Most dental practices end up priced on three figures: what the chairs collect, what it costs to run them, and what the owner dentist takes home. Choose the method that suits how your practice earns, then tie each figure to a document you can hand over. Two things move the price more than the formula does. One is which records stand behind each input. The other is how much of the production leaves the building with you.
Other answers are in the guides hub if you want to read around this one.
How is a dental practice valued?
Three methods come up most often. Each one is a short formula.
- Earnings multiple. V = E × M. E is profit after the owner dentist draws a market salary, with one-off items taken out. M is the multiple comparable practices change hands for, and it falls as the buyer's risk view rises.
- Net assets. V = A − L. A is the fair value of equipment, supplies and any real estate the practice holds. L is the debt it carries. Treat the result as the floor under the other two.
- Discounted cash flow. Forecast the free cash flow for each year and discount it for time and risk. This fits a practice whose next few years will not mirror its past, for instance after an associate joins or a lease runs out. It fits a practice whose next few years will not mirror its past, for instance after an associate joins or a lease runs out.
When a buyer takes the practice's assets rather than its shares, the price gets split across asset classes. The IRS sets how that split works, and it is covered below.
Before you start, read What is my company worth? and How do you export your records?.
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Which method fits your practice?
Pick by how the practice makes its money.
- Steady general practice with a stable patient base: earnings multiple, with net assets as the floor.
- Practice that owns much of its equipment or the building: net assets, adjusted to fair value, alongside earnings.
- Growing practice, or a big change coming (a departing associate, a lease renewal): discounted cash flow, with the earnings multiple as the check.
- Practice where you do most of the chair time: a buyer will discount the earnings for the work that leaves with you. Show the production that does not depend on you, as its own line in the records.
Price it two ways before you trust either. A wide gap between the answers means one input is off, and the record list below shows where each input lives. If the method choice still feels abstract, how it works walks through the steps from records to a figure.
What records do you need to value it?
Every figure in the formulas has a source document. Gather these before you ask anyone to name a price.
| Input | Where it comes from |
|---|---|
| E, adjusted earnings | Profit and loss statements for at least three years, the current year to date, filed tax returns |
| Owner pay adjustment | Payroll records, the owner dentist's pay history, a market salary for a replacement dentist with its source |
| Collections and production | Practice management system reports for collections and production by year, and your payer mix |
| Payer and insurance terms | Signed contracts with dental benefit payers, and the remittance statements from the last year |
| Associate and staff contracts | Employment agreements, the staffing schedule, the hours each dentist works |
| A and L, net assets | Balance sheet, fixed asset register for equipment, supplies count, loans and payables |
| Lease and premises | The lease with its term and renewal options, and any real estate the practice owns |
| M and r, the market inputs | Comparable practice data from a broker or valuation firm, set against your growth and patient age |
Before anything leaves your desk, reconcile the year's bank deposits against the collections report. Any gap you find now is one you can explain in your own words.
What does a buyer read from the same records?
The tax side sets the frame. When a buyer takes the practice's assets, both sides must use the residual method to allocate the price. The consideration is reduced first by cash and general deposit accounts, and the rest is allocated among the business assets in a set order. The allocation also covers how much of the consideration is for goodwill and certain other intangible property.
Inside that frame, a reader on the buying side tests the patient base against your collections by year, checks how long each payer contract runs, and reads the associate agreements and lease for what stays once you step back.
How long do you keep the records?
Keep the records that support an item of income or deduction on a return. For property, keep the records until the period of limitations expires for the year you dispose of the property. Keep copies of your filed tax returns as well.
For patient records, ask your state dental board which retention period applies to your practice. Ask your accountant about the tax side.
Save your valuation workings next to the source documents. Include every change you made to E, the sources behind M, and the date of each run. Without them, a figure you priced a year ago is hard to defend.
Your next step
Pull three years of profit and loss statements, the current year to date, your payer contracts and the collections report. If a sale is on the horizon, the succession checklist sets out what to prepare and in what order. Then run the estimate to see what those records support.
Tax passages come from IRS publications and IRS sale of a business guidance. Valuation method names are standard practice terms.