When buying or selling a dental practice, a key question to accurately answer is: How much is my dental practice worth?
Buyers are especially interested in a fair answer to this question as the dental transitions industry has traditionally been heavily skewed to help (and thus favor) the seller. Most buyers are fine to pay a fair price for a good practice, they just don’t want to get ripped off.
With that in mind, I’ve collected data from 160+ transitions I’ve been involved in to date and combined that data with anonymized data from four brokers in different geographies around the U.S. who were kind enough to collaborate to get a starting point to answer the question:
“How much is my dental practice worth?”
A few notes about the data:
Why You Won’t See the True Value of Dental Practices in This Data
When I help buyers evaluate the price of a practice, I harp on a key fact:
Wealth in dentistry comes from the ownership of an income stream, NOT from buying and selling dental practices.
Sure, no one wants to overpay for a practice. But far more important than the purchase price is the true value of the practice: cash flow. To take a simple example, two practices that collect exactly $1 million each year will probably have an asking price close to each other. But if overhead is 60% in one practice, and 70% in the other – one owner is taking home $100,000 a year more than the other.
A buyer who, presumably, will own a practice for decades should be much more willing to pay top dollar for a practice with demonstrated low overhead and high cash flow.
A buyer looking at a good practice with solid fundamentals and profits, in a city they want to live in, and with a good patient base and staff who haggles over $10,000 on the purchase price is often penny-wise and pound-foolish. There’s nothing wrong with asking politely for $10,000 off the asking price, but destroying the effective transfer of goodwill between a buyer and seller is almost never worth the battle.
If you’re a buyer, be in the ballpark but don’t focus on price to know if you’re getting a “deal”.
The Most Important Takeaways from the Data
Buyers and sellers still want to know if the price they’ve agreed on for a practice is reasonable and within accepted norms. To me the most important takeaways from this data set are the following:
- While representative and real data, this sample set is far from a peer-reviewed and published set of hard data. Use this as directional guidance rather than a representation of pure reality.
- “PY” is Prior Year
- The total number of transactions was just over 1,100 from the five data sources, however, the Endo & Prostho data are not reported here so the total may not add up to the full 1,100+ transactions.
- Only specialties where n>30 were reported with data going back to basic statistics rules that require a minimum sample size of 30 to represent a population with any degree of accuracy.
- Data is roughly evenly split over a 15-year period beginning in 2005 through July of 2019.
- The distribution of practice size looks roughly normal overall, with a slight tilt towards smaller practices, as there are numerically more practices sold at smaller dollar values than large ones.
- The brokers who provided me data anonymized it prior to sending it. No names, zip codes or other identifying data were provided. The brokers themselves will also remain anonymous.
- The total number of transactions provided should not be construed as a true indication of market size as it’s entirely possible the 5 data sets combined here are a simple reflection of a good network in one specialty and not another.
- The last column titled “% Change in 3 Years” is a simple arithmetic calculation of Average Price/PY Collections compared to a similar exercise I did 3 years ago.
Why Goodwill Matters
The average amount of goodwill in a transaction is important for both buyer and seller. But it’s really, really important for the seller as they probably pay a much higher tax rate on any amount not allocated to goodwill. You can read more about How the Asset Allocation Works in a dental transition at the link provided.
Goodwill seems to be hovering in the 75-80% range of total transaction price with the obvious exception of orthodontics where buyers are effectively paying for contracts receivable in addition to the underlying value of the business, which lowers the overall goodwill percentage.
Without question, practice ownership continues to be the most lucrative career option in dentistry. Current practice owners can feel some confidence knowing that the trendline supports higher average practice values compared to prior year collections.
Buyers need to be aware that, while prices are going up, both the number of dental lenders and the amount they are willing to lend is increasing. Banks don’t lend money unless they are confident they’ll get paid back. This is an indication that the path of practice ownership is both safe and lucrative.
Yes, buyers need to also be aware that the data indicate an inherent bias in the pricing structure to favor collections OVER profitability. Practically, this means that the good, profitable practices are going to sell quicker and be marginally harder to find. That just means that buyers need to have a stronger network made up mostly of other dentists, though using brokers is still the second-best way to find a practice to buy.
If you need help analyzing the price of a practice you’re considering, reach out anytime.
I created a guide called “77 Questions to Ask to Avoid Buying the Wrong Dental Practice.”
Get the guide here for free (all I ask is a quick share in return).
Read more below about how to buy a dental practice because good advice is important!
How to Analyze a Dental Practice For Sale – The Qualitative Factors
3 Reasons Not to Buy a Dental Practice From a Multi-Practice Owner
4 Steps to Be Rich Faster Than the Rest of Your Dental School Class
- This data gives you a ballpark to know if a price you’re considering is somewhere near “normal.”
- A LOT more transactions take place in general dentistry as compared to the various specialties. The fishing pond is either large or small depending on your specialty.
- Prices are increasing.
- Orthodontists enjoy the highest price to collections ratio, which is a reflection of the fact that a higher percentage of their patient base is effectively captured for continued visits after ownership changes hands compared to other specialties.
- The average price is a mathematical mean that includes many smaller practices. As a rule, larger practices sell at higher multiples. Practices collecting $300-400k/year will generally sell for a smaller number than the average, and larger practices collecting $750k+ will sell for higher than the averages listed.