Pricing a Practice in the Goldilocks Zone
When selling a dental practice, you want to price it in the Goldilocks zone. Too high, and you might not get any takers. Too low, and you’re giving money away. Just right, and you get the most from your practice.
If you’re buying a practice, you need to assess how much it’s worth to you, rather than blindly accepting the seller’s asking price—or counteroffering $200K over “just because.”
When talking about the right price, don’t expect to nail it down to the nearest dollar. As long as you get it within a range of “just right values,” you’re doing great.
Most buyers are fine to pay a fair price for a good practice, they just don’t want to get ripped off. As a seller, you’ll want solid logic and data to back up your pricing decision.
So, how much is my practice worth then?
Your practice is worth EXACTLY 76.83% of prior year’s collections. Just kidding. That’s an average, and it’s for general dentistry. Your practice could be worth more or less than that, depending on location, specialization, overhead, and a whole lot of other factors.
I arrived at the above figure by collecting and analyzing some data from my clients. Let’s get into the numbers.
The Brian Hanks Data
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?”
Take the following data as just that: data. It’s not the gospel truth to valuing your dental practice, but it is a useful lens.
Here are some key takeaways from the data I compiled:
- 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 than within the various specialties. This means that general dentistry figures are more reliable as guidelines. Take figures for the specialty practices with a lot more salt.
- Prices are increasing. The average price/PY collections ratio has increased for all practice types over the past three years
- The increase has been the highest for orthodontics and prosthodontics practices, suggesting that the value of these practices is growing faster than that of other practices.
- 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.
- Orthodontics has the highest average goodwill/price ratio, indicating that buyers are willing to pay a premium for orthodontic practices. Prosthodontics and oral surgery also have relatively high average goodwill/price ratios.
- The average price/PY collections ratio varies within each practice type. So does the average goodwill/price ratio. These facts indicate that there are a number of factors that can affect the valuation of a dental practice besides its specialization (or lack thereof), such as the practice’s location, its patient base, and its financial performance.
A few notes about the data:
- 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.
For Buyers: You’re Buying an Income Stream, so Value Accordingly
Ultimately, a dental practice’s worth to a buyer is all about its net profitability.
When I help buyers evaluate the price of a practice, I continually emphasize that 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 practice’s after-expenses cashflow.
For 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 get too myopic about price.
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.
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.
Why You Want to Own a Practice
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.
Listen to this podcast to understand how to quantitatively analyze a practice for sale.
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