June 7, 2020

Discover Your Accurate Dental Practice Valuation to Make Smarter Transition Decisions

dentist office

Why A Professional Dental Practice Valuation Matters

Understanding your accurate dental practice valuation is crucial for planning your next steps, whether you’re planning to sell, expand or optimize operations. A formal valuation from Professional Transition Strategies provides a detailed financial snapshot to guide strategic decisions and make informed choices about your practice’s future.

Your comprehensive practice prospectus will highlight your practice’s financial health, identify growth opportunities and lay the foundation for a successful transition – whether you’re considering a sale to an individual buyer, affiliating with a Dental Support Organization (DSO), expanding your footprint or bringing on a partner.

Whether you’re looking to sell all or a portion of your practice or just want to know what the health of your practice is, it’s smart to obtain a prospectus. You’ll better understand your options, so you can make an educated decision based on fact in addition to having a good understanding of where you are and gaining a clear line of sight as to how to reach your goals.

Fair market value, according to IRS Rev. Ruling 59-60, 1959-1 C.B., is defined as, “the price at which a property would change hands between a willing buyer and a willing seller when the buyer is not under any compulsion to buy and the seller is not under any compulsion to sell, with both parties having reasonable knowledge of the relevant facts.”

Source: Dental Economics – Analysis of 46 practice valuations

Key Takeaways:

62% higher value on average with professional appraisal vs. 0.8x revenue rule
27 out of 46 practices were undervalued by $1M+ using simple multiples
Professional valuations consider profitability, growth potential and market conditions

Key Metrics for Dental Practice Valuation: SDE vs. EBITDA

One component included in evaluating a practice is the adjusted earnings before interest, tax, depreciation, and amortization (EBITDA). Put simply, EBITDA measures the practice’s operating performance and determines sustainable cash flow. Adjustments to doctor’s compensation, P&L, personal and one-time expenses and net income of the practice are added together to achieve adjusted EBITDA.

At PTS, we also take into consideration who the buyer will be. For example, the fair market value of a practice being sold to an individual will oftentimes be very different than the value of being sold to a DSO or private equity. This difference is often reflected in the market multiples applied to your practice’s earnings. The reason for the difference is that the value revolves around the limitations on what a bank will lend to an individual vs. the buying power for a group or fund. With our market knowledge and industry expertise, we are experts at delineating the two and presenting accurate values for each type of buyer.

Source: McLerran & Associates Industry Analysis (May 2024)

Key Takeaways:

Private buyers: Pay 70-85% of annual revenue consistently
DSO acquisitions: 6-9X EBITDA (150% – 300% of revenue)
DSO cash at close: 60-80% with remainder held back
Practice size matters: $1M+ revenue required for DSO interest

How Different Factors Impact Your Dental Practice Valuation

How does owning vs. leasing my office affect valuation?

Owning gives you the option to sell the property with your practice for a larger upfront payout or lease it to the buyer for long-term income. The right choice depends on your financial goals and willingness to manage the property post-sale.

Our real estate experts are here to advise you every step of the way.

Do insurance models impact practice value?

Yes. Fee-for-Service (FFS) practices typically earn the highest valuations due to predictable revenue. PPO practices remain attractive – especially when your reimbursement rates are optimized.

Medicaid participation can lower valuation due to lower rates and added complexity. But, at the end of the day, well-run practices still attract buyers.

How can I improve my insurance mix before a sale?

Consider working with seasoned dental practice brokers to understand how your current insurance mix influences your practice’s value by having a formal prospectus of your business performed.

Then, work with experts to explore ways to renegotiate your reimbursement rates, and determine if dropping low-performing plans is advantageous to increase your profitability

Does equipment affect valuation?

Advanced equipment like CBCT or CAD/CAM can boost value, but most buyers focus on cash flow. Outdated tech may reduce valuation if upgrades are needed.

Should I invest in new equipment before selling?

Not necessarily. Upgrades only add value if they improve buyer interest or operational efficiency. An experienced dental practice broker will be able to assess your current equipment and advise on if you should make upgrades.

How does debt affect my practice’s value?

High debt or unresolved legal issues can definitely hurt your valuation. Paying down debt, staying on top of taxes and eliminating liabilities can make your practice more attractive.

There are many factors used in calculating the value of your practice. At Professional Transition Strategies, we use the most hollistic approach of calculating your practice’s worth by looking at both attributes and challenges and how they have impacted the success of the practice.

Factors used in determining dental practice value

The practice’s location, visibility and population of city or town
Type of medicine or dentistry, revenue sources and active patient base
Growth potential
Patient attraction and retention rates
Reason for sale of practice
Projected patient and revenue retention after the sale
Condition and age of medical and dental equipment based on wear and tear, as well as technical advancement
Office decor and condition
Long-term trends of the practice’s revenue and profit margin

The value determined by analyzing the information listed above, as well as financial information, will be the best indicator of what a practice can garner on the open market. It is important to note that in most cases, this valuation will not include the accounts receivable (A/R) of the practice, cash on hand and any other bank or cash accounts, as well as the practice owner’s belongings, marketable securities, real estate or vehicles, if any.

I’m ready to proceed with a practice valuation. What do I have to do?

The typical information collected to create a dental practice appraisal includes:

Three years of profit-and-loss statements
Three years of tax returns
Current balance sheet
Production broken down by provider
Production broken down by procedure type
Total active patients
New patients per month for the past 12 months
A/R aging report
Copy of current lease (if applicable)
Employee roster with hire dates and hourly wages and benefits
Website
Lists of insurance plans the practice accepts

Please note nearly all information can be run on your practice management software or accounting software, as well as your certified public accountant (CPA).

What other factors affect valuation across dental practices?

It is also smart to be aware of the type of dentistry performed based on the composition of the production. For instance, is the practice hygiene heavy, is it a bread-and-butter practice, is there a lot of specialty work performed in the practice, or is it primarily referred out?

One thing that is not included within a valuation is A/R. The A/R can be sold separately or not at all. The final sale price will therefore be the practice valuation plus any accounts receivable purchased at closing. The reason A/R is not incorporated into the value is that it changes by the day, hour or even minute. Therefore, the value of accounts receivables will be determined the day of closing.

Should you be seeking a prospectus for your dental practice because you plan on selling all or a portion of your practice, it is important to note that while the previous three year’s financials are included and trends are analyzed, the most recent year is what the valuation is primarily based on. This is one of the many reasons it is advised to consider a transition during a peak in your production rather than after you’ve slowed down and decreased the value of your practice.

How to Increase Your Practice Value ASAP

1. Streamline Operations

Reduce inefficiencies and ensure all systems are well-documented.

2. Boost Your Online Presence

Encourage positive patient reviews to add credibility to your practice and attract new patients.
Maintain an informative, high-converting website that encourages new patients to move to your practice.

3. Secure Your Patient Base

Show consistent patient retention and growth to make your practice more attractive to buyers.

So, who’s interested in a practice with strong average annual growth?

Just as there are different transition types, there are also different types of buyers, as mentioned before. To ensure you have all the information you need to decide the right strategy for you and your dental practice, it is advised to understand the difference in value from an individual receiving a bank loan compared to a larger DSO with private equity backing.

When conducting practice valuations, we employ multiple methodologies to ensure accuracy. While some buyers focus primarily on a revenue multiple, others may emphasize the excess earnings method or discounted cash flow analysis. As specialists in the healthcare industry, our advisory team combines these approaches to generate the most accurate and defensible valuation. This comprehensive appraisal method ensures you receive maximum value whether selling to an individual doctor or a dental service organization.

Unfortunately, unlike basic real estate, there is not a multiple listing service (MLS) or a centralized database of dental practices previously sold. This is one of the several reasons you should have professional practice appraisals completed for your practice. As noted, business magnate and philanthropist Warren Buffett says, “Managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.”

Know Where you Stand. Start With a Professional Valuation Today!

A professional dental practice valuation from the team at Professional Transition Strategies gives you the clarity and data you need to make informed decisions about your future. Whether you’re exploring a sale, partnership, or just want to better understand your financial position, our valuation process provides the insights to move forward with confidence.

Begin Your Practice Valuation Today.

May 13, 2020

DSO Navigation Webinar: Critical Success Factors Revealed

Click here to learn more about the dental service organization (DSO) landscape and how they are impacting the dental industry. Listen to Professional Transition Strategies Founder and President Kyle Francis and Practice Consultant Kim McCleskey answer some of the most common DSO questions, such as:

What is a DSO? Why do they exist?
What do they do? How are they funded?
Why did they get a bad name?
Are they good or bad?
Should you work with them directly?
What does competition do to offers? Why is leverage important?
What is a “silent partner”? What are the differences between a DSO, DPO and DSP?
What are the biggest pitfalls we see?
Should you create your own?

April 20, 2020

How to Handle Employment of Your Dental Practice during COVID-19

During these uncertain times, it’s impossible to predict when things will go back to the new normal and what that will look like. As a business owner, it’s important to plan for all scenarios while also doing what’s best right now. If you’ve had to shut down shop temporarily, here’s how to handle employment at your dental practice during COVID-19.

Consult HR

Whether you’re operating under a dental service organization (DSO) or as an individual practice, human resource (HR) companies exist for a reason. Is it better to lay off or furlough employees with the expectation of coming back? Should you find work for them to do part-time from home? An HR expert will have answers to all these questions and more, so take advantage of their services.

Review state labor laws

State labor law websites are constantly being updated with new rules for unemployment and paid time off. Because each state has its own set of guidelines that are evolving with the current climate, it would be impossible to list all the scenarios here, so consult your own state’s labor law website as you need guidance going forward.

Consider federal laws

In addition to individual state laws, regulations are being put out on a federal level that cover the best interests of both the employer and employee. The U.S. Family and Medical Leave Act (FMLA) has options for parents trying to juggle childcare, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides relief for those businesses in the health care field, and the Small Business Association (SBA) provides resources to those who have had to shutter their doors indefinitely.

Communicate clearly

Chances are, your employees have all the same questions you do but fewer answers. Once you have a clear path forward, make sure you are communicating with them often so everyone is on the same page. Setting expectations up front as best as you can will make an easier transition once you are able to open your doors again.

What’s next?

Contact the experts at Professional Transition Strategies to figure out your next steps forward and the resources to get you there.

March 30, 2020

Strategic Timing: Why DSO Affiliation Makes Sense Right Now

During these uncertain times, you may be hesitant to make a drastic change. But now more than ever, dental service organizations (DSOs) are looking for private practices to purchase in spite of economic standings. Banks are still lending, and DSOs are still buying. Here’s why you should consider selling your practice to a DSO in the foreseeable future.

Buyer’s choice

New buyer groups have emerged in light of the recent changes. Fewer legacy DSOs will be buying practices at this point as they need to concentrate their efforts on managing the ones they have. Smaller DSOs, Small Business Investment Company-backed DSOs, new private investment-backed DSOs and family office-backed DSOs will emerge as frontrunners when it comes to buying.

Act now

Deals now will receive 2019 values thanks to earn-outs in the next year, if not sooner, while those that wait will see a lesser value. Waiting puts at risk lesser values in 2021 since 2020 numbers will weigh heaviest during the valuation process. What’s more, tax rates are expected to double. It’s easy to forget that cash is kind in times of need.

Benefits

Partnering with a DSO means support with operations, marketing, research, purchasing, recruiting and, above all, a guaranteed exit strategy, among other reasons — all of which are needed more now than ever.

Targeted states

DSOs have identified the following states for possible purchases: Arizona, Colorado, Florida, Georgia, Indiana, Ohio, Rhode Island, Tennessee, and Virginia. Other states include Arkansas, Connecticut, Delaware, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, North Carolina, Pennsylvania, South Carolina, Utah and Wisconsin.

What’s next?

Contact the experts at Professional Transition Strategies to get a prospectus done and figure out if selling to a DSO in these times is the right course of action.

February 20, 2020

How to Maintain Attrition During a Dental Practice Transition

Confidentiality is key during the dental practice transition process, especially when it comes to maintaining attrition rates of both patients and staff alike. Buyers and sellers may be equally excited to pass the proverbial torch, but if not done properly, both parties will suffer the consequences. Here’s how to handle the transitionary period to make sure all involved are on board for the ride.

How to handle

Especially in the case of retirement, it can make financial and logistical sense for the current owner to stay on for a transitionary period to reinforce to the staff and patients that they are in good hands with the new dentist. Limited office hours for a month after the sale will give the seller the opportunity to introduce patients to the buyer and offer advice on operating the dental practice.

How long

The transitionary period typically lasts for three months but perhaps longer, such is the case when selling to a dental service organization (DSO) so the seller can stay on with the practice but wants to release managerial responsibilities. Similarly, since financing and purchase price depend on patient retention after the sale, notifying your patients needs to be done properly and in a timely manner.

What to do

During this time, it is up to the selling dentist to provide introductions in the form of a letter to patients, hosting an open house or writing a newspaper announcement. Not only will all these steps help put patients at ease and afford opportunities to learn about the new dentist, but it also becomes great marketing for the dental practice.

What’s next?

Contact the experts at Professional Transition Strategies to help guide you throughout the dental practice transition process.

January 16, 2020

Why DSOs Can Pay More for a Practice than a Single Practitioner

Now that you know for a fact that fewer dental practices are selling to individuals, the next natural question is, “Why?” When it comes to putting pen to paper, selling to a dental service organization (DSO) can make financial sense for both the buyer and seller. Here’s what you need to know to make sense of the process.

Private equity money

Since DSOs typically do not have to rely on bank financing because they are funded by private equity groups, they can pay more for practices than the standard individual. What’s more, you’ll get a higher valuation because a DSO won’t take hard assets into account but rather will focus on collections and other finances. DSOs also have private equity money, which is favorable to a bank over an individual buyer when it comes to securing a loan.

Economies of scale

With an increase in DSOs comes more options available to dentists looking to sell. More doctors today are affiliating with DSOs than ever before because of the variety available. Selling to a DSO makes sense when the seller is looking to stay on with the practice but wants to release managerial responsibilities, such as in a retirement situation or anyone who is looking to maintain a work-life balance.

Cost structure optimization

DSOs have gotten a negative reputation because of their seeming corporate interest. Again, a DSO is a likely buyer when the seller is looking to stay on with the practice but wants to release managerial responsibilities, such as in a retirement situation or anyone who is looking to maintain a work-life balance. Selling to a DSO allows you to focus on the clinical side and patient care without contributing the time and money associated with running a business.

Loan amount

Banks are typically not able to loan on larger practices that value somewhere around $2 million to single practitioners; however, DSOs can. Simply put, banks essentially have a set amount of how much they will loan a dental practice, while DSOs have the ability to compete in bidding wars without set limits.

What’s next?

Contact the experts at Professional Transition Strategies to see which transition option works best for you.

January 8, 2020

Why Are Fewer Dental Practices Selling to Individuals?

It’s no secret fewer dental practices are selling to individuals than ever before. That’s not to discourage new or transitioning dentists but rather some encouragement to think outside the traditional transition box. Here’s what you need to know to get your dental practice transition on track.

Increased DSOs

With an increase in dental service organizations (DSO) comes more options available to dentists looking to sell. More doctors today are affiliating with DSOs than ever before because of the variety available. Selling to a DSO makes sense when the seller is looking to stay on with the practice but wants to release managerial responsibilities, such as in a retirement situation or anyone who is looking to maintain a work-life balance.

DSO funding

Transition options

More practices are forming private groups and are more interested in associates than bringing on partners than ever before. Most dentists take on an associate in hopes of potentially selling the practice in the future, and because the average dental school loans are close to $300,000, dentists typically need to take on an associate for a few years prior to buying a practice.

Experience

Simply put, new dentists are less specialized than older dentists who are selling their practices. As is the case with a general dentist who has practiced for more than 30 years and has now decided to specialize in TMJ or implants, a new doctor hasn’t practiced long enough to specialize in these aspects of general dentistry.

What’s next?

Contact the experts at Professional Transition Strategies to figure out which selling option is right for you and your dental practice.

November 14, 2019

3 Reasons to Start Your Dental Practice Transition Early

Dental practice transitions don’t happen overnight. In fact, a well-laid plan can take as long as five years if done properly. Even if you aren’t ready to hang up the proverbial hat, it doesn’t hurt to take a few steps in the right direction. Here are some suggestions to make sure your dental practice lands in the right hands.

More transition options

Once upon a time, the only options for transitioning out of a dental practice were to sell to another dentist or close its doors. But today, the options are seemingly endless. You can choose to sell your practice in whole or a portion to a partner for a longer-term transition plan, sell your practice but continue to work as an associate, merge with another successful dental practice, or affiliate with a dental service organization (DSO), among others.

More offers

Your options aren’t limited to the type of transition but also the offers you receive. If you wait until the last minute to transition out of your practice, you may be stuck in a situation where you have to take the first offer you receive. By starting early, you can be more discerning on offers that come in and truly only move forward with the one with which you feel most comfortable.

Increase value

The necessary step of valuating your dental practice not only helps determine which type of transition would be best, but also tells you what upgrades need to be made before selling your business. If the value of your practice isn’t enough to clear your debts, you can decide if you need a few more years to build up the value of your practice before taking that next step.

What’s next?

Learn more about your transition options with the e-book “Strategies for Transition,” then contact the experts at Professional Transition Strategies to begin the process.

October 21, 2019

How to Choose the Best Broker for Your Dental Practice Transition

Hiring a broker to sell your dental practice is a no-brainer, but not all brokers are created equal. A professional broker will focus on the bottom line and vet potential buyers while alleviating stress for you. But how do you know which broker is the best fit for you and your practice? Read on to find out.

Ask the right questions

Before hiring a broker, ask yourself: Are you looking for the most amount of money you can get for your practice? Are you looking for the best person for your practice, patients and staff? Are you looking for a group to affiliate with that has the same practice philosophy as you? Or do you simply want to just throw in the towel and get out as fast as possible?

Read the fine print

Find a broker that is willing to create a full appraisal or prospectus for your practice at the beginning of the process. The best brokers will provide you with this prospectus with no obligation tied to working with them nor will they charge you for this service.

Know the difference

The best brokers won’t lie to you to get you to sign with them by inflating the price of your practice, then decreasing it once they have you locked in. The best broker will work hard for you. They will be proactive when it comes to marketing your practice and getting it in front of qualified buyers. They won’t post it on a handful of generic sites and wait for the phone to ring. They will be active and go out to find interested parties and hopefully present you with several offers to consider.

Open the communication

The best broker will be honest and straightforward with you from the beginning, ensuring you know what is realistic and achievable. The best brokers will also keep you informed throughout the entire process, rather than only calling you to tell you about a showing. They will be in touch on a regular basis to make you aware of the number of inquiries for your practice, the number of nondisclosure agreements (NDAs) signed, the number of prospectuses sent and reviewed, the details of the conversations held, and more.

What’s next?

Contact the experts at Professional Transition Strategies to find the best broker for your dental practice.

October 15, 2019

4 Transformative Benefits of Cloud Dental Management Software

Simply put, cloud-based software runs on the internet rather than hosted locally on the computer in your dental practice office. In a digital era, it might be surprising to learn that cloud-based management software is not the norm—but it’s moving in that direction. Here are the top reasons to get ahead of the curve and switch your dental practice management software over to the cloud.

Backup capabilities

With cloud-based software, there’s no need to manually back up patient records since backups are performed automatically several times a day. In the event of a power outage or network crash, your records are still protected and easily accessible. What’s more, cloud-based software is written to be HIPAA compliant and safe from cyberattacks since the information is stored off-site.

Integration capabilities

Server-based software doesn’t have the capability to integrate with other programs like cloud-based software does. Think social media plug-ins, text messaging, email communication, appointment reminders, and online scheduling all to free up administrative needs. These services are typically lumped into a monthly rate rather than paying a third-party provider individually.

Virtual access

If your records are stored on the computer in your dental office, you can only ever access patient files and data at that particular workstation. But with a cloud-based platform, you can access records anywhere in the world where you have internet access. So, if you receive an emergency phone call over the weekend or while on vacation, you don’t need to physically be in the office to provide support. This also convenient with dental service organizations (DSOs) that have more than one location.

Physical space

Chances are, if you’re still operating on a server-based software, that server is typically physically located somewhere within your office, taking up precious space that could otherwise be used for dental equipment. Physical servers can also be difficult and expensive to maintain.

*Bonus points: Procurement software

As an aside, procurement software, such as Method USA, pulls real-time pricing so you can make smarter purchasing decisions. Not only does this cut down on overhead costs, but it will also increase the overall value of your dental practice when it comes time to sell. Look for a platform that is scalable, easy to use and built specifically for rapidly growing DSOs and independent offices alike.

What’s next?

Contact the experts at Professional Transition Strategies to help ease the transition from server-based software over to the cloud in your dental practice.