How will rising interest rates impact the value of dental practices?

When interest rates rise, money gets more expensive and the value of assets decline.

Take as an example the real estate market: as interest rates increase, home values typically decrease. There is, however, some good news for dental practice owners. Dental buyers are still getting preferential interest rates because dental practices are historically a safe investment. Therefore, the value remains strong.

When we look at dentists who are interested in selling their practice, we see two distinct groups: doctors who manage their practice’s EBITDA and those who don’t.

If you are looking to sell to a solo practitioner, the value of your practice will most likely be based on Seller’s Discretionary Earnings (SDE). In simple terms, SDE are all the benefits you receive from the practice by running personal/one-time expenses such as auto, health insurance, pension, trips to Costco, etc., through the business. These “expenses” combined with owner compensation = SDE. Practices valued this way typically sell for 2 times SDE. If your practice collects $1MM and your SDE is 40% (or $400K), you can expect a sales price of $800,000.

If you are looking to sell to a group or DSO, you may already be familiar with EBITDA. EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. In simple terms, it’s the net profit of the practice. While EBIDTA may take into consideration adjustments for personal/one-time expenses, it does not make an adjustment for owner compensation. Sellers who understand and manage their EBITDA will get a higher value for their practice. Buying groups determine your practice’s value by multiplying the EBITDA by a multiple. If your practice collects $1MM, your EBITDA target should be 20% (or $200,000) for a general practice. If the buyer multiplies your EBITDA by 5.5, then your offer will be $1.1MM.

Gone are the days of multiplying collections by 75%. We encourage dentists to explore their transition options and have an understanding of SDE and EBITDA. Regardless of your transition goals, early planning is key to maximizing the value of your practice.