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US Dental Transitions has been providing formal dental practice valuations since 1998. These valuations are based on cash flow, marketability, transferability of staff and patients, equipment and various other criteria that are required for a purchaser to make a knowledgeable purchase offer.

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4 Methods for Valuing a Dental Practice

Determining the value of a dental practice is often subject to misconceptions and differences of opinion. Some dentists believe their practice is worth an average of 70% to 80% of their last three year’s collections. Others think it’s a simple multiple of 1.5 times their net income. To best understand how to value a practice, below are three dental practice valuation methods that are commonly used today.

Rule of Thumb Valuation Method

Rules of Thumb are generalizations of what has been happening in the market as well as what is expected to happen in the market. Rules of Thumb do not consider specific elements of the practice being valued, but they provide a wider perspective to the dental practice value process.

Due to lack of specific comparisons, Rules of Thumb cannot assure an accurate value of a practice. The most important consideration when using a Rule of Thumb is the accuracy of the information provided. Sellers commonly state, “I understand that practices are selling for 80 percent of gross.” Or, “I understand that practices are selling for 1.5 net.”

The only way to validate the accuracy of a Rule of Thumb is to evaluate enough actual market data to begin to see a legitimate trend, but the data must be relevant to your specific dental practice. In other words, if yours is a specialty practice, apply data from other niche practices like yours.

Determining the value of a dental practice is complex, and the cause for the valuation determines which method the appraiser utilizes. If litigation is necessary, a valuation is needed for estate planning or selling a practice. Be sure to select a qualified party with the experience and market resources to provide a supportable valuation.

If you’re curious as to what your practice is worth, use a Rule of Thumb – probably between 75 percent and 95 percent of gross (on a $700,000 gross revenue, value between $525,000 and $665,000. For a swing of $140,000, it’s probably worth getting a legitimate dental practice valuation).

Focusing on market reality minimizes much of the “tug of war” between buyers and sellers. Often, the buyer and correlating representatives think the appraised price is too high, while the seller and his/her representatives think the price is too low. If the price of your practice is in line with comparable sales of practices, and the terms enable profitability for the purchaser, then it’s likely that the price will be considered equitable by a prospective purchaser.

Market-Based Valuation Method

The Market Approach simply compares your dental practice price with other nearby dental practice sales that recently sold. The theory behind this method is that a ready, willing, and able buyer paid a seller a certain amount of money for a practice and neither party was under duress.

Major Market Factors:

(1) AREA DESIRABILITY: Macro-geographic areas (small town vs. metropolitan areas) and micro-geographic areas (one area of a city vs. another) contribute to nearly identical practices selling for widely different prices. For example, practices in “high growth” areas typically sell at a higher price than “low growth” areas. In general, practices located in large urban areas are in greater demand than the suburbs, and practice values proportionately decrease the further out a practice resides. (Some coastal areas are an exception.) In addition, a dental practice sale’s price is directly related to areas with higher per capita income.

(2) PROJECTED PROFITABILITY: Projected profitability is based on past and present practice figures. Although it is difficult to sell future practice potential, any “windfall” profitability perceived by the purchaser will only enhance the potential selling price. Examples of potential “windfall” profits include specialty procedures such as endo, ortho, perio, implants, pedo, and other procedures that are referred out routinely to specialists rather service as “in house.” Although we are not able to translate potential into a specific dollar value, it can increase the likelihood of a sale at the desired price.

(3) SELLER FINANCING: The Seller’s willingness to finance a large part of the purchase price can often make an immense difference in the final selling price. This financing is preferably at a fixed interest rate and for a longer term than the usual bank financing.

(4) EXISTING EQUIPMENT AGE: Equipment value depreciates rapidly soon after its purchase. Overtime, it is less of a factor when determining overall practice value, especially in established practices.

Cap Rate Valuation Method

The capitalization rate, or “cap rate”, is a percentage that determines the final value of a dental practice and is calculated by dividing earning by cap rate. Selecting the cap rate is market driven and reflects current economic and industry conditions, such as interest rates, inflation and the outlook for the profession and the community.

The most common method for determining the cap rate relies on a valuation of the risk factors that go into investing in a dental practice versus other investments. Most risk factors associated with the purchase of a dental practice versus the purchase of some other type of business are generally low, and the risk tolerance of each individual investor is, to a large extent, a personal matter. Common risk factors to consider when evaluating the cap rate used in the valuation of a dental practice are:

  • Practice productivity trend
  • Number of dental offices in a 5-mile radius
  • Transferability
  • New patient flow
  • Years in practice in the area/years at current location
  • Overall office appearance
  • Age/quality of equipment
  • Existing or future lease and terms
  • Seller/bank financing
  • Local economic outlook
  • Other practices for sale in the area
  • Staff attitude/turnover/skills
  • Office Systems
  • Accounts receivable/collections policy
  • Parking/office access

Most appraisers use their knowledge of the market, the demographics of the community and the practice data to select an appropriate cap rate. The range of cap rates used to value dental practices varies from 18 to 35 percent, the lower rate representing less risk, and the higher rate representing greater risk.

It is also important to note that the cap rate only reflects the return on investment. It does not consider the fact that the new owner works in the practice to contribute to the overall gross collections. Selection of the cap rate is the most subjective process in the approach to determining the value of a dental practice.

EBITDA Valuation Method

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is calculated using a company’s adjusted earnings, (adjusted earnings may include a dentist’s personal expenses that are run through a practice like an automobile) before interest expenses, taxes, depreciation, and amortization are subtracted, as a measure for a company’s current operating profitability. In dentistry, EBITDA represents the profit an investor or group would earn if an associate dentist produces the dentistry.

The EBITDA valuation method relies on a multiple of EBITDA to arrive at a company’s value. Dental practices are commonly sold for a multiple that ranges from 4 times EBITDA, to (in some rare case) 15 times EBITDA or more. There are multiple factors that contribute to the multiple used when valuing a practice or group of practices.

Value = Multiple x EBITDA


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Net Profit 40% to 50%    30% to 40%    20% to 30%
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Dental Practice Valuation FAQs

What is a dental practice valuation?

A dental practice appraisal or valuation is an in-depth analysis of a practice’s cash inflows and outflows. A third party, non-biased valuation of your dental practice reduces the time spent on negotiating a sales price. It also helps the purchaser decide if the price is fair based on current market conditions and aids the financing process.

How much does a dental practice valuation cost?

Dental practice valuation costs vary from company to company. While valuation costs may start at $2500, make note that not all valuations are created equal. Once our team receives the necessary documents, our analysts will carefully review the financials, construct a Cash Flow Analysis, and work with you and your team to identify all personal and one-time expenses. Once finalized, the appraisal document is bound and mailed to the doctor.

What’s the difference between a dental practice valuation and appraisal?

A dental practice appraisal is a formal monetary assessment needed to put your practice on the market, whereas a valuation is an estimate based on certain aspects of your dental practice.

Is a dental practice valuation necessary when purchasing?

It’s only necessary if you want to ensure you are paying a fair price or receiving a fair price for a practice. A formal dental practice valuation based on cash flow, market conditions, transferability, and various other criteria is needed for a buyer to create a valid purchase offer. In the absence of a formal valuation, price becomes the most heated and emotional topic of negotiation and often kills the deal. Items considered in the suggested practice value include: location, staff transferability, cash flow, included equipment, office procedures and transferability of patient records. Buyers will need this information for purchasing the practice, and mortgage companies and banks routinely require a practice valuation to process the loan. US Dental Transitions has been providing formal dental practice valuations since 1997, and we would be happy to help you with a valuation.

What factors affect the valuation of a dental practice?

Economic Variables

One of the more obvious steps in appraising your office is comparing your costs and amenities with other practices. You need to consider the age of your equipment, profitability, and salary expenses.

Recent graduates make up a large percentage of the buyer base for a new practice. Most of these young potential buyers have been trained on modern, state-of-the-art equipment. The older your equipment is, the lesser the value.

You can be one of the busiest practices in your area, but if your overhead is eating up all your profitability, it will negatively impact your sale price. One of the largest portions of your overhead will be employee salaries.

While it is important to have a good staff, you need to maintain a balance with your operating cost and revenue. Dental education is an expensive endeavor. A profitable practice will allow your buyer to feel comfortable attaining an acquisition loan while also maintaining a comfortable salary. This assurance will greatly increase your office’s value.

Office Location

Unfortunately, the market value of practices is inconsistent across the country and sometimes even from city to city. However, understanding the market in your area is one of the most important factors in evaluating your practice.

In highly populated areas, practices can sell for multiples of 90 to 100 percent of the previous year’s gross revenue, but in less populated areas, identical practices could go for as little as the 40 percent mark. Researching these numbers in your area is crucial to finding an appropriate value for your office.

Patient Base

Assessing your patient base isn’t as simple as, “I have ‘x’ number of patients.” There are numerous patient statistics that contribute to the worth of your practice. In addition to your total number of patients, you also need to consider the rate at which you are acquiring new patients, your retention percentage, and the average age of your clientele. A practice frequently growing with young, new patients is more valuable than an office that is surviving off the same customers they’ve had for a decade.

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