It’s difficult to understand practice values in a specific market when comparing national averages. Collections, net income, and EBITDA are important but not the only valuable considerations when understanding the fair market value of a practice. Here is a list of factors taken into consideration when analyzing a practice in comparison with other opportunities in the marketplace.

When providing an appraisal, we are meticulous in the details collected to fairly compare opportunities in the marketplace. Completing approximately 10 appraisals per month and transitioning 3-4 practices per month, we have a depth of knowledge about the Colorado market and what practices are worth. For this reason, a percentage of collections, a set percentage of the adjusted net, or a multiple of EBITDA can create an inaccurate perception of value.

Comparing Practice Opportunities Based on Total Collections

A percentage of gross collections is an inaccurate way to compare opportunities. Practices in Colorado sell for 40% to over 100% of gross collections. If I have two practices that both collect $1,000,000.00, Owner A takes home $275,000, and Owner B takes home $450,000. If this is the only information you know about these two opportunities, it’s obvious that they should not sell for the same percentage of gross collections.

Comparing Practice Opportunities Based on Total Adjusted Net Income

A percentage of adjusted net is a better barometer when comparing practice opportunities. Most practices appraise and sell for $150%-200% of adjusted net income. So, if Owner B takes home $450,000, then this would be $675,000 – $900,000.

Comparing Practice Values Based on a Multiple of EBITDA

EBITDA is earnings before interest, taxes, depreciation, and amortization and adding back reasonable doctors’ compensation for the dentistry to be completed by an employed dentist. If a practice collects $1,200,000, the Adjusted Net is $480,000, the hygiene percentage is 20%, and the doctor compensation for $960,000 in production is $288,000, then the EBITDA will be $192,000. A multiple of EBITDA is commonly used when selling to a DSO. The range in which practices will receive offers for a multiple of EBITDA is 3-10. There are many factors a DSO will consider, including the structure of the offer, that impact the total price. For example, a practice may receive an offer for a 5 multiple of EBITDA that includes 60% cash at close, 10% purchase of stock in the management company, and 30% in bonus to be paid based on the performance of the practice over 3-5 years. The higher the EBITDA, the more likely it is to get a higher multiple of EBITDA as a purchase price. This is often over 100% of the collection and over 200% of adjusted net income.

These examples illustrate that practice values determined simply on total collections, adjusted net income, or multiples of EBITDA have limitations. Oversimplified approaches lack the complexities of analyzing a practice overall. It is important to consider a comprehensive range of factors when assessing the value, rather than relying solely on financial metrics.