Understanding Dental Practice Valuations: Key Metrics and Trends

Valuing a dental practice requires a clear understanding of industry benchmarks and metrics. Here's a breakdown of what dentists and DSOs (Dental Service Organizations) look for:

1. EBITDA Benchmarks
   Most dental practices operate at an EBITDA margin of 15-25%, though some high-performing practices reach 28%.
   Why It Matters: EBITDA is the foundation for calculating the sale value of a practice, with DSOs typically offering 5.5–7x EBITDA after accounting for key man insurance costs.

2. Collections-Based Valuation
   Dental practices often sell for 0.7–1.0x collections, not annual receivables. This method ensures a fair reflection of a practice's earning power.

3. Revenue Drivers

   • Smaller solo practices generate $500,000–$700,000 annually.

   • Multi-doctor practices in high-income areas can exceed $1 million.

   • Specialty services like oral surgery and periodontics tend to drive higher revenues.

By understanding these metrics, dentists can better prepare for a transition or partnership with a DSO.

The DSO Model: What Works and What’s Changing

Dental Service Organizations (DSOs) are reshaping the industry, but not all models are created equal. Here's a closer look:

1. Successful DSO Models

   • Joint Venture (JV) Model: Partnerships where equity terms are clear and associate buy-ins aren't mandatory.

   • 100% Acquisition Model: Combines cash, earnouts, and equity, providing flexibility for sellers.

2. Aggressive DSOs
   While many DSOs actively acquire practices, increased capital costs have slowed some down. Private ownership makes it challenging to identify struggling organizations, but market pressures remain a factor.

3. Integration Costs
   Costs vary based on practice size, geography, and services offered. Key expenses include technology upgrades, staffing, and aligning operations.

Takeaway: DSOs with transparent equity structures and competitive terms will continue to attract more practices.

Geography, Specialization, and Team Retention: Factors That Impact Practice Value

1. Geography's Role

   • Practices in business-friendly states with lower costs of talent tend to command higher valuations.

   • Rural and underserved areas may offer additional growth potential.

2. Specialization

   • Practices focusing on oral surgery or maxillofacial services are in high demand.

   • General dentistry practices with strong hygiene programs also attract competitive offers.

3. Team Retention

   • A practice with a dentist leaving within three months often sells at 0.7–1.0x collections to another dentist.

   • Practices where teams stay for 3-4 years can secure DSO-level valuations at 5.5–7x EBITDA.

Key Expense Drivers in a General Dental Practice

Understanding practice expenses helps owners optimize operations and prepare for transitions. Typical expense allocations include:

• Staff Salaries: 30%

• Owner Salary: 20%

• Labs: 10%

• Supplies: 5%

• Rent: 5%

• Other Expenses: 10%

• EBITDA Margin: 20%

Efficiencies in group purchasing, better insurance reimbursements, and streamlined operations can significantly improve margins, making the practice more attractive to buyers.

DSO Transactions: Financing and Multiples

1. Purchase Financing

   • DSOs often finance 100% of the cash at close with debt, leveraging the practice’s cash flow.

   • Debt costs typically range from 5–8%, with a total cost of capital around 10–15%.

2. PE Multiples
   DSOs undergoing private equity recaps trade at 11–15x EBITDA, influenced by market conditions and size.

3. Typical Purchase Agreements
   Purchase agreements include terms for earnouts, equity, and clauses for team retention. Each deal varies based on the DSO and practice structure.

DentyVal: A Smarter Approach to Practice Valuation

For dentists seeking an efficient, hassle-free way to determine their practice’s worth, DentyVal is a game-changer. The platform delivers instant valuations, ensuring dentists no longer need to go through complex, lengthy processes. Whether preparing for a DSO transaction, exploring partnerships, or simply assessing financial health, DentyVal offers a streamlined solution tailored to the dental industry.

For a fast and accurate valuation of your dental practice, visit DentyVal today and discover your practice’s true worth.

This article is based on an interview with Darren Sardoff, President & Chief Investment Officer of King’s Ransom Group, who shared insights on dental practice valuations and industry trends.