When evaluating a dental practice for purchase, examine three critical numbers: the three-year collections trend to assess patient loyalty, the true overhead percentage to determine profitability, and the percentage of collections from hygiene production to gauge practice stability and recurring revenue.
- Collections trend: Review three years of collections data to identify steady or growing revenue patterns, which indicate patient loyalty and practice health.
- True overhead: Calculate actual overhead costs by adjusting the tax return's net income figure, as two practices with identical revenue can have vastly different profitability.
- Hygiene production: Practices with 22% or more of collections from hygiene indicate loyal patients, strong recall systems, and stable recurring revenue.
- Add-Back schedule: Request the detailed list of adjusted EBITDA add-backs, as inflated adjustments directly increase the purchase price you'll finance.
Last month I gave you the Lemon Test: two questions that eliminate at least 80% of the practice listings you’ll ever see. Do you actually want to live there, and how much did the practice collect last year? Ten minutes, no financial background required.
But a practice that passes both questions hasn’t earned your signature. It has earned the next hour of your attention. You have a job in that next hour: deciding whether the practice deserves the real investment of visiting it in person and hiring the dental-specific accountant that a proper purchase analysis requires.
Here are the three numbers I check in the first hour, every time, and the one number sellers hope you never ask about.
No. 1: The three-year collections trend
Brian Hanks, MBA, CFP.
The Lemon Test asked what the practice collected last year. Now ask for three years, because the trend gives you more context.
Steady or growing collections are patients voting with their feet, year after year. Declining collections invite an explanation, and the explanation better be something that leaves with the seller rather than something that transfers with the keys. A seller who cut back to three days a week is an opportunity. A neighborhood that lost its anchor employer is not.
Watch how fast the seller produces these numbers too. Owners of healthy practices share three years of collections quickly and sometimes proudly. Sometimes hesitation tells you as much as the numbers do.
No. 2: What’s the real overhead?
The second number to nail down is the true overhead of the practice. This is a different number than what gets reported to the IRS, but you need the tax return (or profit and loss) to calculate it. Overhead helps you know if you’ll make enough money in this practice to be worth the additional effort and risk of ownership.
Full disclosure: You probably don’t have the skill to correctly calculate the precise overhead number. But you can get close enough to get a sense. You need the practice’s tax return (or P&L) to understand what comes in and what goes out.
Take the net income number at the bottom and add owner- or tax-related items back to get close to a correct answer here: owner and family salaries, depreciation, interest, things like that. Two practices collecting the same $900,000 can be completely different purchases because one spends 60 cents of every dollar running the office and the other spends 75 cents. The heavy odds are that you make about the same amount the seller did, at least in the short term.
No. 3: Where did collections come from?
What percentage of total annual collections came from the doctor’s production versus someone else’s, like the hygienists'? A practice where hygiene runs full and steady is a practice with patients who come back on their own. That recurring engine is a large part of what you’re actually buying.
Practices with 22% or more of total collections from hygiene tend to have loyal patients, a recall system that works, treatment plans that need to be accepted (and paid for!), and a solid reputation in the community. A good rule is the higher the nondoctor production, the more attractive the practice to a potential buyer.
The number sellers hope you skip
Ask for the list of the add-backs. Somewhere in the listing packet you’ll find a reconstructed earnings figure, usually labeled adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, presented as the practice’s “true” profitability. Behind that number sits a schedule of add-backs: expenses the broker removed to make the earnings look bigger, the seller’s car, a family member’s salary, continuing education, travel, the cellphone plan.
Most add-backs are legitimate. Some are in a gray area hotly debated by valuation experts like me. And the difference matters enormously, because the asking price is usually built on the adjusted number, which means every inflated add-back is money you’re borrowing against earnings that were never real.
So ask for the add-back schedule itself, line by line. Sellers and brokers with defensible adjustments hand it over without flinching. The ones who hope you’ll accept the headline number and move on have just told you something important, and it cost you one question to learn it.
What the first hour buys you
Three numbers and one uncomfortable question. None of them requires a certified public accountant, and together they tell you whether this practice deserves the real due diligence: the payer mix review, the full overhead analysis, and the income projection your advisers will build properly.
The Lemon Test saves you from bad listings. This hour saves you from mediocre ones. What’s left after both filters is rare, and when you find it, you’ll be glad you saved your energy, your money, and your enthusiasm for a practice that deserves all three.
Brian Hanks, MBA, CFP, is a dental accountant, the author of How to Buy a Dental Practice (fifth edition), and founder of Dental Buyer Advocates, where he has advised on more than 1,400 practice acquisitions across 49 states.
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. Some content may be AI-generated.
