Understanding practice valuation is essential for retirement planning, bringing in associates or partners, securing financing, and eventual sale. Multiple valuation methods exist, each with strengths and appropriate applications.

Valuation Methodologies

The three primary valuation approaches are: asset-based (tangible and intangible assets), income-based (earnings multiples), and market-based (comparable sales). Most dental practice appraisals use income-based methods, specifically EBITDA multiples or percentage of collections.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) represents practice profitability before financing and ownership structure effects. Current market multiples range from 4-8x EBITDA for general practices, with specialty practices often commanding higher multiples.

Collection-Based Valuation

Expressing value as a percentage of gross collections provides an accessible benchmark. General dental practices typically sell for 60-90% of annual collections, with significant variation based on profitability, growth trajectory, and market conditions.

A practice collecting $1.2 million annually valued at 75% of collections would be worth $900,000. However, this method can mislead if practice profitability is unusually high or low. Two practices with identical collections but different expense structures have different values.

Factors Affecting Value

Profitability is the primary value driver. Practices with 40%+ overhead (excluding doctor compensation) command premium valuations. Conversely, practices with 65%+ overhead sell at discounts or may be unsaleable.

Patient base characteristics matter significantly. Active patient counts, new patient flow, recall compliance, and patient demographics all affect value. Practices with 1,500+ active patients and consistent new patient acquisition are more valuable than declining practices.

Facility and equipment condition impacts value. Modern, well-maintained offices with current technology command premiums. Practices requiring significant capital investment sell at discounts reflecting needed improvements.

Goodwill Considerations

Goodwill represents intangible value beyond physical assets. "Enterprise goodwill" (transferable to new owners) is valuable; "personal goodwill" (dependent on selling doctor) is not.

Practices where patients are loyal to the practice rather than individual doctors have higher enterprise goodwill. Indicators include: multiple doctors with established patient bases, strong brand recognition, and systems-dependent rather than doctor-dependent operations.

Current Market Trends

DSO acquisition activity has increased practice values in many markets, particularly for practices with strong metrics in strategic locations. However, the 2023-2025 interest rate environment has moderated valuations from 2021-2022 peaks.

Specialty practices, particularly oral surgery, periodontics, and orthodontics, maintain strong valuations due to DSO interest in vertical integration. Pediatric dentistry also commands premium multiples.

Obtaining a Valuation

Professional appraisals cost $3,000-8,000 depending on practice complexity. Certified dental practice appraisers use standardized methodologies and provide defensible valuations for transactions, estate planning, or partnership agreements.

Informal valuations from dental brokers are typically free but may be optimistic to secure listings. These provide useful benchmarks but should not substitute for professional appraisals in significant transactions.

Owners should obtain valuations 3-5 years before planned transitions, allowing time to improve value through profitability enhancements, facility updates, or associate development.