Analyzing Dental Practice Valuations

When I’m working with a new dental client and we’re looking for the first time at a practice for sale, one of the most important questions to answer is:

Is this a good practice to buy?

You can get pretty good sense of the answer by looking at four numbers.

First, look at 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.

Second, look at profitability. 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.

Third, look at 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.

Fourth, 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.

If the practice you’re considering checks all four of those 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.

If you’d like help looking at the numbers on a practice you’re looking at – give me a call or send me an email. I’m happy to help!

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Want to run the numbers and see if you’d pay off your student loans faster as an owner? Connect with me at brian@dentalbuyeradvocates.com and we’ll talk through your options.

Read More:

Buy the Practice YOU Want | Urban vs Rural Dental Practice Purchase

The IDEAL Active Patient Number | Finding a Dental Practice to Buy

3 Vital Numbers You Need to Know | Finding a Dental Practice to Buy

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