Selling Dental Practices
Privately owned dental practices focus on general dentistry (cleaning and maintenance) as well as a broad array of specialty services including orthodontics, periodontics, endodontics, pediatric, dentures, and prosthetics. When it comes time to sell a dental practice, it is important to value the practice properly and to target the correct kind of buyers. Valuation ranges fluctuate between two to four times the adjusted owner benefit (or the pre-tax economic profits and benefits derived by the owner including owner’s salary). The growth rate and longevity of the practice, transferability of the customer base, equipment, location, and overall goodwill of the practice all significantly impact the valuation of dental practices.
Purchasers of Dental Practices
Unless selling to an employee, owners of dental practices invariably will sell their practice to another dentist (or group of dentists) or to a Dental Service Organization (DSO). A younger dentist fresh from school often will be able to acquire a dental practice via bank financing backed by the Small Business Administration (SBA). Other dentists may be relocating or expanding their practice and also make excellent purchasers. The DSOs are investor-funded corporations which acquire and manage dental practices (often with revenue sharing agreements between the operating dentist and the DSO). A local business broker representing a dental practice must target all of these potential buyers.
Valuation of Dental Practices: Income-Based Approach
The income-based approach values dental practices as a multiple of its most recent annual adjusted owner benefit (or Seller’s Discretionary Earnings). This compares with the ‘annual net receipts’ method which values a dental practice simply as a percentage of its annual revenue. The problem with basing the valuation simply on the net revenue is it overlooks the operating expenses of the practice. Dental practices which have lower collection costs (with a patient base largely made up of private payors), lower overhead expenses (more efficient office), and lower marketing costs (instead relying on word of mouth and repeat patients) should be valued higher than a practice with similar net revenues but lower operating profit margins.
Applying Income-Based Approach or Dental Practices
The unique nature of dental practices makes the owner’s role (as a working dentist of the practice) critical in the valuation. To determine the proper adjusted owner benefit used to value dental practices, one first begins with the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) from the most recent annual financial statement. Then one adds back any personal expenses of the owner that flows through the financial statement and the owner’s salary. In order to compensate for the fact that the owner is a working dentist in the practice, one must then deduct the annual cost to hire a working dentist. The resulting adjusted owner benefit thus reflects the excess profits after accounting (in large part) for the replacement of the owner.
Example of Selling Dental Practice
- Let us suppose that Dave is selling Dave’s Dentistry, a general dentistry practice in Palm Beach County.
- Dave is retiring and his practice has been established for thirty years.
- Dave consults with a professional business broker, who determines that Dave’s EBITDA from his most recent financial statement is $400K (with $1.2M of total revenue).
- The business broker then adds back the $200K of salary that Dave pays himself, as well as the $100K of Dave’s personal expenses that were expensed through the financial statement.
- This leaves the tentative owner benefit to be $700K ($400K + $200K + $100K).
- The cost to hire a working dentist to replace Dave is estimated to be $200K and must be deducted from the adjusted owner benefit, resulting in an adjusted owner benefit of $500K.
- The business broker then values the practice at $1.5M or 3 x the adjusted owner benefit of $500K.
- This valuation reflects the transferability of Dave’s patients (and Dave’s commitment to ensure a smooth transition for his patients to the buyer), the longstanding reputation and excellent location of the practice, and an efficient office with well trained staff who will stay after the sale.
- Note that as a part of the valuation, Dave would be expected to give a negotiated non-compete agreement in favor of he buyer.
Real Estate Attached to Dental Practice Sale
Many owners of dental practices own the office and real estate in which their practice operates. If this is the case, the owner may choose to include the real estate together with the business in the sale, or they may choose to simply sell the business and lease to the buyer (if the buyer chooses to remain in the space). For buyer seeking third party financing backed by the SBA or other financial institutions, it is very helpful if real estate is included in the deal. This is because the real estate may serve as hard collateral for the loan, thus making it easier for the buyer to obtain financing. Armed with this knowledge, dental practice owners with real estate included in the deal may actually end up realizing a premium purchase price because of the ease with which buyers may obtain funding.
Whether the buyer of a dental practice is a recently graduated dentist, an established dentist looking to move or expand their practice, or a Dental Service Organization, a dental practice should be properly priced prior to the sale. Dental practice owners should always use a professional business broker to price their practice and in order to ensure the confidentiality of the listing process. This will prevent employees and patients from being alerted to the sale. The practice will be able to operate normally during the sales process, and the owner will have peace of mind in knowing that all potential buyers are properly qualified by the broker.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.