Two Ways Dental Practices Are Valued
Buyers use two primary methods to value dental practices. Understanding both helps you speak the same language as potential buyers and evaluate offers more effectively.
Percentage of Collections
65% to 85%Traditional method commonly used for smaller practices. Take your annual collections and multiply by a percentage based on profitability, location, and practice quality.
Multiple of EBITDA
2x to 5xPreferred method for larger practices and DSO transactions. Focuses on actual profit generation rather than revenue.
The percentage of collections method is simpler but less precise. A practice collecting $1 million with 25% profit margins is fundamentally different from one collecting $1 million with 40% margins. The EBITDA method captures this distinction and is increasingly standard among sophisticated buyers.
For practices under $750,000 in collections, either method typically produces similar results. For larger practices, DSO transactions, or specialty practices with higher margins, EBITDA becomes the dominant valuation approach.
Key insight: Buyers care about cash flow, not just collections. Two practices with identical revenue can have drastically different values based on how efficiently they convert revenue to profit. Focus on improving your margins rather than solely growing your top line.
"In our dental practice M&A work, we most often see valuation disputes arise from aggressive EBITDA addbacks that don't survive buyer diligence. Dentists who prepare 12–24 months in advance—cleaning up financials, documenting addbacks properly, and reducing owner dependency—typically achieve meaningfully higher multiples than those who rush to market with messy books and hard-to-verify adjustments."
How To Calculate Your Practice EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. For dental practice sales, we use "adjusted EBITDA" which adds back owner specific expenses to show what a new owner would actually earn from the practice.
Step By Step EBITDA Calculation
Example Calculation
Start with Net Income: $180,000
Add back standard EBITDA items:
+ Interest expense: $12,000
+ Depreciation: $35,000
+ Amortization: $8,000
Add back owner specific items:
+ Owner salary above market ($350k paid, $180k market): $170,000
+ Owner health insurance: $24,000
+ Owner vehicle expense: $9,000
+ One time legal fees: $15,000
+ Above market rent to self: $18,000
Common Add Backs For Dental Practices
- Owner compensation above market rate. If you pay yourself $400,000 but a hired associate would cost $200,000, you can add back $200,000.
- Owner benefits. Health insurance, retirement contributions, and life insurance premiums paid by the practice for the owner.
- Personal expenses. Vehicle costs, cell phone, meals, and travel that benefit you personally rather than operations.
- One time or nonrecurring expenses. Lawsuit settlements, emergency repairs, relocation costs, or unusual expenses unlikely to repeat.
- Above market rent. If you own your building and charge above market rent, the excess can be added back with market analysis support.
- Family member salaries above market. If your spouse is paid $80,000 but performs $30,000 worth of work, you may add back $50,000.
Warning: Aggressive Add Backs Can Backfire
Every add back you claim will be scrutinized during buyer due diligence. Sophisticated buyers and DSOs challenge aggressive assumptions. If you add back $50,000 for "marketing that a new owner would not need" and the buyer disagrees, you lose credibility on all your other add backs. Be conservative and make sure each add back is defensible with documentation.
Typical Multiples By Specialty And Practice Type
Not all dental practices command the same multiples. Specialty, practice size, geographic location, and buyer type all influence what multiple applies to your adjusted EBITDA.
| Practice Type | Collections | EBITDA Multiple | Notes |
|---|---|---|---|
| General Dentistry | 65% to 80% | 2.0x to 3.0x | Most common; wide range |
| Pediatric Dentistry | 70% to 85% | 2.5x to 3.5x | Higher when Medicaid % low |
| Orthodontics | 70% to 90% | 2.5x to 4.0x | Recurring revenue valued |
| Periodontics | 75% to 95% | 3.0x to 4.5x | Referral networks key |
| Oral Surgery | 80% to 100%+ | 3.5x to 5.0x | Highest margins |
| Endodontics | 70% to 85% | 2.5x to 3.5x | Referral quality critical |
| Multi Location | Varies | 4.0x to 7.0x | Platform premium |
Platform premium: If you own multiple locations with centralized management, you may qualify for "platform" valuations from DSOs, which can reach 5x to 7x EBITDA. Single locations selling to DSOs typically receive "add on" valuations in the 2x to 4x range. This distinction can mean hundreds of thousands of dollars in value.
What Increases Your Practice Value
Buyers pay premiums for practices that reduce their risk and increase their confidence in future cash flows. Understanding these factors helps you position your practice for maximum value.
Strong Hygiene Program
Multiple hygienists keeping recall schedules full signals patient loyalty and recurring revenue. Practices with 3+ hygienists often command premium multiples.
Diversified Payor Mix
Higher percentage of PPO and fee for service patients versus Medicaid or HMO. Buyers are concerned about low reimbursement plan dependency.
Modern Equipment
CBCT, digital sensors, CAD/CAM, modern operatory chairs. Outdated equipment signals needed capital investments after acquisition.
Trained Staff Willing To Stay
Long tenured team members who will remain after sale. Staff turnover during transitions destroys value and damages patient relationships.
Favorable Lease Terms
Long remaining term with renewal options and reasonable rent. Short lease terms create buyer risk and reduce practice value.
Strong Online Reputation
High Google ratings with substantial review volume. Negative reviews or thin online presence concerns buyers about patient acquisition.
"The single biggest value driver we see in dental practice sales is reducing owner dependency. Practices where the owner produces less than 60-70% of revenue—with associate support and strong hygiene programs—sell faster and for higher multiples. Buyers have more confidence the patients will stay when the seller leaves. If you're 2-3 years from selling, hiring an associate now may be the highest-ROI investment you can make."
What Decreases Your Practice Value
Some issues are obvious to sellers. Others come as surprises during buyer due diligence. Understanding what reduces value helps you address problems before they cost you at closing.
Owner Dependency
If the practice cannot function without you, it has limited value to buyers. Practices where the owner produces 90% of revenue with no associate support are difficult to transition. Buyers fear significant patient exodus when you leave.
Common Value Destroyers
- Declining collections. Down trending revenue raises serious buyer concerns about patient retention and competitive position.
- Heavy Medicaid or HMO mix. Low reimbursement patients reduce margins and create uncertainty about payor landscape changes.
- Staff turnover or workplace issues. Buyers interview key staff during diligence. Unhappy team members can kill transactions.
- Deferred maintenance. Dated facilities, aging equipment, or building repairs needed become buyer negotiating leverage.
- Lease problems. Short remaining term, landlord conflicts, above market rent, or assignment restrictions complicate transactions.
- Compliance concerns. OSHA violations, HIPAA issues, or licensing problems create liability fears and due diligence red flags.
- Pending litigation. Patient lawsuits, employment claims, or contract disputes concern buyers regardless of merits.
- Concentration risk. Single referral source providing majority of specialty cases, or single insurance company dominating payor mix.
Concerned About Your Practice Value?
Get clarity on realistic value expectations and what you can do to maximize value before going to market.
Schedule Valuation DiscussionDSO vs Private Buyer Valuations
Who you sell to dramatically impacts both the price you receive and how that price is structured. Understanding the difference helps you evaluate offers and choose the right buyer.
Private Buyer Transactions
Individual dentists buying practices typically pay 65% to 80% of collections for general practices. They finance through SBA loans or conventional bank financing, which limits their ability to pay aggressive multiples.
Advantages: Simpler transaction structures, faster closings possible, often all cash at closing with minimal contingent payments.
Disadvantages: Lower headline prices, SBA loan requirements can be restrictive, buyer pool limited by available financing.
DSO Transactions
Dental Service Organizations often pay higher multiples but structure deals with equity rollover, earnouts, and employment agreements that complicate the actual value received. A "$3 million DSO offer" might actually deliver $2 million at closing with $500,000 in earnout payments over three years and $500,000 in equity you cannot access until the DSO sells.
Advantages: Higher headline valuations, potential equity upside in future DSO sale, operational support after transaction.
Disadvantages: Complex deal structures requiring sophisticated legal review, earnout achievement risk, potential loss of clinical autonomy, equity illiquidity.
Compare apples to apples: When evaluating a DSO offer against a private buyer offer, calculate the actual cash you receive at closing plus the risk adjusted value of any earnout or equity component. A $2.2 million all cash private sale may deliver more certain value than a $3 million DSO deal with uncertain components.
When To Speak With A Dental Practice Transaction Attorney
Practice valuation intersects with legal considerations that benefit from experienced counsel. Dentists should consider consulting with a dental M&A attorney when:
When To Consult A Dental M&A Attorney About Valuation
- Evaluating DSO offers — to understand how equity rollover, earnouts, and employment terms affect actual value received
- Comparing multiple offers — to normalize different deal structures for true apples-to-apples comparison
- Negotiating purchase price allocation — to optimize tax treatment between goodwill, equipment, and other asset classes
- Structuring earnout provisions — to ensure metrics are achievable and within your control post-closing
- Reviewing broker agreements — before engaging a broker to understand commission structures and exclusivity terms
- Planning 2-3 years ahead of sale — to structure ownership, operations, and financials for maximum value at exit
Jaffe Law PLLC represents dentists in practice sales, DSO transactions, and exit planning. Schedule a consultation to discuss your specific situation.
