What’s Your Dental Practice Really Worth? The Power of Enterprise Value in Practice Transitions

When it comes to selling a dental practice, determining the enterprise value (EV) is one of the most critical steps you can take. This figure doesn’t just show a snapshot of what your practice might be worth; it’s a comprehensive look at its total value, from income-generating assets to any debt or liabilities that come with the deal. Here’s how EV is calculated and why it plays such a vital role in understanding, evaluating, and maximizing your practice’s potential in a sale.

What is Enterprise Value?

Enterprise Value is the total value of a business a dental entrepreneur receives at the sale of their practice, calculated by adding the market value of equity and any outstanding debt, while subtracting cash and cash equivalents. Unlike standalone profit metrics, EV considers all aspects of the business — making it a key measure for practice owners aiming to maximize value in a transition.

In other words, EV helps provide an answer to: “What’s the true value of everything my practice encompasses?”

Calculating Enterprise Value

Enterprise value represents the total worth of a dental practice and reflects the buyer’s willingness to pay, payment terms, and the type of capital used (cash, debt, or equity). This value is often simplified into the practice’s EBITDA (earnings before interest, taxes, depreciation, and amortization) and a multiple applied to that cash flow.

Together, these components create a number that represents the total value of the transaction.

Why Enterprise Value Matters in Your Transition

When groups make an offer, their goal is like yours when buying a car or house: to pay the lowest price for the asset. There’s nothing misleading here, as long as they’re transparent, because they’re responsible to their investors to secure the best deal.

For dental entrepreneurs, this means dental service organizations (DSOs) often calculate an adjusted EBITDA that considers factors impacting profitability. We explain to clients that EBITDA can be “squishy” or adjusted to create the impression of a higher multiple, even if the actual enterprise value remains unchanged.

Here’s an example. An investor may calculate EBITDA by factoring in costs the current owner doesn’t have — such as adjusted management expenses, doctor pay or rent if the seller owns the building. Then, they may offer a higher multiple based on the adjusted EBITDA.

So, a practice with $400,000 EBITDA might receive a 6X offer of $2.4 million, while the same practice adjusted to $280,000 EBITDA might get an 8X offer of $2.24 million. Although the 8X multiple may sound more impressive, the true enterprise value was higher in the first case — proving that enterprise value is the most accurate determinant of a practice’s value.

When doctor’s understand that EV is the most important metrics to key in on when assessing offers, they’re then able to make the best decision for their practice.

Making Enterprise Value Work for You

As you prepare to transition your dental practice, remember that enterprise value is more than just a number; it’s a tool that allows you to represent your practice’s full worth accurately. An experienced broker or advisor can help you calculate and understand EV, empowering you to enter negotiations with a clear view of your practice’s strengths and value.

Whether you’re aiming to sell to another dentist, a DSO, or private equity, understanding EV will help you recognize the true potential in every offer. It’s the number that tells the full story — use it to unlock your practice’s worth and secure the future you’ve worked so hard to build.

Common Mistakes When Selling Your Dental Practice

Selling your dental practice is one of the most significant decisions in your professional life. However, many dentists make costly mistakes that can reduce their practice’s value or make the transition more difficult. Understanding these pitfalls is crucial to maximizing your practice’s value and ensuring a smooth transition. Here, we’ll discuss some common mistakes to avoid when selling your dental practice.

Pricing Errors: Getting the Valuation Right

One of the biggest mistakes dentists make is not getting an accurate valuation of their practice. Overpricing can deter potential buyers, while underpricing can result in lost revenue. It’s essential to hire a professional valuator who understands the nuances of dental practices to determine a fair and accurate valuation.

Consequences of Overpricing or Underpricing

Overpricing your practice can lead to it sitting on the market for an extended period, making it less attractive over time. On the other hand, underpricing can lead to a quick sale but at the cost of potentially losing tens or even hundreds of thousands of dollars.

Tips for Obtaining a Reliable Valuation

To ensure you’re getting a reliable valuation:
– Use a professional valuator with experience in dental practices
– Review financial records and adjust for non-recurring expenses
– Consider market conditions and recent sales of similar practices

Overlooking Potential Interest: Reaching More Qualified Buyers

Another common mistake is not marketing the practice to a broad enough audience. Limiting your buyer pool can reduce competition and result in a lower sale price.

It’s crucial to cast a wide net and market your practice to various potential buyers, including DSOs, private buyers and dental groups. That’s why it’s imperative to partner with a brokerage firm when selling your practice who will proactively market the practice and place it in a competitive environment.

Underestimating the Time Required: Start Early

Selling a dental practice is not a quick process. It can take months or even years to find the right buyer and complete the transaction. Starting the process early and being patient is key to ensuring a successful sale. In addition, starting early allows the seller to be more discerning with offers that come in as well as allows them to have the time to make necessary changes so their practice is more desirable or valued higher.

Planning Your Timeline

To avoid rushing the sale:
– Begin planning at least five years before you intend to sell
– Regularly review and update your financials
– Stay informed about market conditions

Neglecting Proper Documentation: Keep Your Records in Order

Incomplete or disorganized documentation can delay the sale process and scare off potential buyers. Proper documentation includes but is not limited to: financial records, patient data and legal agreements. Ensuring that all your records are up-to-date and accurate is essential for a smooth transaction.

Essential Documents to Prepare

Before listing your practice for sale, ensure you have the following documents ready:
– Financials for the last 3-5 years: P&L’s, balance sheets, income Statements, tax returns, credit card statements, bank statements, production list by provider/code
– HR/employee matters: employee handbook, benefit plan documents, bonus/incentive plans, employer retirement contributions, employee contracts/associate agreements, employee list (including: name, date of hire, age, salary, position)
– Insurance: current insurance policies (malpractice, workers comp, business owners, cyber, fiduciary) and insurance carrier list and contracts
– Real Estate Matters: Leases, mortgages, any real estate that is used by the company but is not subject to a written lease
– Corporation docs: Articles of incorporation, bylaws, operating agreement, equity holder agreements and certificate of incorporation good Standing or Formation (just one is needed)
– Equipment: leases, equipment list (which can be found in the depreciation section of tax returns with additional physical condition)
– Vendors: list of vendors used at the practice

Failing to Address Outstanding Liabilities: Clean Up Your Finances

Unresolved liabilities can complicate the sale process and reduce the practice’s value. These can include unpaid taxes, outstanding loans or unresolved legal issues. It’s essential to address these liabilities before listing your practice for sale.

How to Address Outstanding Liabilities

To address outstanding liabilities:
– Pay off any outstanding debts
– Resolve any legal issues
– Ensure all taxes are paid up-to-date

Not Preparing the Practice for Sale: First Impressions Matter

A poorly presented practice can turn off potential buyers. Ensuring your practice is well-maintained and aesthetically pleasing can significantly impact its perceived value. This helps with tours, but does not factor into the value.

Steps to Prepare Your Practice for Sale

– Ensure all equipment is in good working order
– Clean and declutter the office

Ignoring Transition Planning: Preparing for a Smooth Handover

Failing to plan for the transition can lead to a loss of patients and staff, reducing the practice’s value. A well-thought-out transition plan ensures continuity of care and a smooth handover to the new owner.

Steps for Effective Transition Planning

Effective transition planning involves:
– Introducing the new owner to staff and patients gradually after the sale is done. Sharing this news too soon may induce fear in some employees and they may leave, which can negatively impact the practice
– Setting a timeline for your departure
– Offering to stay on temporarily to assist with the transition

Overlooking the Importance of Professional Advice: Get Expert Help

Trying to sell your practice without professional help can lead to costly mistakes. Selling a practice can take anywhere between 150-200 hours, which can add more stress and responsibilities on your already full plate. Hiring a professional dental broker, attorney and accountant can help you navigate the complexities of the sale process and ensure you get the best possible outcome.

How to Choose the Right Professionals

When selecting professionals to assist with your sale:
– Choose a broker with experience in dental practice sales
– Partner with a broker who has a nationwide presence to reach an even larger audience of prospective buyers
– Select a broker who prioritizes your goal first, such as receiving payment after your practice is sold and you are paid
– Choose a broker who leverages a proactive marketing approach to source more buyers instead of only listing the practice online and waits for the phone to ring
– Enlist a broker who’s dedicated to finding the right buyer for you, not just pressuring you to choose a buyer they receive kickbacks from
– Hire an attorney specializing in dental practice transactions
– Work with an accountant who understands the financial nuances of dental practices

Bottom Line

Avoiding these common mistakes can significantly impact the success of your dental practice sale. By getting an accurate valuation, marketing to a broad audience, ensuring proper documentation, planning for the transition, addressing outstanding liabilities, preparing your practice, seeking professional advice and giving yourself enough time, you can maximize the value of your practice and ensure a smooth transition.

For more information and professional guidance, contact us today.