Monthly Archives: January 2018
Valuing an Orthodontics Practice
When valuing an Orthodontics Practice, two important considerations need to be made:
- Accounts Receivable.
- Accrual versus Cash Basis Accounting.
When valuing an Orthodontics practice, especially if it is a startup and less than 2 years old it is important to consider Accounts Receivable in the valuation equation. For instance, when valuing an orthodontics practice, they typically have AR that can stretch out 24-30 months. If you are using cash basis financials, it is important to subtract out beginning AR and add in ending AR to gain a true reflection of actual revenue
Calculation from Cash Basis Accounting to Accrual Accounting is as follows:
Cash Basis Cash Flow $400,000 $400,000
Add: Ending AR $375,000 $375,000
Less: Beginning AR ($179,000) ($179,000)
Equals Accrual Basis Cash Flow $596,000 $2,096,000
Adding back the change in Accounts Receivable to Cash Flow and Revenue reflects a more correct picture of Cash Flow and Revenue. Orthodontics practices are unique due to the fact that their AR may stretch out for 2-3 years, so it is an important consideration to make when valuing an Orthodontics practice.
Beware: A Self-input Business Valuation is not a good idea
There is a type of business valuation software and service available that allows a business owner to input their own financial information. Although this may seem like a good idea, it is a very bad practice. Valuations, like tax returns are complicated and require a seasoned professional to analyze and input the data to get an accurate number for value. One of the main reasons that a business owner would not want to do the valuation themselves is there are key expenses that can be added back into the EBITDA and Cash Flow calculation. If these expenses are missed, the valuation number is inaccurate.
Key add backs and charges tend to be buried in the tax returns or financials and are easily missed. These include:
- Amortization Expense, which is usually shown on the Schedules and buried in the tax return.
- Section 179 Depreciation Expense, which is usually shown on Schedule K-1 of the Tax Return and erroneously added back with the rest of the depreciation.
- Partner Wages and cost to replace the owners for a situation where there is multiple partners who own a business.
- Cost of a working spouse who is not paid.
- Adjusting the lease to the market rate.
- Correct calculation of SDE, EBITDA.
- Repair and Maintenance Expenses that need to be capitalized.
- An S-corp tax return will show more Taxable Income (Net Income) than the P&L due to the expenses and pass through items on the Schedule K-1’s. If the business owner doesn’t understand income and pass-through entity taxation, he will undervalue the business.
- Schedule M-1 on the Tax Return contains important information and business owners tend to not understand how Schedule M-1 works.
Business Valuations are exponentially more accurate if a Valuations Expert or CPA gathers, assimilates, and inputs the critical information pertinent to the engagement to get an accurate value for the business.
The second consideration applies to financial advisors who refer clients to a third-party valuation service and allow their clients to input sensitive financial information themselves. One main reason for a Financial Advisor to not want to refer a client to a self-valuation service like BizEquity is the client’s data is captured by the provider and that data is sold to competitors. Financial advisors often pay for the service, send clients to the service provider, and their clients’ personal financial information is resold by the business valuation service provider to anyone who wants to purchase it. It doesn’t make sense to give competitors sensitive client information, especially when an advisor is paying for the service.
I recommend that a business owner contact a knowledgeable valuation expert who is an independent third party to get an accurate estimate of value for their business. If a client inputs the financial information themselves it is highly likely to produce an inaccurate value for the business.
How to register a new business and get an EIN
I get a lot of requests from Buyers who need to register and start a new business in Utah. This includes getting an EIN, picking a name, etc.
Here is what you will need to start, register and license a business in UT.
1. Pick a name and register it. https://secure.utah.gov/bes/
2. Get an EIN. Go to: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
3. Register your entity with the State of UT. This site will walk you through the process. https://secure.utah.gov/osbr-user/user/preoption1.html?beginRegistation=Begin+Registration&_csrf=a8761e29-dfec-4241-911c-e61e35d5f5e0
The State has a boiler plate set of Articles of Incorporation/Organization, but I would suggest finding a good attorney to help you with that and a good Operating Agreement, particularly when there are partners who are involved. If you need one, I can suggest one that I have used in the past.