, state and local levels
- Provide industry insights, dashboards and CFO level advisory
- Provide practice management consulting geared toward enhancing and protecting your value
Industry focus
Baker Tilly is a founding member of the:
— Office employment policies— Office policies review in post-COVID environment
— Patient check-in policies— Payment policies— Collection procedures— No call/no show fees
— HIPAA and regulatory compliance (CDC, OSHA, Medicare, if applicable)
— Benefit agreements (Health insurance and retirement plans)
Office and procedural policies to evaluate and update
— Hygiene protocol (Post-COVID-19: how long will you allow and what impact will that have on your practice production?)
— Scheduling (spacing / appointment times)
— Standard industry practice vs. Individual owner best practices
— Non-compete changes, if any
— Buy/Sell Agreements updated?
— Defined valuation formulas updated?
Office and procedural policies to evaluate and update (cont.)
— Confidentiality and HIPAA release documents
— Current financial statements
— Tax returns (last 3 years)
— Adjusted normalized cash flows:— Discretionary expenses— Excess rent— Benefits— Vehicle— Unnecessary supplies; Office vs. dental supplies— PPP or other loan stimulus funds separated— Specialized PPE
Documents to prepare or update for prospective buyers
— Production by providers (Doctors and hygiene)
— Fee schedule
— Insurance vs. fee for service
— Active patients for 18 / 24 / 36 months
— New patient history for last 2-3 years
— Equipment listing / depreciation; major purchases that may have been expensed listed
— Practice and building separate, if applicable
Documents to prepare for prospective buyers (cont.)
— Accounts receivable aging summary (collection ratios and procedures post-COVID-19)
— Referral patterns
— Current lease structure – appropriate for transition plan; banks will generally require 5-10 years, options for renewal
— Employment or non-compete agreements, if applicable
— Sole practice vs. partnership differences may be applicable
— Schedule history
Documents to prepare for prospective buyers (cont.)
Practice Valuation ConceptsPRACTICE TRANSITIONS
Valuation Models:- Asset Model- Net Production/Collection Model- Capitalized Excess Earnings Model- Net Annual Earnings Model- Patient Records Model ($150 – $500 per record)- Discounted future cash flow – (post Covid-19 analysis)
GENERAL DENTAL
GROSS PRODUCTION 1,800,000$
LESS: WRITE OFFS AND ADJUSTMENTS 15% (270,000)
NET PRODUCTION (COLLECTIBLE PRODUCTION) 1,530,000
LESS: OVERHEAD 60% (918,000)
NET AVAILABLE TO DOCTORS 612,000
LESS: DR EARNINGS (DR PROD LESS LAB) 35% (322,875)
OWNERSHIP PROFITS 289,125
LESS: PRACTICE DEBT $1,020,000 7 YEARS, 6.0% per month 14,827 (177,924)
OWNERSHIP PROFITS 111,201$
GENERAL DENTAL DR COMPENSATION CALCULATION
DR PRODUCTION (75% OF TOTAL) $1,200,000LESS: WRITEOFFS AND ADJ 15% (180,000)LESS: LAB (97,500)NET DR. PRODUCTION 922,500
TIMES 35% 322,875$
DENTAL PRACTICE PROFIT MODEL
Practice Valuation ConceptsPRACTICE TRANSITIONS
est of value
PAINLESS DENTISTRY ,DDS , PA
Estimate of Practice Value
December 31, 200X
METHOD 1 - ASSET VALUELowHigh
Dental equipment -$150,000$150,000
Office equipmemt and furniture10,50010,500
Leasehold improvements20,00020,000
Dental supplies & hand instruments15,00015,000
Accounts receivable110,000125,000
Patient records/goodwill490,000765,000
Total value$795,500$1,085,500
PAINLESS DENTISTRY ,DDS , PA
Estimate of Practice Value
December 31, 200X
METHOD 2 - ANNUALIZED NET PRODUCTION (Weighted Ave)
12/31/xx$1,100,000times 1$1,100,000
12/31/xy1,350,000times 2$2,700,000
1231/xz1,530,000times 3$4,590,000
6$8,390,000
divide by 6$1,398,333
Average annual net production $1,398,333
Total value$769,083$1,048,750
55%75%
PAINLESS DENTISTRY ,DDS , PA
Estimate of Practice Value
December 31, 200X
METHOD 3 - CAPITALIZED EARNINGS
Average annual net production-(from above)$1,398,333
Less: Average operating expenses60%(839,000)
Professional labor (38% of net Dr.prod after lab)(350,000)
Equipment contribution(25,000)
Excess Earnings$184,333
Capitalization Rate20%16%
(5 times)(6.25 times)
Total value$921,667$1,152,083
1
PAINLESS DENTISTRY ,DDS , PA
Estimate of Practice Value
December 31, 200X
METHOD 4 - ANNUALIZED EARNINGSLowHigh
Total earnings(amt available for doctors)
12/31/xx$420,000
12/31/xy$520,000
12/31/xz$650,000
Total earnings for the above years$1,590,000
div by 3
Average annual earnings$530,000
22.5
Total value$1,060,000$1,325,000
PAINLESS DENTISTRY ,DDS , PA
Estimate of Practice Value
December 31, 200X
Average value of the four methods presented
Method 1$795,500$1,085,500
Method 2769,0831,048,750
Method 3921,6671,152,083
Method 41,060,0001,325,000
Total of the four methods presented$3,546,250$4,611,333
div by 4div by 4
Average of the above valuation methods$886,563$1,152,833
Calculated value (average of low & high)$1,019,698
Other Balance Sheet items at 12/31/0x
Cash$20,000
Accounts payable(2,500)
Payroll withholdings payable(7,500)
Notes payable(100,000)
Current year profit0
Net total($90,000)
Net value929,698
Net value-rounded930,000
2
$135,653
$162,807
$161,763
$460,223
$153,408
profit model
PAINLESS DENTISTRY ,DDS , PA
Estimate of Practice Value
December 31, 201X
DENTAL PRACTICE PROFIT MODEL
GENERAL DENTAL
GROSS PRODUCTION$ 1,800,000
LESS: WRITE OFFS AND ADJUSTMENTS15%(270,000)
NET PRODUCTION (COLLECTIBLE PRODUCTION)1,530,000
LESS: OVERHEAD60%(918,000)
NET AVAILABLE TO DOCTORS612,000
LESS: DR EARNINGS (DR PROD LESS LAB)35%(322,875)
OWNERSHIP PROFITS289,125
LESS: PRACTICE DEBT $1,020,000 7 YEARS, 6.0%per month14,827(177,924)
OWNERSHIP PROFITS$ 111,201
GENERAL DENTAL DR COMPENSATION CALCULATION
DR PRODUCTION (75% OF TOTAL)$1,200,000
LESS: WRITEOFFS AND ADJ15%(180,000)
LESS: LAB(97,500)
NET DR. PRODUCTION922,500
TIMES 35%$ 322,875
comp formula
PAINLESS DENTISTRY, DDS, PA
COMPENSATION FORMULA
FOR THE 12 MONTHS ENDED DECEMBER 31, 200X
PRACTICE VALUE=$930,000 50%=$ 465,000
STOCK90,000AFTER TAX $
COMP SHIFT375,000PRE-TAX $
6.0% =$5478.08 PER MONTH FOR 72 MONTHS
NET INCOME100,000
ADD: SALARIES AND FRINGE BENEFITS OF OWNER DRS511,846
COMPENSATION POOL611,846
ALLOCATION OF COMPENSATION POOL:SENIORJUNIORTOTAL
70% COMP POOL X NET PRODUCTION %266,104162,188428,29270.00%
30% COMP POOL X OWNERSHIP $91,77791,777183,55430.00%
TOTAL COMPENSATION357,881253,965611,846100.00%
COMP SHIFT (5478.08/MO)65,738(65,738)0
NET EARNED423,619188,227611,846
LESS: SALARIES PAID300,000150,000450,000
AUTO EXPENSES1,00001,000
DUES AND JOURNALS1,6121,3012,913
OFFICERS LIFE INS1,07201,072
TELEPHONE5960596
MEDICAL INS18,00010,00028,000
PROF FEES000
CONTINUING EDUCATION3,2005653,765
PROFIT SHARING/401K24,500024,500
TOTAL SALARIES AND FRINGES349,980161,866511,846
BALANCE OF COMP DUE (OVER)-CURRENT73,63926,361100,000
BALANCE OF COMP DUE (OVER) FROM PRIOR YR000
COMPENSATION DUE (OVERPAID)73,63926,361100,000
Stock Payment90,0006 yr 7%
1534.41/mo18,412
SENIORJUNIORTOTAL
GROSS PRODUCTION 750,000450,0001,200,000
LESS: LAB FEES PAID (65,000)(32,500)(97,500)
NET PRODUCTION685,000417,5001,102,500
PERCENT OF NET PRODUCTION62.13%37.87%100.00%
PERCENT OF OWNERSHIP50.00%50.00%100.00%
MET HOD 1 - ASSET VAL UE L ow High
Dental equipment - $200,000 $200,000Office equipment and furniture 10,500 10,500Leasehold improvements 20,000 20,000Dental supplies & hand instruments 15,000 15,000Patient records/goodwill 550,000 840,000T otal value $795,500 $1,085,500
PAINLESS DENTISTRY, DDS, PAEstimate of Practice Value
December 31, 201X
Practice Valuation ConceptsPRACTICE TRANSITIONS
Sheet1
PAINLESS DENTISTRY, DDS, PA
Estimate of Practice Value
December 31, 201X
METHOD 1 - ASSET VALUELowHigh
Dental equipment -$200,000$200,000
Office equipment and furniture10,50010,500
Leasehold improvements20,00020,000
Dental supplies & hand instruments15,00015,000
Patient records/goodwill550,000840,000
Total value$795,500$1,085,500
MET HOD 2 - ANNUAL I ZED NET PRODUCT I ON (Weighted Ave)
12/31/xx $1,100,000 times 1 $1,100,00012/31/xy 1,350,000 times 2 $2,700,0001231/xz 1,530,000 times 3 $4,590,000
6 $8,390,000
divide by 6 $1,398,333
Average annual net production $1,398,333
T otal value $769,083 $1,048,75055% 75%
December 31, 201X
PAINLESS DENTISTRY, DDS, PAEstimate of Practice Value
Practice Valuation ConceptsPRACTICE TRANSITIONS
Sheet1
PAINLESS DENTISTRY, DDS, PA
Estimate of Practice Value
December 31, 201X
METHOD 2 - ANNUALIZED NET PRODUCTION (Weighted Ave)
12/31/xx$1,100,000times 1$1,100,000
12/31/xy1,350,000times 2$2,700,000
1231/xz1,530,000times 3$4,590,000
6$8,390,000
divide by 6$1,398,333
Average annual net production $1,398,333
Total value$769,083$1,048,750
55%75%
PAINLESS DENTISTRY, DDS, PAEstimate of Practice Value
December 31, 201X
METHOD 3 - CAPITALIZED EARNINGS
Average annual net production (from above) $1,398,333 Less: Average operating expenses 60% (839,000)
Professional labor (35% of net Dr.prod after lab) (323,000)Equipment contribution (25,000)
Excess Earnings $211,333
Capitalization Rate 25% 20%
(4 times) (5 times)
Total value $845,332 $1,056,665
Practice Valuation ConceptsPRACTICE TRANSITIONS
PAINLESS DENTISTRY, DDS, PAEstimate of Practice Value
December 31, 201X
METHOD 4 - ANNUALIZED EARNINGS Low High
Total earnings (amt available for doctors)12/31/xx $420,000 12/31/xy $520,000 12/31/xz $610,000
Total earnings for the above years $1,550,000
div by 3
Average annual earnings $520,000 1.5 2
Total value $780,000 $1,040,000
Practice Valuation ConceptsPRACTICE TRANSITIONS
PAINLESS DENTISTRY, DDS, PAEstimate of Practice Value
December 31, 201X
Average value of the four methods presentedMethod 1 $795,500 $1,085,500 Method 2 769,083 1,048,750 Method 3 845,332 1,056,665 Method 4 780,000 1,040,000
Total of the four methods presented $3,189,915 $4,230,915
div by 4 div by 4
Average of the above valuation methods $797,479 $1,057,729
Calculated value (average of low & high) $927,604
Other Balance Sheet items at 12/31/0xCashAccounts receivable
$20,000110,000
Accounts payable (2,500)Payroll withholdings payable (7,500)Notes payable (100,000)Current year profit 0 Net total $20,000
Net value $947,604 Net value-rounded $948,000
Practice Valuation ConceptsPRACTICE TRANSITIONS
— Growth vs. decline (production, new patients, etc.)— Sustainability – patient base— Asset purchase vs. stock purchase— Support from outgoing Dr.— A/R collection rate pre and post COVID (note A/R typically is not
sold to buyer)— Potential appointment backlog due to closure – bounce back plan in
place?— 3 & 6 month projections, highlighting expected collections &
expenses reduced
Other considerations
— Bank financing could be uncertain; banks don’t know what their rules will be yet
— Validity of active patient counts— Contingent or earn out-type clauses for transactions— Recruiting and staffing— Cost of PPE— Coding and billing
Other considerations (cont.)
— Appointment times under new rules— Valuation as noted and uncertainty— Will buyers be willing to accept new risks? Will sellers be willing to
share risk? New compromise— Staffing variables – more assistants needed?— Front desk environment (no contact, remote payment acceptance)— New systems / processes— Retirements and recruiting
Other considerations (cont.)
— Bank financing (updated PFS, new loan programs from SBA)— How long before back to “normal” – 3 / 6 / 12 months?— What will the new normal be?
— Owner holdback (Contingencies, sharing risk)— Deferred compensation – internally financed
Financing considerations
ADAPT Coffee Talk featuring �Baker Tilly��Selling your practice in the COVID-19 era: advice from accounting experts��May 15, 2020To see a list of future �ADAPT Coffee Talk events �and to register, visit:AgendaToday’s presentersSlide Number 5Dental specializationOffice and procedural policies to evaluate and updateOffice and procedural policies to evaluate and update (cont.)Documents to prepare or update for prospective buyersDocuments to prepare for prospective buyers (cont.)Documents to prepare for prospective buyers (cont.)Practice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsPractice Valuation ConceptsOther considerationsOther considerations (cont.)Other considerations (cont.)Financing considerationsThank you!Looking to sell?