How to analyze the value of a dental practice

You’ve found a practice and are thinking about submitting a letter of intent. Your biggest concern is to figure out what the practice is worth to you. 

Let’s look at what factors you should analyze, and how to approach them.

Quantitative vs qualitative analysis

There are the cold, hard numbers, then there are the more touchy-feely factors. Both contribute to a practice’s value.

1. Quantitative factors: the financials and other aspects that you can measure with actual numbers. For example: collections, profit margin, patient attrition, overhead, and much more.
2. Qualitative factors: all of the factors that affect a practice’s value, but can’t be measured with a number. These include: curb appeal, competition, goodwill, a practice’s online presence and marketing acumen, and more.

Factors to analyze

The seller’s level of transparency will affect your ability to really drill down on these: if the seller has released documents to you before the letter of intent, consider yourself lucky. 

Whether you’re analyzing before the LOI or after, here are the main “buckets” of concerns you need to put under a microscope.

• Financial performance: review the practice’s profit and loss statements, balance sheet, tax returns, and key financial ratios such as revenue production, accounts receivable, overhead, and more. These give you insight into the financial health and earning potential of the practice. You can then dig deeper into the finer points, such as accounts payable, marketing outlay, debt-to-equity ratio, and much more.
• Patient base: assess details such as the number of active patients, patient retention rates, new patients per month, patient demographics, insurance coverage mix, and recall effectiveness. These paint a picture about  the stability and growth potential of the patient base.
• Location and competition: evaluate the practice location, surrounding demographics, economic health of the region, and competitive landscape. These indicate the market dynamics for the practice area.
• Facilities and equipment: audit the physical infrastructure, technology, clinical systems, and equipment. This verifies assets and identifies any necessary upgrades.
• Staffing: review staff roles, credentials, staff compensation, and policies. A competent team is critical for smooth operations.
• Growth potential: assess opportunities for expansion into new services, markets, or locations. 
• Profitability drivers: identify factors most crucial to the practice’s profitability so you can maintain or enhance those areas. For example, look for areas where you know you can cut overhead.

If this all sounds overwhelming, you’re not alone. Most dentists feel like throwing in the towel at some point or another when faced with this much information. Don’t worry: we do hundreds of these valuations. Our fee will be the best money you ever spent. Or, you could pull your hair out trying to do it all yourself. Your call. 

Contact us for a free consultation if you’re interested in taking a load off.

Let’s look more closely at four big factors that will have an oversize impact on practice value:

1. Collections
2. Profitability
3. Employee expenses
4. Lab fees and dental supplies

While there are dozens more things to scrutinize, make sure you give each of these four their due, and then some.

If the practice you’re considering checks all four of these buckets, chances are you’re looking at good practice to buy. Of course, there is a lot more due diligence and analysis you’ll want to do before moving forward. But if you have limited information, these four numbers can usually get you more than 80% of the way to a helpful answer.

Let’s touch on each of these Big 4 in more detail.

Collections

The practice should be collecting at least $800k a year. Collections at that level indicate a healthy business with enough patients and cash flow to support you as the buyer. Collections below that amount can indicate problems in the business that are hard or impossible to change, like demographics or a tough competitor.

Profits

The average dental practice has a profit margin of about 40% and the practice you’re looking at should be around that amount or higher. To get that number, you’ll need to back out the doctor-specific expenses like the doctor’s salary and depreciation. I recommend getting help with these numbers (hint hint, hire a good dental-specific CPA such as, I don’t know—me).

Employee expenses

Your staff will be your largest expense as a business owner. Your total employee expenses as a percentage of collections should be 30% or less. That will include salaries, payroll taxes, and any provided benefits.

Lab fees and supplies

See how much the practice is currently spending on lab fees and dental supplies. A good benchmark is 5% of collections in each category, depending a little on specialty. This can tell you how carefully the doctor manages the practice in general.