How Much Should You Pay for a Dental Practice?
An overview of the factors that influence the price of a dental practice.
A Comprehensive Guide to Pricing a Dental Practice: What You Need to Know
If you're considering buying a dental practice, you're probably wondering, “How much is a dental practice worth?” Whether you're just curious about the costs or you're evaluating a specific practice, understanding how practices are valued is crucial. In this article, we'll cover the major factors influencing the price of a dental practice, how practices are valued, and a few tips that could save you tens, if not hundreds, of thousands of dollars in your journey toward ownership.
Prediction of Future Income
The core value of a dental practice lies in its potential to generate income. When buying a practice, you'll primarily focus on two key financial figures: revenue and profit.
Revenue is the total amount of money the practice earns.
Profit is what's left after all expenses are covered.
In many cases, revenue is a more telling figure than profit because the latter can be heavily influenced by how the dentist operates the practice. Dental insurance reimbursements tend to be fixed by region, making revenue a good indicator of patient flow and treatment volume. As a potential buyer, your goal should be to assess whether the practice has a steady stream of patients and consistent revenue.
Tip: Don’t just look at last year’s revenue; analyze trends over the past 5 to 10 years. For example, if a practice’s revenue was steady for several years and suddenly jumps in the year before a sale, this could be a red flag. The selling dentist might have over-treated patients to inflate the numbers, leaving you with minimal work on the schedule after the sale.
The Story Behind the Numbers
A practice’s financials only tell part of the story. You must dig deeper to understand the dynamics at play:
Are there patients regularly scheduled for hygiene and recall appointments?
What procedures did the selling dentist focus on? Were they doing a lot of high-dollar treatments like crowns and bridges that may not be sustainable after the sale?
You want to avoid a situation where the selling dentist pushed aggressive treatment plans to boost numbers, only for you to inherit a practice with little ongoing work and upset patients. Ideally, look for a practice with a well-balanced procedure mix and patient base, and where treatment planning has been consistent over time.
Location, Location, Location
Location is one of the biggest factors in determining the price of a dental practice. If you're set on a practice in a major city, expect to pay a premium. But if you're open to working in a more rural area, you can often find much better deals.
Urban practices are in higher demand, which drives up prices, while rural areas tend to have fewer buyers competing for available practices. Even though city practices come with a higher price tag, don't let that discourage you from buying if it's where you want to live and work. After all, practice ownership can be highly profitable, and the initial cost will seem smaller once you're reaping the rewards of ownership.
Insurance Mix and Patient Base
One of the most important aspects to consider is the insurance mix of the patient base. Practices typically fall into three categories:
Cash-paying patients: These are the most valuable, but they can be highly loyal to the selling dentist. When transitioning ownership, many cash patients may leave if they don’t connect with the new dentist.
PPO insurance patients: They generally offer a good balance between value and stability. These patients are likely to stay, but reimbursements are lower than for cash patients.
HMO and Medicaid patients: These practices are often valued lower because reimbursements are the smallest. However, these patients are often more loyal due to the limited number of providers accepting their insurance.
Knowing what type of practice you want to run will help you evaluate whether a specific practice fits your goals.
Team Members and Staff Loyalty
Another significant factor in valuing a dental practice is the team you'll inherit. In many cases, the dentist is leaving, but the staff remains. Loyal, long-term staff can make or break the patient retention rate during the transition.
Look closely at whether key team members, such as the hygienist and receptionist, are staying. Patients often have strong relationships with the staff, and if a crucial team member leaves, they may take patients with them. This can significantly reduce the practice’s value after the sale.
If the practice's key staff includes the selling dentist’s spouse or family, be aware that they will likely leave, and this could create gaps that you’ll need to fill.
Practice Valuations: How They’re Done
Valuing a dental practice can be tricky. Ideally, you’d compare it to similar practices recently sold in the area, but it’s often hard to find direct comparables because every practice is unique, and sale details are usually not public.
A common method is to look at the practice's average revenue over the last few years. Dental practices typically sell for 50% to 110% of their annual production. Practices in cities, or those with a significant cash or PPO patient base, are on the higher end of that range. Rural or Medicaid-heavy practices tend to be valued lower.
Tip: Be cautious of relying solely on a practice broker’s valuation. Brokers are paid by the seller, which means they are incentivized to get the highest price possible. Get an independent valuation and speak with dentists who have recently purchased a practice to get a clearer picture of what’s fair.
Equipment and Location Considerations
When buying a practice, you’re also purchasing the equipment. The quality and condition of that equipment can greatly influence the value of the practice. Additionally, consider the practice’s visibility and ease of access for new patients. A practice located in a central, high-traffic area will likely command a higher price than one in a hidden or less convenient location.
Also, be mindful of whether the selling dentist is retiring or opening a new practice nearby. If they’re planning to stay in the area, ensure you have a strong non-compete agreement in place to prevent them from taking patients with them to a new practice.
Final Thoughts
The value of a dental practice is more than just the numbers on paper. It’s about understanding the story behind those numbers and carefully considering all aspects of the practice, from location to patient demographics, to staff loyalty. Don’t rush into a purchase. Get independent evaluations and ensure that the practice you buy aligns with your goals and vision.
Becoming a practice owner can be one of the most rewarding decisions of your career—both financially and personally—but it’s essential to approach the process with due diligence. Every day you delay ownership is a day you're missing out on building equity in your future. Take control of your career and start the process today.
