As a dental practice owner, your business is one of your largest assets, though you may not know how much it’s worth. Attempting to calculate operating expenses and annual gross collection numbers—not to mention determining practice value fluctuations while juggling new patients and dental office staff—can feel overwhelming. If you’re considering a dental practice transition, you’ve come to the right place.
At Weave, we want to help you determine the value of your dental practice so that you can make an educated decision. So how much do dental practices sell for?
If you’re interested in finding ways to streamline your practice ownership and increase patient retention, consider our comprehensive Weave platform that helps you manage everything from payments to appointment scheduling.¹
How Do You Value a Dental Practice?
Different formulas exist for valuing your dental practice. Whether you’re a young dentist or established practice, you can use one of these methods:
Income-based valuation: You can calculate your capitalized earnings by averaging the practice’s net income over the last few years and dividing that figure by a cap rate of 25% to 31%.
Market-based valuation: This method uses market data from local competitors but doesn’t account for profits, risks, and other factors.
Net asset valuation: Asset valuations consider all tangible assets in your dental service organization plus intangible goodwill assets. Because dentistry is so service-oriented, this method doesn’t adequately capture a reliable value, so we recommend combining it with other information.
Every method has pros and cons, so you should use multiple angles to find the most accurate dental practice appraisal.
The Dental Practice Valuation Rule of Thumb
Before diving into piles of paperwork and complex equations, we recommend using a quick formula to obtain a broad dental practice value estimate to understand your potential buyer landscape better. You can use the following methods to determine a quick, estimated value.
Gross revenue method: Your dental practice values at 70% of its gross revenue
Net income method: Your dental practice’s estimated value equals one times your net income
The calculations above will only provide a vague insight. For example, imagine that two similar dental practices each collect $1 million, though one has an overhead of 70%, while the other is 50%. The gross revenue method would value each business at $700,000, though the practice with 50% overhead has a larger profit, making it more valuable.
Less costs equals more revenue.
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Considerations When Using a Dental Practice Valuation Calculator
Because every business is unique, we can’t offer a one-and-done formula for perfect value estimates. Instead, we recommend considering the factors below when using any value calculations so that you can better understand which aspects impact your practice’s value the most.
- The practice’s annual revenue
- Unnecessary expenses (parties, business trips, etc.)
- Equipment age and value
- Gross income and net income
- Growth potential
- Physical building renovations or improvements
- Demand level and cost of living in your location
- Existing patient base
- Local reputation
- Total employees on the payroll
After considering the above information, you can better gauge which valuation formulas will offer your business the most realistic depiction. For example, if you have a lot of outdated equipment, the net asset method may undervalue your practice.
Dental Practice Valuation Multiples
Valuation multiples, or market multiples, are ratios that help you compare various financial metrics related to your existing dental practice.
Revenue multiple: This refers to the revenue sales a business makes versus the price at which the business sells. Multiply your practice’s revenue by 0.65 to determine its approximate worth.
EBITDA multiple: The EBITDA formula starts with adding your earnings before tax, interest, depreciation, and amortization to measure your practice’s ROI. Next, multiply this figure by 1.63 to determine the estimated EBITDA value for the dental practice sale.
Seller’s discretionary earnings (SDE) multiple: The SDE multiple begins with the EBITDA ROI figure, though you can subtract any potential expenses that the average dentist wouldn’t choose to purchase. Next, multiply the SDE figure by 1.7 to understand the estimated value.
Dental Practice Valuation Worksheet Sample
1. Add current cash assets and total fixed assets.
2. Subtract the estimated fair market value adjustments.
3. Add your estimated intangible goodwill assets to the final number.
Calculate capitalized earnings:
1. Average the practice’s net income from the last few years.
2. Divide net income by a cap rate between 20% and 30%.
Calculate average annual earnings:
1. Start with your practice’s earnings from the past three years.
2. Analyze local percentages for similar dental practices.
3. Multiply earnings based on the above analysis.
Calculate discounted cash flows:
1. Forecast estimated cash flows of net income for the next ten years.
2. Discount that figure based on estimated capital and risks.
Calculate annual net receipts:
1. Calculate a percentage of the average net receipts over the last few years.
2. Use market data information from similar dental offices.
3. Use the discovered percentage to discount your figure.
Do You Have Dental Practices for Sale?
Purchasing or selling dentist-related real estate can feel challenging, especially considering the complex research and equations above. Dental brokers can help with the sale end of the transition.
Understanding complexities that make a general practice vary from specialty offices, like oral surgery, can help you better estimate values. Whether you’re an average office that’s part of the American Dental Association needing help with the transition, or a qualified buyer seeking a new dentistry investment, a professional broker can help you through each step.
What Percentage of Collections Do Dental Practices Sell For?
Regarding how much dental practices sell for, the general sales price is 60% to 80% of their annual revenue. In collection percentages, orthodontics and pediatric dental practices remain the most valuable, with periodontics practices coming in at the lowest averages.
Note that this valuation method doesn’t provide a comprehensive view of the value of your practice, so you should use your resulting figure with other calculations for the most accurate estimate.
What Is the Average Revenue of a Dental Practice?
According to the Income, Gross Billings, Expenses, and Characteristics survey from the Survey of Dental Practice Report, the average general dentist earns a net income of $170,160, while the specialty average is $323,780.²
While each dentist or owner may make well above six figures, estimating the average practice’s average revenue is more complex since you must factor in many variables. Practices with additional dentists can generate more profits, though you must consider the added overhead and other fees. Certain dentistry specialties also receive higher revenues because they charge each patient more for their services.
Dental practice owners must understand the value of their business to predict growth trends, buyer behaviors, and more. If you’re interested in keeping your business and increasing its value, consider making some changes from within.
At Weave, we want to help you streamline your dentistry organization so that you can attract more patients, increase profits, and continue flourishing. For more information on how our platform can help your practice, call us today at 833-572-2139 or request a Weave demo by filling out our online form.