Your dental practice isn’t worth 60-85% of collections or 6-12x earnings before interest, tax, depreciation, and amortization (EBITDA). It’s worth what someone is willing to pay for it.
I was an economics major in college and always loved supply and demand graphs. They began in equilibrium, where supply and demand intersected. Then, there would be a shock to the system: an increase in demand. That shock would shift the demand curve out and with all other things held constant (ceteris paribus), the equilibrium price would increase. Thus, an increase in demand with supply held constant resulted in a price increase. Simple. Elegant. Straightforward. These basic principles apply to today’s dental practice valuation world more than ever.
Yes, your practice or Group/DSO’s value is rooted in valuation theory, but there’s more to it! To determine the baseline value of your business, you need to work with an Advisor who can provide you a valuation based on an Income Approach to Value (Discounted Cash Flows or Capitalization of Income). A Comparable Sales Approach to Value is appropriate when relevant, recent comparable sales data exists. Even so, these two methods only provide a starting range.
The true value of your dental practice will be driven by demand. Drivers of demand include but are not limited to:
- Cash Flow / Net Income / EBITDA
- Total Collections
- Product Mix
- Payer Mix
- Current Fees
- Fixed Assets
- Curb Appeal
- Number of Buyers
- Number of Dentists
- Availability of acquisition dollars (debt markets and interest rates)
- Your flexibility around working post-sale
- The story of the business and what success lies ahead
- State regulations
- Your acquisition pipeline
- Legal Structure
- And many, many more…
We all know that there’s more interest and investing activity in the dental economy now than ever before. There are numerous DSOs and Groups looking to buy practices, and dental schools are graduating more and more dentists each year, the vast majority of whom desire to be independent practice owners.
Through constant contact with buyers, we know that most are looking to acquire general dental practices with the following characteristics: collections between $750,000 and $1,200,000; five or more operatories; and highly visible locations. If this describes your practice, then the demand for your practice could be twice that of others. And if that’s the case, shouldn’t this information be reflected in the price of your practice? Sadly, too many Advisors and Brokers ignore the simple principles of supply and demand when working with their clients.
When you decide to sell your dental practice, it’s imperative that you work with an Advisor or Broker who can tell the story of your business to position it in the best light possible, in front of the greatest number of buyers. Your Advisor should know the buyers in the market as well as what they are looking for in a practice. They should work with you on setting the price for your practice based on Valuation Theory and Demand Drivers in the market. There is no magic number or multiple that will provide you the answer to that age-old question when you are looking to sell your practice to a third party. That number can only be realized when supply meets demand and equilibrium is realized.
At the end of the day, the principles of supply and demand, and the theory of valuation serve only as a guide. What matters most to the seller is getting the best possible selling price for their life’s work at the lowest commission rate possible. The real value to them is the cash in their bank account.
Have questions about selling your dental practice? Comment below.