How Much Do Dental Practices Sell For?

How Much Do Dental Practices Sell For?

By Cecil Staton, Arch Financial Planning

When it comes to selling a dental practice, understanding its true value and potential market is crucial. As a dental-focused financial advisor at Arch Financial Planning, I’ve assisted numerous dentists in navigating this complex process. Whether you’re considering selling to a Dental Service Organization (DSO) or a private potential buyer, several factors influence the sale price of your practice. Let’s delve into the details.

DSO Sale vs. Private Buyer Purchase Price

One of your first decisions is whether to sell to a DSO or a private buyer. Both options for dental practice sales have their pros and cons, and the right choice depends on various factors, including the size and performance of your practice.

Dental Service Organizations (DSOs):
DSOs are typically interested in practices with substantial annual revenue. In the current market, practices with more than $1,500,000 in collections attract significant interest from DSOs. These organizations offer competitive offers due to their robust infrastructure and ability to streamline operations, often resulting in higher sales for larger practices.

Private Buyers:
For smaller practices, selling to a private buyer might be the more feasible option. A dental practice owner with annual collections under $1,500,000 generally sells for 60-100% of the prior year’s collections. The specific percentage depends on several factors, including net income, patient base, and practice location.

Factors Influencing Practice Value

Several key factors influence the value of your dental practice. Understanding these can help you achieve an accurate dental practice valuation and maximize your sale price.

• Net Income:
  Your practice’s net income is a critical determinant of its value. Higher profitability typically leads to a higher sale price.
• Annual Revenue:
  Your practice’s annual revenue or gross revenue provides a snapshot of its financial health. Practices with higher revenues generally attract more interest and command higher prices.
• Patient Base:
  The size and demographics of your patient base play a significant role. Practices with a large number of active patients and a steady influx of new patients are more appealing to potential buyers.
• PPO vs. Fee-For-Service:
  If the patient base has more PPO patients than fee-for-service patients, you’ll generally receive a higher value because the PPO patients are more tied to your office.
• Real Estate:
  Ownership of the dental office’s real estate can significantly impact the practice’s market value. If you own the real estate, it can either be sold with the practice or leased to the new owner.
• Intangible Assets:
  Intangible assets such as brand reputation, patient loyalty, and the quality of the practice’s staff contribute to the overall value and often enhance the perceived value of the practice.
• Profit Margin:
  A practice with a higher profit margin is more attractive as it indicates efficient operations and better future earnings potential.

Related Reading: How Dentists Can Maximize Income

Dental Practice Valuation Formulas

Dental practice valuation methods encompass several approaches to accurately determine the worth of a practice, with goodwill value being a critical component. Common methods include the income approach, which evaluates the practice’s future earnings potential by discounting anticipated cash flows to their present value; the market approach, which compares recent sales of similar practices to establish a benchmark; and the asset-based approach, which considers the value of tangible assets alongside intangible ones like goodwill. Goodwill represents the practice’s reputation, patient loyalty, and brand strength, contributing significantly to its overall value. It reflects the intangible benefits that a well-regarded practice offers, such as sustained patient referrals and community trust. Accurately assessing goodwill, alongside tangible assets and revenue streams, ensures a comprehensive and precise valuation, providing a clear picture of the practice’s market worth.

Valuation Methods & Valuation Process

Valuing a dental practice involves various methods, each considering different aspects of the business:

• Rule of Thumb:
  A common rule of thumb is that practices sell for a percentage of the prior year’s collections. While straightforward, this method doesn’t account for the practice’s unique attributes.
• Market Value:
  This method involves comparing recent sales of similar practices in your area. It provides a realistic view of what potential buyers might be willing to pay.
• Future Cash Flow:
  This approach estimates the practice’s future earnings, discounting them to their present value. It’s particularly useful for understanding long-term profitability.
• Business Valuation:
  A comprehensive business valuation considers both tangible and intangible assets, providing a detailed and accurate dental practice valuation.

Obtaining a dental practice appraisal is essential for understanding your practice’s financial performance and ensuring an accurate valuation by reviewing the dental practice’s earnings before interest, taxation, depreciation, and amortization (EBITDA). An appraisal provides a comprehensive analysis of total revenue, net income, and profitability, offering insights into the financial health of your practice. It also includes evaluating the capitalization rate, which reflects the risk and return associated with your practice. By assessing these factors, the appraisal helps you understand the true market value of your practice, guiding you in making informed decisions whether you’re planning to sell, merge, or simply optimize operations. An accurate valuation ensures you maximize the financial benefits and achieve your long-term professional goals.

Private Buyers (Dentist Selling to Another Dentist)

When selling a dental practice to another dentist, it’s common for the sale price to be valued between 60-100% of the prior year’s collections. However, most practices fall within the 70-80% range. This valuation considers various factors, including the practice’s net income, patient demographics, and overall market value. Private buyers are often young dentists looking to own their own practice and are attracted to well-established practices with a strong patient base and solid profit margins. These buyers typically perform due diligence to ensure the practice’s future earnings potential aligns with their investment goals. Therefore, presenting accurate financial records and highlighting the practice’s strengths is crucial to achieving a favorable sale price in this range.

For example, a private practice that makes $1,000,000 in collections will most likely sell for around 80% of collections or $800,000. If the practice is growing, in a desirable location, and has newer equipment, then the practice’s value should be higher. Alternatively, a young dentist could consider net profit as their preferred dental practice valuation method. The best way to understand the value of a practice is to look beyond gross income.

Related Reading: How To Buy A Dental Practice

Selling Your Dental Practice to a DSO or Private Equity Firm

For dental practices with collections exceeding $2,000,000, considering offers from Dental Service Organizations (DSOs) or private equity firms can be a lucrative option. DSOs and private equity firms have the financial resources and strategic interest to pay significantly more than many private buyers. These entities are particularly attracted to high-performing practices because they can integrate them into their larger networks, leveraging economies of scale and centralized administrative support to enhance profitability. As a result, they often offer competitive prices, sometimes well above the typical market value, reflecting the practice’s strong revenue and potential for future growth. If your practice fits this profile, exploring DSO offers can maximize your sale price and provide a smoother transition process, given their experience in acquiring and managing dental practices.

Here are the four common components of selling to a DSO, each playing a pivotal role in shaping the outcome of your transition:

Cash Consideration: The upfront payment you receive for your practice. It’s the immediate financial recognition of the value you’ve built over years of hard work.

Rollover Equity: An opportunity to invest a portion of your sale proceeds back into the DSO, allowing you to benefit from the collective success of the network. It’s a vote of confidence in the future growth of the organization you’re joining.

Earnouts: Tied to your practice’s future earnings, earnouts ensure that you’re rewarded for continued success and growth post-acquisition. This component motivates you to maintain a high standard of care and profitability.

Employment as an Associate Dentist: This allows you to continue practicing dentistry without the burdens of management. It’s an opportunity to focus on what you love—patient care—while benefiting from the resources and support a DSO provides.

Transitioning your practice to a DSO is a journey that requires careful consideration and planning. These components offer a framework for understanding and negotiating your deal, ensuring it aligns with your personal and professional goals.

Related Reading: Selling Your Dental Practice To A DSO

Rural Area vs. Populated City

Dental practice valuations can significantly differ based on whether the practice is located in a rural area or a populated city. In larger cities, the market can often be over-saturated with dentists, which can drive down the valuation of individual practices due to intense competition. Conversely, practices located in higher-income suburbs within these cities may command higher valuations due to a wealthier patient base and higher earning potential. In rural areas, while there may be fewer potential buyers, the lower saturation of dental services can also lead to higher valuations, given the limited competition and the essential nature of dental care. Ultimately, location plays a crucial role in determining the value of a dental practice, influencing factors such as patient demographics, demand for services, and overall profitability.

Preparing for Sale

To maximize the value of your practice, thorough preparation and due diligence are essential:

• Financial Records:
  Ensure your financial records are accurate and up-to-date. Potential buyers will scrutinize your financial statements to assess the practice’s performance.
• Patient Demographics:
  Analyze your number of patients and demographics to highlight the practice’s strengths. A diverse and growing patient base is a strong selling point.
• Real Estate:
  Decide whether to sell the real estate with the practice or offer a lease agreement. This decision can impact the overall sale price and buyer appeal.
• Marketing and Presentation:
  Present your practice in the best light. Highlight the positive aspects, such as modern equipment, a loyal patient base, and an excellent location.

Related Reading: Average Dental Office Overhead

Conclusion

The value of a dental practice depends on various factors, including its net income, patient base, and future earnings potential. Whether selling to a DSO or a private buyer, understanding these elements and preparing accordingly can help you achieve the best possible sale price. Arch Financial Planning specializes in guiding dentists through this complex process, ensuring you get the most value from your life’s work.

If you’re considering selling your dental practice, contact Arch Financial Planning. We’re here to help you every step of the way.

For more personalized advice on managing your dental practice’s overhead, feel free to contact me at Arch Financial Planning. Together, we can achieve your financial goals and secure the future of your practice.

Arch Financial Planning is a dental-focused financial advisor that helps dental practice owners nationwide. Be sure to read our guide and hire the right team of advisors who can assist with building and selling the practice you’ve built to empower your retirement plan. 

Related Reading: Tax Consequences of Selling Your Dental Practice

Disclaimer:

This website (the “Blog”) is published and provided for informational and entertainment purposes only.  The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as a description of services provided by Arch Financial Planning, LLC or Cecil Staton, CFP® CSLP®.

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