Whether you’re considering selling your dental practice soon or simply want to understand its present value, we’re here to help.
In this article, you’ll learn how to evaluate your dental practice and strategies to maximize your exit.
If you want to skip the theory and just find out what your dental practice is worth, start by getting a Built to Sell Valuation. If you’d prefer to understand the theory behind valuing a dental practice, read on.
The four most common methods of appraising a dental practice are through
1) Valuing your Assets
3) Multiple of your Seller’s Discretionary Earnings (SDE) or
4) Multiple of your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
Let’s delve into the similarities and differences of all 4 methods, so you can decide which one is best for your business.
Best for: a simple valuation
Assets-based is the simplest way of valuing your dental practice. In short, consider the value of its hard assets minus its debts. For instance, your dental practice has expensive equipment and technology. These hard assets have value, which can be calculated by estimating the resale value of your equipment.
This valuation method often renders the lowest value for your practice because it assumes your company does not have any “Good Will.” In accounting speak, “Good Will” has nothing to do with how much people like your clinic; Good Will is defined as the difference between your practice’s market value (what someone is willing to pay for it) and the value of your net assets (assets minus liabilities).
Typically, dental practices have at least some Good Will, so in most cases, you’ll get a higher valuation by using one of the other methods.
Best for: gaining insights into valuations of similar practices & a good rule of thumb
Comparables is another common valuation technique and involves looking at the value of comparable dental practices that have sold recently. For example, you can typically find out what dental practices are selling for by asking around at an industry conference like The American Association of Dental Office Management (AADOM) Annual Conference.
This approach often provides a good rule of thumb in the dental industry, but depending on who you are comparing yourself to, may not be as accurate as possible. Factors like your location, size of your patient list etc. can all have a material impact on the value of your practice, and it’s often difficult to find public comparables for your practice.
Best for: valuing a small dental practice (with under $1 million annual revenue)
The most common way to value a small dental practice is to use a multiple of your Seller’s Discretionary Earnings (or SDE).
SDE reflects the total financial advantage your company offers a full-time owner and is the best metric to use if you run a small dental practice with less than $1 million in annual revenue.
SDE is better for valuing smaller practices, as these clinics are likely to be owner-operated. As revenue grows, so does the probability of a practice having a management team – making a multiple of EBITDA a more appropriate valuation metric (see below for more details on valuing a dental practice on a multiple of EBITDA).
To calculate your dental practice’s SDE, employ the following equation:
Net Income + interest expense + depreciation expense + amortization expense + owner’s salary + taxes + discretionary expenses + non-recurring expenses = SDE
Non-recurring (e.g., legal fees) and discretionary expenditures (e.g., personal phone and fuel) are added back as they don’t reflect mandatory operating costs.
Given the incoming buyer will likely step into an owner-operator role, you need to reincorporate the salary you’ve allocated to yourself.
Best for: larger dental practices that exceed $1 million in annual revenue
If your dental practice exceeds $1 million in revenue, it’s better to use a multiple of your Earnings Before Interest Taxes Depreciation & Amortization (EBITDA) to value your dental practice.
Larger practices typically have a management team and often attract offers from strategic buyers and private equity groups, making an EBITDA multiple a better way to value your practice.
Calculating your dental practice’s EBITDA involves similar add-backs as SDE valuations, barring one: the owner’s compensation.
For instance, if your annual compensation is $280,000, but a manager with an equivalent skillset could be retained for $200,000 per year, the $80,000 difference is added back – increasing your EBITDA by $80,000.
Practices evaluated through EBITDA typically attain higher multiples compared to those via SDE, primarily because:
Things to note
Similar to SDE evaluations, a range of multiples is applied to your EBITDA, determining both the minimal and maximal purchase price for your practice.
You may be wondering, ‘what drives my multiple?’ The most important factor that affects your multiple is the risk associated with acquiring your practice.
The more risk associated with acquiring your practice, the lower the multiple.
The less risk associated with acquiring your practice, the higher the multiple.
Struggling with terminology? Take a look at our M&A Glossary, for simple definitions without fluff
Let’s address some of the factors that buyers look at to gauge risk, which ultimately determines the multiple they’re willing to offer.
A large, diversified base of patients can go a long way in showing an acquirer that you’ve built a strong practice – and that it will succeed without you there. You’ll need to demonstrate a high level of patient retention rates and customer satisfaction.
Google reviews and testimonials showcase that you’ve built a reputable dental practice that your patients trust. If you haven’t set up a Google Business Profile yet, we recommend you do so. This complimentary service provides an opportunity for increased online visibility and gathering customer reviews – both of which can enhance revenue and serve as a key selling point for your business.
Like most businesses, the less involved you are in attracting and treating patients, the less risk there is for a buyer who’s considering acquiring your dental practice.
If your practice relies too heavily on you, especially when it comes to treating patients, start offloading some of those responsibilities onto your most trusted and experienced employees and partners.
One way to prove to an acquirer that your practice can operate without you is by creating Standard Operating Procedures (SOPs). This helps you standardize tasks, assign clear responsibilities and provide training for your staff to remove points of failure and ensure an excellent standard of care.
Use video to document your SOPs
Built to Sell has helped thousands of business owners document their all-important SOPs using VidGuide, a plug-and-play tool that lets you display video instructions inside the software your team uses to run your dental practice.
Integrate VidGuide with the practice management software your dental practice already uses, such as:
Avoid the painstaking process of creating written instructions by shooting a quick video of your screen to create digestible step-by-step instructions. Try VidGuide today for free; there’s no credit card required.
One surprising way to increase the value of your dental practice is to create recurring revenue streams. Although somewhat unusual for a dental practice, recurring revenue makes your practice more resilient and appealing to potential buyers.
There are several ways to create recurring revenue in a dental practice, such as membership plans and orthodontic services.
Diverse recurring revenue streams help your practice to cover its fixed costs, such as rent, payroll, and utilities. It also helps your practice to invest in new equipment and technology. You’ll also enjoy these other benefits:
You could set up membership plans which your patients could pay for in annual or monthly instalments. Generally, this fee would cover bi-annual check-ups, regular cleanings, X-rays and exams. Some dental practices also offer exclusive discounts to members on other treatments, such as 10% off restorative or cosmetic procedures or priority access to preferred appointment times.
Orthodontic treatments are another great way of diversifying your recurring revenue streams. These treatments can take years to complete, so patients will typically pay in instalments. Orthodontics is a solid way of securing your practice with a steady stream of revenue.
Depending on the size and scale of your dental practice, you could attract individual, strategic, or private equity buyers. Let’s delve into what each of these buyers offers and the likelihood of selling to each.
If your dental practice generates less than $1 million in revenue, there’s a high likelihood that it will be sold to an individual dentist. Often, these buyers are new graduates from dental school or experienced dentists leaving larger practices or dental groups with the ambition of owning and running their own clinics.
For financing the acquisition, individual buyers typically rely on loans through a bank, seller financing, or a mix of both. Selling your dental practice to an individual dentist can be a good choice if you’re seeking someone with a similar ethos to sustain and grow your practice after you move on.
Strategic buyers are other entities within (or related to) your industry who see value in acquiring your practice. For your dental clinic, this might be larger dental groups or medical practices looking to expand their services and take advantage of economies of scale when buying medical supplies and equipment.
For instance, a general medical practice might aim to include dental services and see your practice as the perfect opportunity to expand. Typically, strategic buyers are more interested in practices with EBITDA of at least $1 million per year.
Private Equity Groups are rolling up dental practices. Their goal is to consolidate back-off services and take advantage of economies of scale when purchasing dental supplies. These private equity groups typically have a goal of selling the collection of practices they have accumulated within 5-7 years of making an acquisition.
The best way to sell your dental practice is to start with a Built to Sell Valuation. This will help you decide whether or not you’re ready to sell and give you an idea of how to create an exit plan for the future.
What are your options for valuing your dental practice?
Built to Sell Valuation – $399
Sometimes, things don’t go quite the way you planned. To ensure you’ve got a plan B, map out your BATNA (Best Alternative to a Negotiated Agreement) to protect your practice if a negotiation fails. When selling a dental practice, it’s crucial to have a BATNA in place – but you also need to remember that your potential acquirer likely has a BATNA, too.
When it comes to selling a dental practice, due diligence can make or break a deal. Conducting diligence allows potential buyers to verify the information you’ve given them about your practice, so you must be well-prepared for the process. Ensure all financial documents are up-to-date and well organized, provide evidence of legal compliance, and have a clear record of employee contracts, operational procedures, and patient records to hand. By adequately preparing, you make the due diligence process smoother and position your dental practice as a credible investment.
To secure a premium valuation multiple when selling your dental practice, you’ll need to put a business transition plan in place to alleviate any potential acquirer’s concerns. One of the best ways to sell a dental practice is to demonstrate that your business can thrive without you using detailed Standard Operating Procedures (SOPs). With VidGuide, you can showcase that your business can thrive without you because the SOPs are all in one accessible place.
With over 2 million downloads and 400+ interviews with founders with successful exits, Built To Sell Radio has helped countless entrepreneurs avoid costly mistakes when selling their businesses.
Selling a dental practice has some similarities with other healthcare providers so you can also look at what other caregivers have done to sell their firms.
In 2020 veterinarian Dr. Joseph Marchell started Old Brown Dog Veterinary Partners (OBDVP) after identifying a unique opportunity to do a rollup of family-owned animal hospitals.
Marchell acquired three practices for around ten times EBITDA. He then implemented a streamlined operational strategy that resulted in the sale of OBDVP less than two years later for almost three times the purchase price.
You should now have a clearer understanding of the different dental practice valuation methods, how buyers perceive risk and what you need to prepare before entering negotiations. For more valuable resources, take a look at our best-selling books, interactive courses, informative blog posts and our business podcast. Become a better business owner and maximize your exit for when the time comes to sell.