Health Care Practice Sales, LLC deals exclusively with dental brokerage transactions. Founded nearly a decade ago by a former dentist, our firm helps dental professionals sell their dental practice to appropriate buyers.  We have the necessary experience to guide both parties to a successful and satisfying conclusion.

If you’re a dentist who’s thinking of selling, the first question you’re probably asking yourself is “How much will I get when I sell?”

Price is What the Market will Bear

In any transaction, a business is only worth what a buyer will pay for it. The good news is the current business climate is very favorable for both buyers and sellers. Today’s millennial buyers would rather purchase a practice than start one from scratch.

Most new dentists will need financing, so part of what the market will bear will be determined by the amount the lender will lend. Another market constraint will be the dentist-service mix the new dentist is looking for. Luckily, there are formulas to guide us.

Three Market Valuation Formulas

This article will cover three formulas that will help you begin to measure the value of your practice. After years of doing business, we know dentists like to start evaluating on their own before they decide to engage a professional brokerage firm. As a first step, you need to become familiar with three formulas.

The three formulas are:

  1. Debt to service ratio
  2. EBIDA
  3. Dental hygiene production ratio

Debt to Service Ratio

The debt to service ratio formula determines the cash flow generated and available to pay the buying dentist’s debt obligations and expenses. The cash flow must cover operating expenses, repayment of the loan, and the buyer’s take home pay. Currently, banks like to see a ratio of 1.2:1. That means for every dollar paid toward expenses, the banks want to see $1.20 in income.

A healthy cash flow means a buyer should be able to make a good living even after paying back the bank. The debt to service ratio is the minimum the bank is looking for. The buyer will want a higher ratio that enables a take home of about 25 to 38%.

EBITDA

EBITDA stands for Earnings Before Interest, Taxes, and Depreciation Amortization. This valuation method is commonly used by private equity companies. Using this calculation, they’re able to offer more money to the borrower.

When private equity lenders arrive at the EBITDA, they multiply that factor four, five, six, seven or even more times to come up with their own internal value based on their own internal metrics. They can even offer above what the practice grosses if certain factors are present.

Private equity lenders generally only work with practices grossing over $1 million and who have associates. They also require the seller to stay on and work for a few years. Additionally, they want the accounts receivable at closing. Another caveat is they hold back 25 to 30% of the sale for three years with a yearly pay out based on profits and fulfillment of employment obligations.

Dental Hygiene Production

Today’s dental hygienists contribute significantly to the dental practice’s bottom line. As with anything else financial, there are metrics to consider. The benchmark for dental hygiene production, as a percentage of total production, should be between 30% and 33%.

Does this mean you have a problem if your dental hygiene production is close to 40%? Absolutely not. From our experience, a higher hygiene percentage is not only acceptable, it’s often desirable. Many buying dentists simply prefer a different doctor-service mix. Also, some dentists prefer to focus on maximizing production from the chair rather than just focusing on hygiene.

What About Good Will?

All the above formulas explain how to estimate the financial strength of your business. The cash flow formulas are especially important because cash flow drives the value of the business. Yet, when the dental practice valuation is complete, what the buying dentist is really buying is the good will.

Good will makes up 80 t0 85% of the purchase price and is made up of three factors:

  • Patient records
  • Staff
  • Doctor’s reputation

How is Good Will Valued

The dollar amount of good will is ultimately determined by the collections. According to banking experts, the collections are 90% of the value of the practice. You can expect to sell your dental practice for 60 to 75% of collections. As you can see, there is considerable range within the formula, and it takes an expert in dental practice appraisals to determine where your practice will fall within this range.

Why Do Good Will Percentages Vary?

The good will formula used in dental practice appraisals varies because the quality of collections varies. Buying doctors wants to be assured of at least the income selling doctors enjoyed. A deep look into the demographics and other factors of the patient lists are necessary to help buyers feel their potential earnings are secure.

Sellers also need to know they’re getting the maximum price for their practice. Sometimes they’re surprised when they see the numbers as they start to fall together. No matter how high the value is, most selling dentists would like it to be higher. Fortunately, there’s a way to do that. We can add back discretionary expenses and boost your value.

Adding Back Discretionary Expenses

“Add backs” are legitimate expenses that a dental professional has been legally allowed to take as tax deductions. Nonetheless, those expenses were discretionary and can be added back to the dental practice valuation.

Some examples of discretionary expenses are:

  • Owner’s salaries
  • Business trips
  • Office parties
  • Gifts
  • Subscriptions
  • Advanced training
  • Employment of family members
  • Insurance, such as health and life
  • Retirement funding
  • Other perks, such as auto expenses

 Other Factors That Contribute to Price

An accurate valuation involves more than formulas. Many other factors must also be considered. Among the first questions a buyer will ask is whether the office is computerized and if it has digital x-rays. It’s much harder to sell a practice that lacks these.

Physical plant space also plays an important role in whether a buyer gets excited or turned off. Many new dentists aren’t willing to do extensive renovations. A space that’s dated and worn out is much more difficult to sell.

Buyers need to know if the office is “fee for service” or PPO. Many buyers want to see a mix of both. They also want to know if there’s a significant percentage of Medicaid patients.

Summary

This article has explained three very important formulas used in creating a dental practice valuation. Learning about these will help you understand how a selling price is determined. Of course, these formulas are only a start. You’ll need to take a long hard look at the contributing price factors listed in the above section. No matter how many years you’ve been in practice, selling a practice requires a completely different skill set, knowledge, and experience.

Moving Forward

Hiring the team of experts at Health Care Practice Sales, LLC will make the process of selling your practice as easy and financially rewarding as possible.

If you’re interested in selling or buying a dental practice, you can email us at performdent@aol.com,  call us at 201-663-0935, or fill out our contact form for a dental practice valuation.

We know this is a big and important decision. It’s probably one of the biggest decisions you’ll ever make. We understand that. We’ve been through this ourselves and have guided many dentists through this crucial transition. We know you’ll be happy with our service.

If you’re still feeling unsure, please check out our testimonials page. There you’ll read about the wonderful experiences our clients have had using our services. We hope to hear from you when you’re ready to make your dental practice transition.