June 25, 2024

In traditional dental practice sales (i.e., dentist-to-dentist transactions), valuations are based on practice collections or seller’s discretionary earnings (SDE)[1]. Valuations based on collections typically range from 60% and 100% of collections, but you can generally expect to receive approximately 75%. Valuations based on SDE are typically in the 2x to 3x SDE range, but can be as high as 4x for practices nearing SDE of $1,000,000.

Collections Example

Practice Collections: $1,000,000

Revenue Multiple: 75%

Practice Valuation: $750,000

SDE Example

SDE: $400,000

SDE Multiple: 2x

Practice Valuation: $800,000

In contrast, DSOs base valuations on profits, specifically EBITDA[2]. This approach tends to lead to higher valuations, which has contributed to the surge in practice sales to DSOs in recent years. Under this valuation model, a practice is valued at between 3x and 6x EBIDTA, though generally you can expect to receive approximately 4x EBITDA.

EBITDA Example

Practice EBITDA: $250,000

EBITDA Multiple: 4x

Practice Valuation: $1,000,000

Regardless of the method used, several factors can affect a valuation upward or downward, including the following:

• Location and demographics. Practices in high-traffic areas and those that serve a large number of patients can command higher prices than those in less populated areas or those with a smaller patient base.

• Reputation. Patient satisfaction leads to more repeat business and referrals, and vice versa.

• Competition. The more dentists offering similar services within driving distance of a practice, the less valuable the practice.

• Technology used in your practice. Practices that use more modern technology tend to be worth more because they can treat more complex cases and provide better patient care.

• Staff members’ experience and training. An existing staff that is well-trained and experienced in the inner workings of a practice eliminates the time and expense necessary to train new staff members, adding value to the practice.

• Condition of equipment and facility. Outdated offices can have a negative impact on potential purchasers. While significant renovations may not be necessary, occasional minor updates can help keep your practice looking fresh and modern.

• Specialization. Some procedures are more profitable than others, so a specialty practice would likely be more valuable.

• Age. Older practices tend to have more value than newer ones due to more established patient bases and referral networks.

[1] Seller's Discretionary Earnings (SDE) is a measure of a small business's profitability that takes into account the owner's salary, benefits, and other discretionary expenses (e.g., auto, health insurance, pension, etc.). In simple terms, SDE is the practice’s net income with these discretionary expenses added back to determine potential cash flow.

[2] EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It is essentially the net profit of the practice.

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