The methods for determining the value of your dental practice have evolved. Old “rules of thumb” are no longer enough for owners who want to secure the best outcome in a competitive market. Sophisticated buyers, from large Dental Service Organizations (DSOs) to private equity groups, analyze your practice with a level of financial rigor you must be prepared to meet.
They value a business based on the quality and predictability of its cash flow, its risks, and its potential for future growth. To maximize your practice’s value, you must understand how these buyers think. This guide explains the process we use at SovDoc to help you model, position, and negotiate the true worth of your dental practice.
Step 1 Establish Your True Earnings with Adjusted EBITDA
The foundation of your practice’s valuation is its Adjusted EBITDA. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. The key is in the “adjustment” process, where we prepare your financial statements for a buyer.
Think of it like selling a custom-built car. You would remove personal modifications to show the car’s core value. Similarly, we normalize your EBITDA by removing expenses unique to your ownership. We understand that showing your financials can feel like a vulnerable experience. A proper normalization process ensures the story your numbers tell is accurate and powerful.
For example, if your practice has $4.2 million in revenue and $500,000 in reported net income, you might think that is your starting point. But a careful review could reveal a $300,000 owner salary ($150,000 above market rate) and $50,000 in personal travel. Adjusting for these items reveals the true underlying earnings.
- Reported EBITDA $500,000
- Add back salary normalization +$150,000
- Add back owner perks +$50,000
- Adjusted EBITDA $700,000
This process, detailed in our EBITDA Normalization Guide, requires a defensible rationale for every adjustment to withstand a buyer’s detailed examination.
Step 2 Determine the Right Multiple for Your Practice
Once you establish a solid Adjusted EBITDA, we apply a valuation multiple. This is not a fixed number but a range that reflects your practice’s attractiveness to a buyer. This is where deep market knowledge becomes essential.
Several key factors influence your multiple.
- Scale of EBITDA Larger practices with higher earnings are viewed as less risky and command higher multiples.
- Provider Model Is your practice dependent on you, or do you have a stable team of associate dentists driving production?
- Payer Mix As we explain in our guide on the Impact of Payor Mix on Valuation, the balance between insurance and private pay is a significant factor.
- Growth Profile Your demonstrated year-over-year growth and clear pathways to future expansion are highly valued.
For the example practice, its $700,000 in Adjusted EBITDA, multi-provider model, and cosmetic revenue justify a 6.75x multiple, based on our proprietary data.
Enterprise Value = $700,000 × 6.75 = $4,725,000
Here are valuation ranges you might see in the current market.
| Adjusted EBITDA | Typical Multiple Range |
|---|---|
| < $750,000 | 4.0x – 5.5x |
| $1M – $2M | 5.5x – 7.5x |
| $3M+ (Platform) | 8.0x – 10.0x+ |
Step 3 Calculate Your Final Take-Home Proceeds
The Enterprise Value is the headline number, not the amount you will receive. To estimate your net proceeds, you must subtract debt and fees.
- Enterprise Value $4,725,000
- Less Debt – $500,000
- Less Transaction Fees – $200,000
- Estimated Net Proceeds $4,025,000
Many deals also include structures like earnouts or equity rollovers, which can have significant financial implications and require careful planning. You can explore these further in our guide to PE Deal Structures.
Common Mistakes in Dental Practice Valuations
- Using “Rules of Thumb” Relying on outdated metrics will almost certainly undervalue a quality practice in today’s market.
- Presenting Messy Financials Buyers will scrutinize every line item. As we detail in our Financial Due Diligence Guide, being unprepared invites skepticism.
- Ignoring Key Value Drivers The story of your practice—your clinical reputation, your team, your technology—is a critical asset.
- Accepting a One-Off Offer An unsolicited offer is a starting point, not the destination. Without a competitive process, you have no leverage.
Your Partner in Maximizing Practice Value
Valuing a dental practice today requires both financial analysis and market insight. With capitalization rates in the dental sector often falling between 25% and 31%, every dollar of earnings you can legitimately add through normalization can increase your final value by three to four dollars.
At SovDoc, we help you build that clear picture. We create a true baseline for your earnings, use proprietary data to determine the right valuation multiple, and frame a compelling story for the right buyers. We help you manage the complexities of the entire sale process.
Curious what your practice might be worth in today’s market? Request a Complimentary Value Estimate →
Frequently Asked Questions
What is the initial step in valuing a dental practice according to a private equity approach?
The initial step is to establish your true earnings using Adjusted EBITDA, which normalizes the practice’s financial statements by removing owner-specific expenses and personal perks to reveal the core earnings before interest, taxes, depreciation, and amortization.
How is the valuation multiple for a dental practice determined?
The valuation multiple is determined based on several factors including the scale of EBITDA, the provider model (whether it depends on the owner or a team of associate dentists), the payer mix between insurance and private pay, and the practice’s growth profile. It reflects the practice’s attractiveness and risk level to buyers.
What is the difference between Enterprise Value and the net proceeds a seller receives?
Enterprise Value is the headline valuation of the practice. The net proceeds are calculated by subtracting any practice debts and transaction fees from the Enterprise Value. For example, if Enterprise Value is $4,725,000, after subtracting $500,000 debt and $200,000 fees, the estimated net proceeds would be $4,025,000.
What are common mistakes owners make when valuing their dental practice?
Common mistakes include relying on outdated rules of thumb, presenting messy or unorganized financials, ignoring key value drivers such as clinical reputation and technology, and accepting unsolicited non-competitive offers that limit leverage in negotiation.
Why is financial normalization important in the valuation process?
Financial normalization is important because it ensures the earnings reflect the true, sustainable value of the practice by removing non-recurring, owner-specific, or personal expenses. This process strengthens the financial story and withstands rigorous buyer examination, often increasing the practice’s final valuation.