Preparing your dental practice for top valuation involves understanding what buyers put a premium on. Things like predictable cash flow, patient retention metrics, and operational efficiency all play a vital role in the final valuation.
However, these areas are not static, and dentists who command top dollar for practices understand that sound preparation can boost the metrics that buyers value most. The sooner they begin to prepare, the more improvement that can be made in these areas, resulting in a higher sale price.
Below, we’ll outline the strategies dentists use to obtain top valuations through preparation and optimization in the months leading up to a sale.
Buyers can come in a variety of shapes and sizes. They can be private-equity-backed DSOs, individual dentists, or group practices looking to expand. But despite this variety of buyers, they’re all going to look well past your last year’s revenue when valuing your practice.
They want to see a history of clean, consistent financial data that provides them with a sound trajectory that allows for reliable future projections. This means that the earlier you begin to prepare for the sale, the more time you have to optimize the areas of your practice that matter most to buyers.
For example, a common valuation method will look at EBITDA (earnings before interest, taxes, depreciation, and amortization), which is then adjusted for owner-specific add-backs. Then, a multiple is applied to the EBITDA to create a valuation starting point.
In this scenario, one strong year of revenue won’t drive the multiple higher, as buyers will see that single year as an anomaly. Remember, buyers want to see a consistent trajectory so they can forecast future earnings.
Optimizing right before the sale won’t move the needle much. Instead, thoughtful preparation in the 2-5 years before a sale is often seen as ideal, as it allows your practice to show a predictable history of earnings and efficiency that drives a higher multiple.
Financial documentation is going to be the first place buyers look during the due diligence process. Inconsistencies or poor documentation are going to be an instant red flag for buyers, and immediately start to negatively impact any potential multiple or valuation.
Cleaning up your financial documentation should focus on these key areas:
Separate personal and practice expenses: Items such as vehicle leases, personal travel, or family payroll that run through the practice need to be identified and clearly documented as add-backs. These also need supporting documentation, as unverified add-backs can be a red flag for buyers.
Normalize owner compensation: If you’re paying yourself below or above market associate rates, buyers will adjust for it. Determine what a market-rate associate dentist would cost to replace you clinically, since that number directly affects EBITDA.
Clean up accounts receivable: Aged receivables signal to potential buyers that there are likely collection issues that haven’t been addressed. Tightening up your revenue cycle in the year before a sale improves cash flow, buyer confidence, and overall valuation.
Document all liabilities: Equipment leases, loans, or litigation all need to be clearly documented. If these items appear by surprise during due diligence, they can quickly derail any negotiations and negatively impact the valuation.
After potential buyers examine your financial documentation covering the past 3-5 years, they’ll investigate the operational efficiency of your practice. The main concern will be determining how well the practice will run without you.
This is where the operational structure will either place a premium on the selling price or put a cap on it. Even if a practice has strong financials, too much dependency on the owner can drag down the value and possibly cause some buyers to walk away.
Here are the structural areas that buyers will be most concerned with:
Provider dependency: If you’re a solo practitioner, consider bringing in team members before the sale. Practices that rely on 90% of the production from the owner are considered riskier. Those with hygienists and associates sharing the workload will make the transition for the new owners much easier. In high-performing dental practices, the hygiene department generally generates about 30% of the practice’s total gross revenue. Falling well below this could be a concern for buyers.
Staff retention and tenure: Buyers look for stability among your staff and clinical administration team. Clearly defined roles and responsibilities signal that the practice can continue smoothly after an ownership change. For larger group practices, especially those selling to a DSO, a dedicated management layer that handles scheduling, billing, and other administrative tasks can further reduce owner dependence and make the practice more attractive to buyers.
Modernized administration systems: Buyers want to see modern practice management software, along with integrated imaging and digital workflows. Outdated or siloed workflows that use a patchwork of systems can be a signal that the buyer will need to make additional capital expenditures after the purchase.
Standardized operating procedures: A practice with well-documented protocols for scheduling, onboarding, case presentation, collections, and clinical handoffs makes the practice easier to integrate post-sale. This is particularly important to DSO buyers managing multiple locations.
Financial metrics are important, but buyers are also purchasing patient relationships and the reputation of the practice. To measure this clinical goodwill, buyers will look at the following metrics:
As you can likely tell from this list of metrics, these aren’t numbers that can be easily improved overnight. This is why preparing ahead of the sale is so important when maximizing dental practice valuations.
However, strategies to improve these metrics are generally not cost-intensive and can be improved with simple protocol changes.
For example, tightening your recall and reactivation process through automated reminders or a dedicated team member responsible for hygiene scheduling can begin to improve several metrics. Another strategy is adding a clear protocol for reaching lapsed patients, which can also easily improve key patient metrics without adding significant costs.
To improve case acceptance metrics, present treatment plans with clear financing options and implement follow-ups instead of leaving these interactions as a one-time conversation at checkout.
These are just a few examples, but improving these metrics over time often just involves adjusting your operating procedures as opposed to adding complex systems or costs.
Ideally, you want to contact a broker as early in the decision-making process as possible. If you’re considering a sale, even just casually, it helps to speak with a broker who understands the current market.
One of the biggest mistakes practice owners make is waiting until their production and collections have already begun to decline. Buyers are generally much more attracted to practices that are stable rather than those showing a downward trend. Planning ahead allows you to sell from a position of strength.
An experienced broker can provide a clear and honest assessment of your practice. By comparing it to others in the market, they can identify opportunities to improve value before you go to market.
In general, contacting a broker 18–36 months before a sale provides enough time to make meaningful improvements without disrupting day-to-day operations. However, even if you’re closer to retirement, a broker can still help position your practice in the best possible light and maximize its appeal to prospective buyers.
Whether you’re just starting to consider selling or you’re ready to exit this year, the first step toward maximizing a dental practice valuation is understanding where your practice stands today.
Lakeshore Dental Brokers can give you an immediate snapshot of where your practice stands and provide no-obligation advice on the local market.
Get in touch today to learn how to maximize your valuation and obtain the most lucrative exit possible in today’s market.
Understanding your baseline is the first step toward maximizing your worth. Let’s start with a free, no-pressure valuation – and I’ll walk you through the whole process from there.
Prefer to talk it through? Contact Lakeshore Dental Brokers.
