Valuation Considerations for Orthodontics Practices

When valuing an Orthodontics Practice, two important considerations need to be made:

1. Accounts Receivable.
2. 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:

Revenue                                                                              $1,500,000

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.