Every buyer starts with the same question: how much is this practice actually worth?
The broker has a number. The seller has a bigger one. The bank will happily lend you either, which is exactly why you need your own.
The right price depends on the practice’s real profit, what it will cost you to replace the selling doctor, the lease, and whether you can keep doing the dentistry that produces the collections. We will walk through how we price a practice for a buyer.
What dental practices sell for as a percentage of collections
Most conversations start with price as a percentage of collections. A banker from Bank of America Practice Solutions told us on our channel that practices are typically priced somewhere around 70% to 95% of collections, with some upper-echelon practices priced right at 100% (watch the discussion).
The banker was also clear that valuing a practice is the broker’s job, not the bank’s. A percentage of collections is a quick screen, not a price.
The market around the deal matters too. Running costs keep climbing, financing is not as cheap as it was a few years ago, and many practices on the market need real investment to compete, so a lower asking price on a fixer-upper is not automatically a bargain.
Two practices collecting the same amount can be worth very different amounts to you. The difference is almost always in the profit, which brings us to what you are really buying.
You are buying cash flow, not collections
What you are really buying is the profit the practice will produce after you own it. That is why we value on EBITDA (earnings before interest, taxes, depreciation and amortization), and why you should look hard at how the seller’s EBITDA was calculated. We explain the metric in detail in what is the average EBITDA for a dental practice.
EBITDA can hide the fact that an owner is underpaying themselves. If the doctor’s salary is low, EBITDA looks artificially high and the deal looks like a smash hit.
Discretionary, one-time expenses distort it too. Continuing education, a family car or a one-off equipment repair can all move the profit number a broker hands you, so you need a deeper dive into the P&L to decide what gets added back.
How do you reverse engineer the right purchase price?
Do not value a practice off the broker’s “doctor’s discretionary income” number. It assumes you personally are the one producing, for free.
Instead, back out what the selling owner currently pays themselves and replace it with what you would actually have to pay an associate to do that same production. Whatever profit is left after a market-rate doctor is paid is what the practice really earns.
Here is the math from one of our buyer webinars. Say a P&L shows $200,000 in owner discretionary profit and the asking price is $800,000 (watch Omar walk through it).
If paying a doctor at market rate for that production costs $50,000 more than the seller pays themselves, the real profit is $150,000.
At the same multiple the seller used, you are getting about $600,000 of value, not the $800,000 on the listing.
You can run a first pass on any practice with our dental practice valuation calculator. Treat its answer as the start of the conversation, then put a real P&L review behind it, starting with the red flags below.
Red flags that change what you should pay
Let’s look at an example from a deal we reviewed. We had a buyer who sat with the seller, looked at the schedule, and saw it completely full and booked out for weeks. When we opened the P&L, the collections were not there, because a full schedule does not mean the money is being collected.
The other patterns we see in due diligence:
- The seller’s spouse runs the office for far below market pay, so EBITDA drops the day you hire a real office manager
- Strong new patient numbers, heavy marketing spend and flat revenue, which means patients are walking in the front door and out the back
- A multi-office seller running shared costs (lab, supplies, a rotating hygienist) through the office they are keeping
- Dirty books that make the practice look worse or better than it is
On that last one, we see sellers lose real practice value simply because their bookkeeping was cheap and wrong. Ask for production reports and clean financials the day you sign the letter of intent, not eight months into the process.
The lease and the equipment belong in the price
A practice lives or dies on its lease. If the seller is on a ten-year lease with no renewal rights and you are buying in year seven, you have three years left, and that has to be fixed with extension options before you close.
Watch for a recapture clause too. It can let the landlord take the space back instead of approving the assignment, and a lot of the value you are paying for can go with it.
Then price in what it will cost to make the practice viable. Buyers get emotional and forget the upgrades: equipment, digitizing paper charts, lease improvements and signage. If you do not add that real investment to the purchase price, you end up buying golden handcuffs, not a business.
The next question is whether the production itself comes with you.
Can you keep the production you are paying for?
If 40% of the collections come from implants or sedation and the selling doctor is taking that skill set with them, the production can drop fast. Look at production by procedure code and be honest about which of those procedures you will actually do.
The same goes for the team and the patients. A transition where the seller stays on for a period, introduces you to patients and keeps the team steady is worth more than a clean break, and the price should reflect which one you are getting.
Does bank approval mean it is a good deal?
No. Getting bank approval does not mean it is a good deal. The bank is strictly looking at your debt-to-income and your ability to pay the loan back, which is a good first box to check, but you have to look a lot deeper than that.
The same banker told us their acquisition loans are 100% conventional financing, and that most banks look to do that because dentists are so lendable (watch the discussion). That makes it easy to borrow for a practice that is priced too high.
A pre-approval is also tied to a specific practice’s numbers. A lender might pre-approve you for a large loan and then find that one particular practice only cash-flows a much smaller one. For the full financing picture, see dental practice financing: SBA, banks or private.
Buying a practice is the biggest financial decision most dentists make, and we built our dental practice purchase consulting around it: P&L review, deal structure, tax planning and a price you can defend.
Common Questions
What percentage of collections do dental practices sell for?
A Bank of America Practice Solutions banker on our channel described typical pricing around 70% to 95% of collections, with some upper-echelon practices at 100%. Use it as a screen, then value the practice on its real profit.
Should I use the broker’s valuation?
Use it as a starting point. Rebuild the profit yourself by replacing the seller’s pay with a market-rate doctor’s pay and removing one-time expenses before you agree to a price.
Is an asset purchase or a stock purchase better for a dental practice?
We almost always recommend an asset purchase. In a stock purchase you take over the seller’s entity, including its liabilities and its books, while an asset purchase lets you start fresh, and both sides report the price allocation to the IRS on Form 8594.
About the Author
Omar Virjee, CPA, CTC is the founder of Virjee Consulting, a CPA firm that works only with dentists. He and his team handle year-round tax planning, monthly bookkeeping and CFO work for solo and small-group dental practice owners across the United States.
Looking at a practice right now? Book a call with Virjee Consulting before you sign the letter of intent, and we will review the numbers with you.
If you liked this, you might also like: Buying a Dental Practice Checklist
