What is my dental practice worth?

2022 10 25 23 38 7160 2022 10 26 Cumbus Kevin 400

Your dental practice isn't worth 60% to 85% of collections or six to 12x earnings before interest, tax, depreciation, and amortization (EBITDA). It's worth what someone is willing to pay for it!

Kevin Cumbus.Kevin Cumbus.

Yes, the value of your solo practice, group practice, or dental service organization (DSO) is rooted in valuation theory, but there's so much more to it than formulas. To determine the baseline value of your business, there are a few things you could do, including the following:

  • You could work with an adviser who can provide you with a valuation based on an income approach to value (discounted cash flows or capitalization of income).
  • You could rely on someone to provide you with comparable transactions with characteristics similar to your practice to provide you insights into what your business could sell for.
  • You could even let a potential buyer run the numbers and tell you what your business is worth. (This is a very bad idea, by the way.)

While there's a lot of things you could do, the best way to maximize your value is through a competitive sales process. After all, demand drives value.

Drivers of demand

We all know that there's more interest and investing activity in the dental economy now than ever before. Numerous DSOs and groups are looking to buy practices, and dental schools are graduating more dentists each year, with the vast majority desiring to be independent practice owners.

Drivers of demand include but are not limited to the following:

  • Number of interested buyers
  • Cash flow/net income/EBITDA
  • Location(s)
  • Total collections
  • Product mix
  • Payer mix
  • Current fees
  • Fixed assets
  • Curb appeal
  • Number of dentists
  • Availability of acquisition dollars (debt markets and interest rates)
  • Flexibility around working post-sale
  • The story of the business and what success lies ahead
  • State regulations
  • Your acquisition pipeline
  • Legal structure
  • And many more factors

Through constant contact with buyers, we know that most buyers are looking to acquire general dental practices with the following characteristics:

  • Collections between $1 million and $50 million
  • Six or more operatories
  • Highly visible locations

If this describes your practice or group, then the demand for your practice could be twice that of others. And if that's the case, shouldn't this information be reflected in the price of your practice? Sadly, too many advisers and brokers ignore the simple principles of supply and demand when working with their clients.

The importance of a great adviser

When you decide to sell your dental practice, it's imperative that you work with an adviser who can tell your business's story to position it in the best light possible to the greatest number of buyers. Your adviser should know the buyers in the market as well as what they are looking for in a practice. They should work with you on setting the price for your practice based on valuation theory and demand drivers in the market.

There is no magic number or multiple that will provide you with the answer to that age-old question when you are looking to sell your practice to a third party. That number can only be realized when supply meets demand and equilibrium is realized.

At the end of the day, the principles of supply and demand and the theory of valuation serve only as a guide. What matters most to a seller is getting the best possible selling price for their life's work. The real value to them is the cash in their bank account.

As the dental mergers and acquisitions (M&A) world has grown, so, too, have the number of M&A advisers looking to play a role in the transaction. Although there are a small handful of excellent M&A advisers in the space who have worked on hundreds of deals across all specialties, there are brokers who have no idea what they are doing. These brokers are outgunned and outmanned in negotiations with DSO.

A great M&A adviser can do the following:

  • Truly understand the nuance of each buyer
  • Visit the DSO's corporate headquarters, know the C-suite personally, and talk with private equity representatives backing the businesses regularly
  • Know the lenders providing the capital to aid in the company's growth
  • Connect you with previous clients who have affiliated with these groups and provide you with an insider's look at what life is like post-sale

Great M&A advisers also know when to leverage their relationships inside these businesses to get deals done. Remember, your business is likely worth more than you think (and certainly worth more than any single buyer will offer you in an unsolicited offer).

Kevin Cumbus is the founder and president of Tusk Partners, an M&A advisory firm focused exclusively on large and group practices that want to partner with a DSO or private equity group.

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.

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