Dental practice valuations have not yet been significantly impacted by inflation, higher interest rates and bank fiascos. However, for many practices, values and options may be impacted in the coming months and quarters for practice transactions which require bank financing for the buyer.

Factors Affecting Dental Practice Valuations

Practice values vary dramatically based upon the following:

  • the size of the practice
  • whether a doctor wants to sell all or just a part of the practice 
  • the doctor’s desired time frame to continue practicing 

In short, larger practices with a younger doctor who has a 10+ year horizon of continuing to lead their practice will achieve the highest values. 

Options for Monetizing Dental Practices: Doctor-to-Doctor, DSOs, and IDSOs

Doctors with less than $1.8 million in collections will typically monetize 100% of their practice in a doctor-to-doctor transition. Dental practice valuations will be based upon the practice collections in the prior 36 months. The doctor will typically have an option to stay as an employee or contractor for a defined period of time. These size practices may also have the option to sell 100% to a Dental Support Organization (DSO) at similar values.  

Doctors with a three year or longer time horizon and a desire to continue leading their practice have the option of monetizing a part of their practice value in a partnership with an Invisible Dental Support Organization (IDSO). 

In an IDSO partnership doctors sell 51% to 90% of their practice’s value at a multiple of the practice’s operating profit (dental practice EBITDA), rather than a percentage of collections, as in a doctor-to-doctor transaction. Doctors retain ownership and continue to lead the practice with the support of a resourceful, silent IDSO partner.

In part, because the doctor is committing to stay as an owner, an IDSO partnership typically yields the highest initial practice value. Fortunately, IDSOs have not been as impacted by the credit markets and bank challenges as their capital and debt is not typically provided by banks, but rather large institutional investors. 

Dental Practice Values in a Doctor-to-Doctor Sale/Transition 

Doctors will typically achieve a practice value of 70% to 80% of the average practice collections within the previous three years. In some cases, they will also be paid the value of their receivables at closing. Challenges with this model are the requirement for the purchasing doctor to arrange bank financing and a reduction in the number of potential buyers.

In 2013, about 15% of graduates joined an IDSO or DSO. In 2022, that percentage had grown to 30%+, giving selling doctors fewer prospective purchasers. 

Dental Practice Valuations in a Sale to a DSO

DSOs will also value dental practices at doctor-to-doctor practice values, and many are eager for doctors to remain with the practice as an employee. The DSO may provide additional upside consideration to a doctor based upon their performance after closing, on top of the regular doctor employee compensation. 

In a DSO sale of a practice, doctors typically sell 100% and contract to work for an agreed period of time. After a sale, the doctor’s practice management duties are reduced or eliminated as the doctor no longer has ownership. DSOs are typically well financed and thus less impacted by purchase bank financing requirements. They are an option for doctors with a short chairside time-frame goal. 

Partnering with an IDSO; Not a Sale, a Partnership

The highest dental practice valuations are achieved for practices with doctors eager to continue leading their practice under the doctor’s brand, team and strategy for at least three years and preferably for decades. Many doctors in their 30s and 40s with larger practices are now partnering with IDSOs in all 50 states. Doctors sell a percentage of their practice and remain as owners of anywhere from 10% to 49% of the practice. 

Unlike a DSO buyout, doctors retain full autonomy and continue as the decision maker within the practice. The increase in the value of the doctor’s partial ownership can become far more valuable over time than the 100% ownership held prior to the IDSO partnership. Some doctors have seen gains on their retained equity of over 500% in less than three years. 

The IDSO acts as a silent partner providing administrative support services including handling banking, payroll, accounting, tax, legal, compliance, credentialing and payor/vendor negotiations. IDSO partnership can provide doctors with resources including recruiting, marketing, lower costs and higher reimbursement rates from payers. They may also provide capital for expansion and denovo practices or complementary acquisitions benefiting the doctor. Their goal is to enable the doctor to grow bigger, faster and more profitably. 

IDSOs achieve the highest values for practices with over $500,000 in EBITDA. Values are based upon a multiple of the prior 12 months EBITDA which can range from 6x EBITDA to 12x EBITDA for exceptional practices. In relative terms, some practices can be valued at 100% to 400%+ of collections. A great practice in an LPS advised process will have six to ten or more qualified IDSO bidders from which to select their IDSO partner. An IDSO partnership is best for achieving long term wealth and is not a short-term transition or exit strategy.Contact us today to schedule your no-cost, no-obligation dental practice valuation with Chip Fichtner. If nothing else you will learn something new!

Chip Fichtner