You've probably never had to read a dental practice's real financials. That's normal. Associates see a schedule every day, and the numbers that decide what a practice is worth stay with the owner.
So when you find a practice for sale and the seller says it produces $1.5 million a year, the asking price can sound like a great deal. It might be. But when you're buying a dental practice, revenue alone doesn't tell you what it's worth. Stephen Trutter, CEO of Ideal Practices, walked through what does on a recent episode of The Startup Dentist Podcast.
One of the biggest mistakes Stephen sees is starting with the asking price. He sees posts all the time asking whether a certain price is reasonable for a practice. Nobody can answer that from a social media post, and in his view it's the wrong first question anyway.
The first question is what you're actually buying. That includes the patient base, goodwill, equipment and technology, a trained team, systems, the location or lease, and the practice's reputation. Most importantly, you're buying future cash flow. As Stephen put it, "The asking price is simply the seller's number or the broker's number."
Stephen starts with a basic premise: "production is not collections." A practice might produce $1.5 million but only collect $1.2 million, and that's a very different economic picture.
Look at gross production, adjustments, write-offs, and collections, and find out why those numbers differ. What's being written off? What's the collection percentage? Is there a lot of old accounts receivable? A buyer should never evaluate a practice on production alone.
Stephen was blunt here: "One year of financials isn't enough." He recently reviewed a practice whose collections had fallen by roughly half, from almost $1 million to about $600,000. There was a story behind it, and he still didn't love the story.
Banks don't love negative trends either. When you apply for a loan, the bank evaluates you and the practice. You can qualify as a buyer while the practice itself gets declined for falling revenue.
Look at 2 to 3 years of financials, including hygiene production, new patient numbers, and production by provider and by procedure. A practice that went from $800,000 to $1.1 million to $1.4 million tells a very different story than one that went from $1.5 million to $1.3 million to $1.1 million.
A seller's tax return or P&L doesn't necessarily show the economic reality for you as the buyer. It may include the owner's auto expenses, health insurance, family payroll, or one-time costs. Normalizing earnings shows what the practice truly generates for a new owner under normal operating conditions.
Doctor compensation matters too. Stephen described two practices that each collect $1 million. In one, the doctor produces $700,000, and in the other $400,000. Those practices can have very different values, because the buyer has to replace the seller's clinical production. The better measure is the practice's profit after paying reasonable compensation for the dentistry being performed.
Overhead matters, but Stephen warns against obsessing over the percentage. A practice with 65% overhead isn't automatically bad, and one with 55% isn't automatically great. Ask what's causing the overhead and whether you can realistically improve it.
Hygiene is one of Stephen's favorite things to evaluate because it tells a story about the health of the practice. Look at hygiene production, recall and reappointment, and schedule utilization. A strong hygiene program is a stable foundation, and an underused one can be an opportunity.
Even though you personally guarantee the loan, the practice is carrying the debt. Banks measure that with debt service coverage. A ratio of 1.0 means a dollar comes in for every dollar that goes out, and most banks want 1.2 to 1.25 at minimum.
That math covers more than the purchase price. Working capital sits on top of it, because payroll and rent start on day one and so does your loan payment. Equipment needs and marketing get factored in too.
A $1 million practice with room to grow might have more upside than a $1.5 million practice already running at maximum capacity. Stephen said that in today's environment, the $1 million practice could have an opportunity to exceed $2 million.
But he drew a clear line: "you don't want to pay the seller in advance for the growth that you intend to create." Banks don't fund on potential either. Stephen once sat down with a seller whose practice filled 4,000 square feet and 10 treatment rooms, collected $1.2 million, and came with a building priced at $2 million. The seller kept pointing to the potential, and the real question was whether a newer dentist would have the funds left over to grow into that space.
You'll hear that practices sell for some average multiple of earnings. Stephen's warning: "There's no magic multiple that makes every practice worth the same." Two practices with identical revenue can differ in growth, payer mix, location, team, lease, and procedure mix. The better question is why this particular practice deserves the multiple being asked.
Before moving forward on any acquisition, Stephen wants buyers to answer 3 questions: what the practice collects, what it earns after normalized expenses, and what you'll realistically earn as the owner after paying debt and operating the practice. In his words, "If you can't answer those three questions, you're not ready to determine whether the purchase price makes sense."
He also suggests a walkaway test. Forget the asking price and ask what it would cost to build this exact practice from scratch, then compare that with buying it and improving it.
For anyone who has been searching a long time, Stephen's advice is to avoid buying a cheap practice just because you finally found one. A practice priced far under market is like a luxury car priced 25% below value, and you want the Carfax before you find out it was in a flood.
If you've been looking for years, set a date. If the right practice hasn't turned up by then, decide what your other path is, including starting your own.
Stephen's advice comes down to one line: "The goal is to buy the right practice at the right place with the right economics for you." He goes deeper on every one of these numbers in the episode.