How to Calculate a Dental Practice’s True Market Value: Key Metrics to Use
Determining the true market value of a dental practice isn’t as simple as applying a generic multiplier to last year’s collections. Instead, it involves careful consideration of financial metrics, operational data, and intangible assets.
In this guide, we’ll break down the essential methodologies and metrics professionals use to quantify a dental practice’s true value in a given market.
What Is Market Value?
In a dental practice sale, the fair market value (FMV) is simply the estimated cash price a practice would sell for in the current market. Agreed upon by both a willing buyer and seller, it assumes no obligation to buy or sell from either party.
It’s important to note that FMV isn’t just an arbitrary multiple of current revenue. It incorporates historical performance and any potential future risk, all of which impact the value of the practice. In essence, the value is based on a predictable stream of future income and the infrastructure (goodwill, equipment, staff) required to maintain it.
In the sections that follow, we’ll outline how these core elements are analyzed and calculated to create a realistic market value.
The Three Primary Valuation Approaches
Valuation starts with three fundamental approaches, each weighted differently depending on a variety of factors, such as the size of the practice.
Income Approach
The income approach focuses on the practice as an ongoing income stream for the buyer. With this valuation method, earnings are normalized (adjusted for owner-specific expenses) and then multiplied or capitalized at a rate that reflects the risk of the investment.
In other words, perceived risks to future income act as a discount within the calculation, while higher potential earnings increase the multiplier.
Market Approach
The market approach places greater weight on real-world market data. It compares the practice being sold with practices recently sold in the same region. This is similar to real estate comps, which you may already be familiar with, where home prices are set based on recent sales in the area.
When calculating value with the market approach, analysts will generally use either Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) or Seller Discretionary Income (SDE) to establish a baseline. We’ll cover exactly how both EBITDA and SDE are calculated and applied when we dive into revenue metrics further below.
Asset Approach
As the name suggests, the asset approach values the practice’s assets, both tangible and intangible. For a dental practice specifically, intangible assets or “goodwill” may include things like reputation within the local market and loyalty of the patient base.
Tangible assets include any equipment, property, and other physical items owned by the practice.
When calculating value with the asset approach, these two asset types are assigned values, and then any liabilities are subtracted to determine the final amount. While asset valuation is important, it’s generally used to calculate the “floor” price of the practice and acts as more of a starting point. However, for a practice in distress, it could serve as the primary valuation method.
Revenue: The Starting Point
Now that you have an overview of the valuation methods, we’re going to look at how revenue is handled during the valuation process.
Production vs. Collections
When evaluating a dental practice, it is important to understand the difference between production and collections.
Production represents the total value of services provided based on the practice’s fee schedule. Collections represent the actual revenue received after insurance adjustments, contractual write-offs, discounts, and uncollectible amounts are accounted for.
For practices that participate with insurance plans or Medicaid, production is often significantly higher than collections. This is because insurance companies establish reimbursement rates and fee schedules that are typically lower than a practice’s standard fees. In exchange for being in-network and gaining access to covered patients, dentists often accept reduced reimbursement amounts compared to what they might charge a patient paying directly without insurance.
Medicaid can result in even larger write-offs than commercial insurance, although reimbursement levels vary considerably by state. In some states, Medicaid reimbursement rates are relatively low, while in others they may be quite competitive. For example, certain procedures in Indiana have historically benefited from comparatively strong Medicaid reimbursement rates.
Because collections reflect the actual revenue generated by the practice, they are generally considered more important than production when assessing value. While production can provide insight into patient demand and clinical activity, collections offer a more accurate picture of the practice’s financial performance.
Percentage of Collections: A Common Rule of Thumb
One of the most widely recognized valuation benchmarks in the dental industry is a practice’s value as a percentage of annual collections (revenue). While this approach is not a formal valuation method and should not be used in isolation, it remains a common rule of thumb – particularly for practices generating less than $1 million in annual collections.
In many markets, dental practices may sell for approximately 60% to 90% of annual collections, although the appropriate percentage can vary significantly. Factors that influence where a practice falls within this range include:
- Profitability and cash flow
- Patient demographics and payer mix
- Practice size and growth trends
- Location and local market demand
- Provider dependence and staffing stability
- The structure and terms of the transaction
Because two practices with similar revenue can have very different earnings and risk profiles, collections alone do not determine value. Instead, this benchmark is best viewed as a starting point that helps owners and buyers establish a preliminary valuation range before conducting a more detailed financial analysis. In practice, sophisticated buyers and appraisers place greater emphasis on profitability, cash flow, and future earnings potential than on revenue alone.
EBITDA: The Most Important Profitability Metric
Savvy buyers or financial institutions will focus on EBITDA to determine profitability instead of just looking at gross earnings.
What Is EBITDA?
EBITDA allows buyers or investors to evaluate the core operational profitability of a dental practice that’s independent of its current capital structure, tax environment, or non-cash accounting treatments.
Essentially, this means stripping away variable financial factors to create an “apples to apples” profitability comparison that works across different practices regardless of certain financial and accounting decisions.
EBITDA Formula
The standard EBITDA formula is:
EBITDA=Net Income+Interest+Taxes+Depreciation+Amortization
When determining the value of a dental practice, adjusted EBITDA will be used. This takes the output from the standard EBITDA calculation and adds back discretionary, one-time, or non-operational expenses paid by the current owner (such as a personal vehicle lease, family travel, or above-market continuing education costs).
Adjusted EBITDA = EBITDA + Owner Add-Backs − Normalized Owner Compensation
As a simple example, let’s assume a practice has a net income of $200,000. The owner paid herself $500,000 in salary, and a fair market replacement dentist would cost $300,000.
The appraiser would add back the difference between the owner’s current salary of $500k and the cost to replace her with another dentist of $300k, thereby increasing the adjusted EBITDA by $200k, for a total EBITDA of $400k.
EBITDA Multiples in Dental Practice Valuation
Once the adjusted EBITDA of the dental practice is established, a valuation multiple is determined. The multiplier will reflect the size, type, and risks that the practice may face in the future.
The multiples can vary greatly, but in general, a low-risk, modern practice that can be easily scaled will command the highest multiple.
A general framework for multiples is as follows:
- Large Solo/Multi-Provider: 4.5x – 5.5x
- Multi-Location/Group Practices: 5.5x – 7.5x
- DSO-Ready Platforms: 7.5x+
Just keep in mind that these are generalized figures, and real multiples can vary based on a number of factors.
Seller’s Discretionary Earnings (SDE)
While institutional buyers and DSOs focus on EBITDA, smaller solo practices transitioning to an individual doctor-buyer will often use seller’s discretionary earnings (SDE). Calculating SDE starts with pre-tax net income and adds back the owner’s total compensation (salary + benefits), interest, depreciation, amortization, and any one-time or non-recurring expenses.
SDE = Net Income + Owner Compensation + Add-Backs
To put it simply, SDE reflects the total financial benefit available to the new single owner-operator. In most cases, for practices with collections under $1.5 million, SDE-based valuation is used instead of EBITDA.
Patient Base: The Core Driver of Goodwill
The patient base of any practice is the engine that drives predictable future income. It is one of the most valuable intangible assets of a dental practice and a primary component of goodwill. While equipment and facilities can be replaced, an established patient base provides the recurring revenue and cash flow that buyers are ultimately acquiring.
For valuation purposes, several aspects of the patient base are particularly important when determining fair market value:
Active Patient Count
An “active” patient is typically defined as a patient who has had at least one visit within the past 18 to 24 months. A larger, stable, or growing active patient base is generally more valuable because it provides a stronger foundation for future production and collections.
However, buyers look beyond the total number of active patients. They also evaluate trends over time. A practice with a growing active patient count is generally viewed more favorably than one experiencing patient attrition. Similarly, a practice with significantly fewer active patients than comparable local practices may receive a lower valuation.
Recall Rate
Recall rate measures how effectively a practice brings patients back for routine preventive care and hygiene appointments. Since most patients are placed on a six-month hygiene cycle, a well-managed practice should see a substantial portion of its active patient base at least once or twice per year.
Strong recall systems create more predictable revenue, improve patient retention, and generate opportunities for restorative and specialty treatment. From a buyer’s perspective, a high recall rate is a sign of operational discipline and patient engagement. It also provides confidence that patients are likely to remain with the practice after a transition in ownership.
New Patient Growth
New patient growth reflects a practice’s ability to attract patients through referrals, marketing efforts, insurance participation, online visibility, and community reputation.
Consistent new patient flow is essential because every practice experiences some degree of patient loss due to relocation, insurance changes, life events, or other factors. As a general benchmark, many practices target approximately 20 to 30 new patients per month per full-time practitioner, although this can vary significantly depending on market size, specialty, and local competition.
A strong history of new patient growth often indicates a healthy market position and can positively influence valuation.
Payer Mix
Payer mix is another important driver of practice value because it directly affects profitability, reimbursement rates, and future growth opportunities.
In general, buyers tend to view payer types in the following order of desirability:
- Fee-for-Service (FFS)
- PPO Insurance
- HMO Insurance
- Medicaid
Fee-for-service practices are often viewed as the most attractive because they have greater control over fees, less dependence on third-party payers, and typically higher profit margins. Fully fee-for-service practices have become increasingly rare in many markets and may command premium valuations when supported by strong patient demand.
PPO-based practices remain highly desirable because they often provide a balance between patient volume and reimbursement levels. HMO-heavy practices typically receive lower valuations due to lower reimbursement rates and reduced provider flexibility.
Medicaid participation can be an effective strategy for serving certain communities and generating patient volume, but many buyers—particularly private equity-backed groups—apply valuation discounts to practices with significant Medicaid exposure. In many transactions, buyers prefer to see Medicaid represent no more than approximately 10% of total collections, although acceptable levels vary by market and reimbursement environment.
Ultimately, buyers evaluate payer mix alongside profitability, patient demographics, and local market conditions to determine how sustainable future earnings are likely to be.
The strongest patient bases combine a large active patient count, effective recall systems, consistent new patient growth, and a favorable payer mix. Together, these characteristics create the predictable future cash flow that drives goodwill and practice value.
Provider Dependence Risk
This is a risk that many practice owners underappreciate. It’s a structural risk and can be an issue if the owner is responsible for a large portion of the practice’s goodwill and production.
To explain this further, let’s look at two potential risk scenarios:
High-Risk Scenario
A practice where the owner-dentist personally produces 85 – 90% or more of the revenue. In this scenario, the owner will also have deep personal relationships with the majority of patients and have no associate dentists.
The risk in this scenario is that the patients may not be retained when the original practice owner leaves and is replaced. In these scenarios, the value of the practice is discounted.
Lower-Risk Scenario
In a low-risk scenario, production is distributed across multiple providers within the practice. Hygienists drive consistent recall revenue, and operational systems run independently of the owner. The owner can still be directly involved, but the practice’s identity is distributed, making the transition less jarring for patients.
Learn More About The True Value of Your Dental Practice
Determining the true value of a dental practice is a mix of art and finance. No two practices are the same, no single valuation process can be applied to every practice, and understanding your current baseline is the first critical step toward actively maximizing your practice’s worth before putting it on the market.
For help navigating this crucial step, expert guidance can make all the difference when selling a practice. Contact Lakeshore Dental Brokers to learn more about valuing your practice and how we can support you during the entire sales process.
