Dental Practice Valuations
When it comes to valuing dental practices, there’s a secret that doesn’t get talked about enough… brokers don’t set the values, banks do.
Most brokers in the dental space have a good sense of what a bank will lend for a certain practice upon initial review of the financials, and that’s the foundation for most valuations. The interesting part of all this though is that the lending space is fiercely competitive for your practice. Banks, especially those trying to gain a foothold in the dental market, often push the boundaries of values and lend more than what a practice might realistically be worth just to win the deal.
And we, as brokers, know this. We factor it in when we’re “painting the picture” of a practice’s value for everyone involved. Of course metrics like cash flow and overhead benchmarks are critical, but there’s a lot more to buying a practice than the numbers on a spreadsheet.
What this all means is that yeah a bank might loan you the asking price, but it doesn’t mean you’re not overpaying. It also works on the flip side, if a bank doesn’t see enough cash flow then it’s not worth what the broker has it listed for.
Main Street Deals vs Mid Market
In the world of dental practice transactions, there are two primary categories which I’ll refer to as main street deals and mid-market deals.
Most dental practice transitions fall into the main street category such as other small businesses. These are smaller, community based practices with annual revenue typically under a few million. In these transactions, valuations are often shaped by a mix of hard data and subjective factors such as:
• The practice’s reputation within the community.
• Location and patient demographics.
• Potential growth opportunities
Because of these subjective factors, there’s room for creativity. Brokers lean heavily on their ability to craft a compelling narrative that makes the practice feel like a smart investment. And they always love to say how many buyers they have looking, even when it has been available for months.
The other less common side for most dentists is the mid-market deals. These are larger, more complex transactions involving multi-location practices or dental groups. These deals often attract corporate buyers or private equity firms, and the stakes are higher. Think about practices and groups in excess of a few million dollars per year.
Valuations here are less about storytelling and more about data. Metrics like EBITDA, revenue multiples, and operational efficiency take center stage. The process is more structured, and buyers demand detailed financial analyses to back up the asking price.
For most solo dentists looking to buy or sell a practice, main street deals dominate and that’s where the “art” of valuation truly shines.
The Role of Addbacks in Valuations
One of the most crucial and often misunderstood parts of the valuation process is the use of addbacks. These adjustments can significantly impact the perceived profitability of a practice and by extension its value.
Addbacks are adjustments made to a practice’s financials to reflect the true earning potential for a buyer. They remove or “add back” non-recurring, discretionary, or owner-specific expenses that wouldn’t transfer to a new owner.
Examples include:
• Owner’s Compensation: If the current owner takes a higher-than-market salary, the excess is added back to reflect standard compensation for a buyer.
• Personal Expenses: Any expenses the owner runs through the practice (personal travel, vehicles, or family cell phone plans).
• One Time Costs: Non-recurring expenses like equipment upgrades or office renovations.
• Non-Cash Expenses: Items like depreciation and amortization, which don’t impact cash flow but are included in financial statements.
Addbacks help paint a more accurate picture of the practice’s cash flow and profitability for a potential buyer. They allow the buyer to see what they could realistically expect to earn after taking over the practice.
But here’s the catch, addbacks can also be a gray area. Sellers and brokers may be tempted to overinflate addbacks to make the practice look more profitable than it really is. Buyers need to scrutinize these adjustments carefully to ensure they’re justified.
How Brokers Paint the Picture
So how do brokers add that artistic flair to practice valuations? It starts with understanding what buyers want and shaping the narrative accordingly. Here are a few key areas where brokers “paint the picture”:
- Highlighting Growth Potential
Even if a practice’s current numbers aren’t stellar, a good broker will identify untapped opportunities. For example:
• A practice with outdated marketing might be framed as a goldmine for a buyer willing to invest in digital advertising.
• A seller who hasn’t expanded services (offering Invisalign or implants) could present an opportunity for a buyer to increase revenue. - Framing Weaknesses as Opportunities
No practice is perfect, but how those imperfections are framed makes all the difference.
• Outdated equipment. Instead of being a downside, it’s an opportunity for the buyer to modernize and attract more patients.
• High staff turnover. Framed as a chance to bring in fresh talent and shape the team culture.
• High rent. Spoken to the location and visibility within a certain area. - Leveraging Community Goodwill
The intangible value of a practice’s reputation can’t be overstated. A well loved practice in a tight knit community is often worth more than what the spreadsheets suggest. Brokers use this goodwill as a selling point, emphasizing the relationships the practice has built with its patients.
The Role of Banks in Practice Valuations
As much as brokers play a role in shaping valuations, the ultimate gatekeepers are often the banks. Here’s why:
• Banks determine lending limits. The maximum loan amount a buyer can secure often sets the ceiling for what a practice is worth in the current market.
• Market competition among banks. Some banks, eager to grow their dental portfolios, may stretch their lending criteria to win deals, effectively inflating practice values.
• If a bank won’t go up to the asking price, a broker will typically suggest additional cash from the buyer or a portion of seller financing.
This creates a dynamic where brokers and sellers are incentivized to present practices in the best possible light, knowing the bank’s appetite for lending can sometimes surpass the practice’s true intrinsic value.
Why Most Buyers Pass on the First Few Practices
It’s not uncommon for buyers to pass on one or two practices before finding the right fit. And often, it’s because something doesn’t add up in the valuation.
As a broker, my role isn’t just to help buyers find a practice, it’s to educate them on what’s really going on behind the numbers. For example:
• Cash Flow Analysis: Does the practice have enough cash flow to comfortably cover loan payments and still provide a livable income?
• Hidden Costs: Are there deferred expenses that will impact profitability in the near future?
• Unrealistic Growth Projections: Are the seller’s growth projections based on real opportunities or just wishful thinking?
By digging into these details, I help buyer clients avoid costly mistakes and find a practice that’s truly a good fit in reality, not just on paper.
Key Takeaways for Buyers and Sellers
For Sellers:
• Be prepared to work with your broker to tell the best possible story about your practice. Highlight its strengths, address its weaknesses, and showcase its unique value to potential buyers.
• Understand the role addbacks play in shaping your practice’s value and be transparent about what adjustments are legitimate.
For Buyers:
• Scrutinize addbacks to ensure they’re reasonable and accurately reflect the practice’s earning potential.
• Work with a broker who will help you see beyond the surface and identify the real value of a practice.
The Bottom Line
Practice valuations are a mix of art, science, and even a bit of theater. For most dental transitions, the narrative plays a huge role in shaping perceived value. But whether you’re buying or selling, understanding the balance between the numbers, addbacks, and the story is key to making informed decisions.
If you’re navigating a dental transition, I can help. My process goes beyond valuations as I focus on educating my clients, digging into the details, and uncovering the truth behind the numbers. Let’s work together to find the right practice or the right buyer for you.
Kyle Womeldorff
480-690-5200
info@dentalbroker.com
Check out the video I made on this topic here: The Art of Dental Practice Valuations – YouTube
Download my free Dental Transitions Playbook here: Copper Dental Transitions – Start. Buy. Grow. Sell.