For decades, dental practice valuation relied on a simple shortcut: a practice is worth 60–80% of its annual collections. It's easy to calculate, easy to explain — and for most purposes, deeply inadequate.
DSOs, private equity firms, and sophisticated individual buyers don't use this formula. They use EBITDA-based analysis adjusted for practice-specific quality factors. Understanding the difference can mean $200,000–$500,000 or more at closing.
The Collections Percentage Problem
The formula treats two completely different businesses as equivalent. Consider two practices both collecting $1.5M annually:
| Metric | Practice A | Practice B |
|---|---|---|
| Collections | $1,500,000 | $1,500,000 |
| Overhead | 72% | 58% |
| EBITDA | ~$168K | ~$360K |
| Collections % Value | $1,050,000 | $1,050,000 |
| EBITDA-Based Value | ~$700K | ~$1.8M |
Same collections. Dramatically different real value.
EBITDA-Based Valuation: The Right Framework
Normalized EBITDA adds back owner-specific expenses a new owner wouldn't incur: owner compensation above market rate, personal vehicle/insurance/phone, above-market rent if owner owns the real estate, family members on payroll, and one-time expenses.
The Multiple: What Drives It Up or Down
- Hygiene program strength — The most consistent multiple premium driver
- Revenue growth — A practice growing 10%+ commands a higher multiple than a flat one
- Associate coverage — Reduces key-person risk significantly
- Location and demographics — Growing suburban markets with favorable age demographics trade at premiums
- Patient base quality — Insurance mix, fee-for-service percentage, active patient count
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