Presented by PYA’s Jim Lloyd (Consulting Principal) and Robert Mundy (Consulting Senior Manager), "Valuation of Dental Practices,” provide valuable insights regarding dental practice operations, merger and acquisition activity, and valuation approaches. The presentation also covers: Key operating statistics that drive the value of dental practices. Compensation trends for dentists. Regulatory constraints and related issues.

1. Valuing Dental Practices
Robert M. Mundy, CPA/ABV, CVA
W. James Lloyd, CPA/ABV, ASA, CFE
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2. Forensic and Valuation Services Section 1
Speaker Biography
W. James Lloyd
W. James (Jim) Lloyd, CPA/ABV, ASA, CFE is a Principal with Pershing
Yoakley & Associates (PYA), an accounting and consulting firm
specializing in the healthcare industry. Primary areas of focus include
valuation, transaction advisory, and dispute related services.
Healthcare industry experience includes: ambulatory surgery centers,
cancer centers, dental practices, dialysis facilities, imaging centers,
hospice, hospitals, long-term care facilities, managed care, pharmacies,
pharmaceutical manufacturers, physician practices, and physician
compensation arrangements among others.
Frequent speaker at national and regional conferences on valuation and
dispute related topics.
Past chair: American Institute of CPAs' ABV Credential Committee. Past
member: American Society of Appraisers' Board of Examiners.

3. Forensic and Valuation Services Section 2
Speaker Biography
Robert M. Mundy
Robert M. Mundy, CPA/ABV, CVA, is a Senior Manager with Pershing
Yoakley & Associates (PYA), an accounting and consulting firm
specializing in the healthcare industry. Primary areas of focus include
valuation, transaction advisory, and dispute-related services.
Healthcare industry experience includes: general acute care and
specialty hospitals, diagnostic imaging centers, ambulatory surgery
centers, skilled nursing facilities, assisted living centers, cancer
treatment centers, and a variety of physician practices.
Co-authored “The Valuation of Hospitals” chapter in Business Valuation
Resources’ Guide to Healthcare Valuation.

4. Forensic and Valuation Services Section
Agenda
1
2
3
4
5
Overview of the dental industry
Valuation and compensation trends
Current trends affecting dental practices
Overview of regulations affecting healthcare and dental industry
Key operating benchmarks and data resources
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5. Forensic and Valuation Services Section
Overview of Dental Industry
Over 195,000 professionally active dentists in the U.S. as of
2012
Segments of the dental provider industry:
• General dentistry
• Oral and maxillofacial surgery
• Prosthodontics
• Orthodontics
• Pediatric dentistry
• Endodontics
• Periodontics
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6. Forensic and Valuation Services Section
Overview of Dental Industry
General dentists comprise the vast majority of dental providers
in the U.S.
80.2%
3.5%
2.5%
5.1%
3.2% 2.8% 2.7%
Number of Active Dentists by Specialty
General dentist
Oral surgeon
Endodontist
Orthodontist
Pediatric dentist
Periodontist
Other
Source: American Dental Association, Dental Data, November 2012
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7. Forensic and Valuation Services Section
Overview of Dental Industry
Restorative, preventative, and diagnostic services comprised
the majority of dental services in 2013
6.90%
22.20%
15.60%8.80%
9.80%
14.90%
5.40%
2013 Services Distribution
OMFS
Restorative dental services
Preventative services
Fixed prosthodontics
Orthodontics
Diagnostic services
Non-surgical endodontic
services
Source: IBISWorld, Dentists in the U.S. Industry Report, December 2013
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8. Forensic and Valuation Services Section
Current Trends in Dental Industry
Positive Trends for the Dental Industry
Aging population
Profitability still high for the industry, even during economic downturn
Improved economic conditions
• Increased access to employer-sponsored health insurance; however, many
employer-sponsored plans do not include dental benefits
• Increases in disposable income should lead to more dental procedures
Greater awareness and focus on oral health
Increasing access to coverage through healthcare insurance exchanges
Trend toward more cosmetic procedures
According to Centers for Medicare & Medicaid Services, dental
spending is projected to increase from $110.9 billion in 2012 to $191.3
billion in 2022, representing a 5.6% compound annual growth rate
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9. Forensic and Valuation Services Section
Current Trends in Dental Industry
Challenges Facing the Industry
Rapid advancements in technology
Rising costs of operations
Volatile prices for nonferrous metals
Better preventive care by patients leads to fewer patient visits
Only 60% of U.S. has some form of dental benefits1
Shift from private insurance to more public coverage and out of
pocket payments
Potential cuts to Medicaid for adult dental coverage
Changing demographics among dental providers
1 2013 National Association of Dental Plans / Delta Dental Plans Association Joint Dental Benefits Report on Enrollment
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10. Forensic and Valuation Services Section
Current Trends in Dental Industry
Trend Toward Consolidation
Shift from solo practitioners to group practices
• Rising operating costs and capital requirements
• Economies of scale
• High costs of dental education and student loans make solo practice less
attractive
Growing interest with private equity and dental practice
management companies (DPMCs)
• Potential for high-profit margins with sufficient volume
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11. Forensic and Valuation Services Section
Dental Practice Management Companies
Publicly traded company
Birner Dental Management Services, Inc. (BDMS)
• 66 offices throughout Colorado, New Mexico, and Arizona
• Revenues in excess of $64 million in 2013
• Market value of invested capital (MVIC) to Revenue = 0.65x
• MVIC to EBITDA = 11.75x
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12. Forensic and Valuation Services Section
Dental Practice Management Companies
Privately held companies
American Dental Partners, Inc.
• Acquired for $398 million in 2011 by private equity firm JLL Partners
InterDent, Inc.
• Provides support services to over 150 affiliated dental offices
• Employs over 450 dentists
Smile Brands Group, Inc.
• Provides support services to over 400 dental offices
• Employs over 1,300 dentists
Pacific Dental Services, Inc.
• Provides support services to over 275 dental offices
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13. Forensic and Valuation Services Section
Dental Practice Key Statistics
Practice Gross Billings
Gross Billings per Practice Hour by Number of Chairside Assistants
Source: American Dental Association, 2010 Survey of Dental Practices, median values
All Independent
Dentists
No Non-Owner
Dentists
Includes Non-Owner
Dentists
General Practitioners $700,000 $650,000 $1,163,250
Percent Collected 95.6% 95.9% 94.4%
Specialists $1,000,000 $900,000 $1,700,000
Percent Collected 96.0% 96.0% 95.6%
1 Chairside Assistant 2 Chairside Assistants 3+ Chairside Assistants
General Practitioners $299 $377 $510
Specialists $326 $430 $624
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14. Forensic and Valuation Services Section
Dental Practice Key Statistics
Percentage of Practices Employing Non-Dentist Staff
Average Number of Non-Dentist Staff per Dentist
Source: American Dental Association, 2010 Survey of Dental Practices
Dental Hygienists Chairside Assistants
General Practitioners 76.0% 94.3%
Specialists 28.6% 97.0%
Dental Hygienists Chairside
Assistants
Total Non-Dentist
Staff
General Practitioners 1.8 1.6 4.5
Specialists 1.6 2.5 5.1
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15. Forensic and Valuation Services Section
Dental Practice Key Statistics
Staffing Expenses as a % of Gross Billings for General Practitioners
Source: American Dental Association, 2009 Survey of Dental Practices
1Q Median 3Q
Salaries for shareholder dentists 18.8% 25.6% 35.8%
Salaries for employed dentists 3.9% 8.0% 13.7%
Salaries for non-dentist staff 17.5% 22.7% 26.8%
Payroll taxes for all staff 2.4% 3.5% 6.5%
Employee benefits for all staff 2.3% 4.5% 8.4%
Total staffing expenses 44.9% 64.3% 91.2%
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16. Forensic and Valuation Services Section
Dental Practice Key Statistics
Staffing Expenses as a % of Gross Billings for Specialists
Source: American Dental Association, 2009 Survey of Dental Practices
1Q Median 3Q
Salaries for shareholder dentists 21.6% 31.2% 43.8%
Salaries for non-dentist staff 14.0% 19.5% 25.7%
Payroll taxes for all staff 2.2% 3.1% 6.7%
Employee benefits for all staff 2.9% 5.0% 7.9%
Total staffing expenses 40.7% 58.8% 84.1%
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17. Forensic and Valuation Services Section
Dental Practice Benchmark Resources
American Dental Association
• Survey of Dental Practice Fees
• Survey of Dental Practice Expenses
• Survey of Dental Practice Employment
• Survey of Dental Practice Income
Rosen & Associates
• “See How You Compare” Survey
Dental Economics – www.dentaleconomics.com
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18. Forensic and Valuation Services Section
Overview of Healthcare Reform
Patient Protection and Affordable Care Act of 2010 (PPACA)
• Signed into law on March 23, 2010.
• Primary goals:
- Provide healthcare coverage for many uninsured.
- Reform healthcare system to improve quality.
- Reduce overall healthcare costs.
Health Care and Education Reconciliation Act of 2010
• Signed into law on March 30, 2010.
• Includes several amendments to PPACA.
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19. Forensic and Valuation Services Section
Key Healthcare Reform Provisions
Affecting Dental Practices
• Individual insurance mandate
- Tax penalty for non-compliance beginning in 2014.
- Each state must establish healthcare insurance exchange by 2014.
- Stand-alone dental plans must offer pediatric oral essential benefits
without annual and lifetime limits
• Expansion of Medicaid
- Expands eligibility to cover individuals up to 138% of the federal
poverty level.
- Extended funding of Children’s Health Insurance Program (CHIP)
- States that provide CHIP coverage through the Medicaid expansion
are required to cover basic dental services
- Supreme Court ruling allowed states to opt out of expansion.
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20. Forensic and Valuation Services Section
State Adoption of Medicaid Expansion
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21. Forensic and Valuation Services Section
Key Healthcare Regulations
Healthcare
Regulations
Stark Law
Anti-Kickback
Statute
Stark Law
False Claims Act
IRS 501 (c)(3)
Anti-Inurement
Rules
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22. Forensic and Valuation Services Section
Stark Law
• Also called the “physician self-referral law.”
• Prohibits a physician from making referrals for designated health
services to entities in which the physician (or a family member)
has a financial relationship.
• Designated Health Services (DHS):
- Currently 12 health services.
- Includes hospital inpatient and outpatient services, as well as
clinical lab, physical and occupational therapy, radiology,
certain imaging, DME, home health, and various other
services and supplies.
• Is a “strict liability” law.
• Contains various “safe harbors.”
• Provisions enforced by the Centers for Medicare & Medicaid
Services (CMS), although Department of Justice adjudicates
false claims arising from violations of the Stark Law.
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23. Forensic and Valuation Services Section
Stark Law
Stark Law Definition of Fair Market Value:
The value in arm’s-length transactions, consistent with the general market
value. “General market value” means the price that an asset would bring
as a result of bona fide bargaining between well-informed parties to the
agreement who are not otherwise in a position to generate business for
the other party, on the date of acquisition of the asset or at the time of the
service agreement. Usually, the fair market price is the price at which bona
fide sales have been consummated for assets of like type, quality, and
quantity in a particular market at the time of acquisition, or the
compensation that has been included in bona fide service agreements
with comparable terms at the time of the agreement, where the price or
compensation has not been determined in any manner that takes into
account the volume or value of anticipated referrals.
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24. Forensic and Valuation Services Section
Anti-Kickback Statute
1 2 3 4
Prohibits the
payment or
receipt of
remuneration
to induce or
reward
referrals for
Medicare or
Medicaid
services.
Criminal
statute that
requires proof
of “intent,” i.e.,
knowingly and
willfully paying
for referrals.
Contains
various “safe
harbors.”
5
Enforced by
the Office of
Inspector
General (OIG)
and the
Department of
Justice (DOJ).
If one purpose
of the payment
is to induce
referrals, then
the Anti-
Kickback
Statute (AKS)
is violated,
even if there
are other
legitimate
business
reasons for the
payment.
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25. Forensic and Valuation Services Section
False Claims Act
Imposes liability on any person who
submits a claim to the federal
government that the person knows
(or should know) is false.
Civil statute.
Often “piggy-backed” with the AKS
and Stark.
Subject to qui tam (“whistle-blower”)
suits.
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26. Forensic and Valuation Services Section
Penalties for Violations of
Stark & AKS
Penalties for violation can include:
1. Denial of payments.
2. Refund of payments.
3. Civil monetary penalty up to $15,000 per claim.
4. Civil monetary penalty up to $100,000 for each “scheme”
designed to circumvent the law.
5. Civil monetary penalty of up to 3 times the amount of
claims.
6. Possible criminal penalties, including jail time.
7. Exclusion from the Medicare or Medicaid program.
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27. Forensic and Valuation Services Section
IRS 501(c)(3) Anti-Inurement Rules
501(c)(3) tax exempt
entities must avoid “excess
benefit” transactions.
Transactions must be at
FMV and be consistent
with the entity’s charitable
mission.
Violations can result in loss
of tax exempt status
Rules
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28. Forensic and Valuation Services Section
Valuation Approaches
Asset
Approach
Income
Approach
Market
Approach
Provides an indication of value based
upon market date derived from other
similar businesses.
Provides an indication of value based on
the anticipated future economic benefits of
ownership.
Provides an indication of value based on
the cost to replace or replicate the tangible
and intangible net assets of the business.
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29. Forensic and Valuation Services Section
Valuation Methods for
Each Approach
Asset Approach Income Approach Market Approach
• Adjusted Net
Asset Value
Method
• Excess
Earnings
Method
• Discounted
Cash Flow
Method
• Capitalized
Net Cash
Flow Method
• Guideline
Public
Company
Method
• Comparable
Transactions
Method
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30. Forensic and Valuation Services Section
Asset Approach
Cash and accounts receivable are often excluded unless the
transaction is structured as a stock purchase.
Fixed assets (equipment, real estate/improvements), and
supplies must be adjusted to their current value.
Intangible assets must be identified and valued. Common
examples include:
• Workforce-in-place
• Non-compete agreements
• Trade name/trademarks
As a general rule, intangible asset values should be supported
by an appropriate level of economic benefit (i.e. cash flow).
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31. Forensic and Valuation Services Section
Income Approach
Discounted Cash
Flow (DCF)
Method or
Capitalized
Income (CapInc)
Method.
CapInc Method
utilizes a
constant growth
rate and is
normally more
appropriate for
mature entities
with stable
operations.
DCF Method
requires cash
flow projections
and is normally
more appropriate
for growth
companies.
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32. Forensic and Valuation Services Section
Discounted Cash Flow Method
3
2
1
Step #3: Develop appropriate discount rate and
determine present value of the projected cash flow.
Step #2: Prepare or review cash flow projections
(revenue, expenses, working capital, cap-ex).
Step #1: Analyze historical financials and operations. Make
normalization adjustments as necessary to develop
baseline for future years.
4
Step #4: Adjust as applicable for any non-operating
assets or liabilities.
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33. Forensic and Valuation Services Section
Normalization of Earnings
Historical financials often require some level of
normalization to be used as a basis for projecting future
cash flow.
• Common examples of normalization adjustments for dental practices:
 Overstaffing and/or excess salaries to family members
 Above or below market rate rent expense
 Discretionary/personal expenses
 Non-recurring or non-operating income or expenses
 Billing or coding issues (past errors anticipated to be corrected)
• Purpose is to restate earnings to a level that can be expected to continue
in the future and/or improvements that a hypothetical buyer could
effectuate
• Owner dentist compensation should be normalized to fair market value
• Caution regarding synergistic type adjustments that may be applicable to
a specific potential buyer (if FMV is the standard of value)
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34. Forensic and Valuation Services Section
Revenue & Expense Projections
Cash flow (i.e. revenue, expenses, working capital, cap-ex, etc.)
must be projected until a stabilized level of operations is
reached which can then be capitalized (terminal period).
For revenue projections, consider the following:
• Dentist(s) age and historical productivity
• Local demographics
• Competition (current and anticipated future)
• Capacity issues (dentists and facilities)
• Ancillary services
• Historical trends and benchmarks
Revenue should generally be projected utilizing two growth
metrics – patient volume and net revenue per applicable unit.
For operating expenses, segregate between fixed and variable.
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35. Forensic and Valuation Services Section
General Dentist Compensation Trends
$156,850
$158,770
$161,750
$163,240
$164,570
$152,000
$154,000
$156,000
$158,000
$160,000
$162,000
$164,000
$166,000
2009 2010 2011 2012 2013
National Annual Mean Compensation
Compound Annual Growth Rate = 1.2%
Source: Bureau of Labor Statistics
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36. Forensic and Valuation Services Section
Oral & Maxillofacial Surgeon
Compensation Trends
$210,710
$214,120
$217,380
$216,440
$218,960
$206,000
$208,000
$210,000
$212,000
$214,000
$216,000
$218,000
$220,000
2009 2010 2011 2012 2013
National Annual Mean Compensation
Compound Annual Growth Rate = 1.0%
Source: Bureau of Labor Statistics
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37. Forensic and Valuation Services Section
Orthodontist Compensation Trends
$206,190
$200,290
$204,670
$186,320
$196,270
$175,000
$180,000
$185,000
$190,000
$195,000
$200,000
$205,000
$210,000
2009 2010 2011 2012 2013
National Annual Mean Compensation
Compound Annual Growth Rate = -1.2%
Source: Bureau of Labor Statistics
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38. Forensic and Valuation Services Section
Discount Rate
• Discount rates utilized in connection with the
Income Approach should reflect the risk of the
projected cash flows.
• Most common method for developing an equity
discount rate for small- to medium-sized dental
practices is the “Build-Up Method”:
- Starts with a risk-free rate (usually 20-year U.S.
Treasury bond).
- Adds various risk premiums: Equity Risk
Premium, Small Size Risk Premium, Industry
and Company-Specific Risk Premiums.
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39. Forensic and Valuation Services Section
Market Approach
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Guideline Public Company Method
• Difficult to apply for most small/medium-sized dental practices due to
significant size and operating differences
Comparable Transactions Method
• Multiple databases available that include dental practice transactions
such as: Pratt’s Stats and BIZCOMPS®
• Often difficult to apply due to lack of transaction details such as:
- Dentist’s age, qualifications, and historical productivity
- Use of mid-level providers
- Competition, demographics, and local economic conditions
- Ancillary services, cosmetic procedures/products, etc.
- Post-transaction compensation terms
Often utilized as a “sanity check” to other valuation
approaches

40. Forensic and Valuation Services Section
Market Transactions
0.62
0.63
0.59
0.62
0.30
0.40
0.50
0.60
0.70
2010 2011 2012 2013
Price to Revenue
Count=24
Count=27
Count=28
Count=44
Source: Pratt’s Stats and BIZCOMPS® databases (excludes duplicate transactions)
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41. Forensic and Valuation Services Section
Questions???
40

42. Forensic and Valuation Services Section
Contact Information
Robbie Mundy, CPA/ABV, CVA
Senior Manager | PYA
RMundy@pyapc.com
(404) 266-9876
W. James Lloyd, CPA/ABV, ASA, CFE
Principal | PYA
JLloyd@pyapc.com
(865) 673-0844
www.pyapc.com
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