How Much Does it Cost to Buy a Dental Practice?

What Factors are Influencing Sales Prices?

Several factors play a role in determining the cost of a dental practice. While financial performance is key, the dentist selling the practice must also consider:

• The number of active patients
• The time and effort invested in growing the practice
• The amount spent on dental equipment
• Whether the office is equipped with the necessary technology or requires major upgrades
• Whether the office is move-in ready or needs extensive remodeling

These are just a few factors that can influence the sale price of an established dental practice.

Practice Location

Location plays a major role in the success of a dental practice, as it directly affects patient flow. A practice in an area with a declining population and little economic activity will likely see lower revenues and growth potential compared to one in a growing city.

Accessibility is another factor influenced by location. An urban practice might benefit from being close to public transportation, while a rural practice may depend on patients with personal vehicles. However, rural practices often face less competition, and in some cases, they may even have a monopoly, leading to strong performance.

Other important considerations include whether the office has good ground-floor visibility or is tucked away inside a building. With so many people searching online for services, you might ask whether visibility is worth the extra rent or if that money would be better spent on Google ads and other marketing efforts.

Patient Demographics

When evaluating an established dental practice, it’s essential to look beyond the number of active patients and assess whether the practice has the right patient demographics to support long-term growth. Demographics, in marketing terms, refer to characteristics that help segment customers, and for dentists, the most important factors to consider are patient age and income level.

Age is crucial for ensuring a steady flow of patients. For example, if the average patient age is 60, the practice may lack enough younger patients to sustain or grow your revenue. A shortage of young adult patients could also limit your ability to expand into pediatric dentistry. On the flip side, if you’re focused on periodontics or implants, an older patient base would align better with your practice goals, as these services are more commonly needed by older individuals.

Income level is also a key factor, as it affects patients’ ability to afford certain treatments. If you specialize in high-cost procedures like dental implants, a practice with wealthier patients would be a better fit. For example, with implants costing up to $4,500 each, patients with higher incomes are more likely to invest in such treatments. For general dentistry, income may be less critical, but it’s still worth considering when assessing the potential for growth and the types of services you plan to offer.

Staff Qualifications

When purchasing an established dental practice, it’s common for existing employees to remain after the ownership transition, making staff qualifications a critical factor in determining the practice’s value. Experienced and long-tenured staff are a significant asset, so a practice with employees who have been in their roles for several years may come with a higher price tag. On the other hand, if the practice has a history of high staff turnover and no employees have been there for more than a year or two, the sale price may be lower.

Staff credentials also play a role in pricing. A practice with employees who hold advanced certifications in areas like dental hygiene, assisting, or laboratory technology might be priced higher than one with staff who have only basic qualifications.

The involvement of the selling dentist in the transition process can also influence the sale. Some dentists primarily manage administrative tasks, while others are deeply involved in patient care and are central to the practice. The buyer will need to determine if a longer or shorter transition period is best, depending on the specific situation. Typically, a transition takes no longer than six months. In many cases, the seller finishes a few ongoing cases and leaves, allowing the buyer to grow the practice significantly after the transfer.

Financial Stability

Financial performance is a critical factor when evaluating a dental practice, and reviewing the financial statements thoroughly can take several weeks. While many dentists focus solely on production numbers, this can be misleading, as a practice may have high production but still not be profitable.

Roger Levin, an experienced dentist with an MBA, highlights that two key indicators of a practice’s financial health are production measurement and collections measurement. Both are essential for understanding the true profitability and sustainability of the practice. By focusing on these metrics, you can get a clearer picture of whether a practice is financially sound and worth pursuing.

Production Measurement

Production measurement in a dental practice is all about productivity and efficiency, often calculated through metrics such as production per patient, per chair, and per hour of dentist or hygienist work. Two key performance indicators tied to these measurements are case presentation and case acceptance.

Case presentation reflects how effectively a practice generates revenue by presenting recommended services to patients, essentially acting as the sales process. Case acceptance refers to when patients agree to proceed with the recommended treatment plans. As a potential buyer, it’s important to look for a practice with high levels of both case presentation and case acceptance, as this indicates a healthy flow of treatments being recommended and accepted, ultimately driving revenue.

Collections Measurement

When evaluating a dental practice, it’s essential to not only focus on revenue but also on how much of that revenue is actually collected. Three key financial performance indicators to consider are total practice collections, collection ratio, and accounts receivable.

Total practice collections refers to the actual cash available to cover operating expenses such as employee salaries, clinical supplies, and facility costs. A practice with strong cash flow is more attractive to buyers and typically commands a higher sale price, especially if it has a stable patient base.

Collection ratio measures the relationship between production (services rendered) and the actual income collected. For example, if a practice generates $1 million in revenue but loses 25% to bad debt, that’s a $250,000 loss. A high collection ratio is crucial for financial health, and practices with strong ratios are valued more highly. In insurance-based practices, the difference between the billed fee (usual and customary) and the insurance company’s reimbursement is often written off. This is not a sign of a poorly run practice but simply a reflection of its business model.

Accounts receivable represents the amount of money owed to the practice for services already provided. While some patients pay quickly, others can take 30, 60, or even 90 days to pay, and it becomes harder to collect after 90 days. Generally, accounts receivable on the day of the sale remain with the seller, while the buyer implements their own collection policies to improve efficiency.

Considering these factors will help you assess the financial health and potential profitability of a practice you’re looking to purchase.