What Is Your Practice Really Worth?

 A dentist called me last month. 32 years in practice. He'd built it from a single chair to four operatories. He has a loyal patient base, the whole thing. And he said to me, "Phil, I think I wanna sell next year. I figure the practice is worth, uh, 1,200,000 because that's what my buddy got for his." Here's the problem.

His buddy's practice and his practice had almost nothing in common except the same zip code. Different production mix, different overhead, different lease, different team, and he was about to anchor the biggest financial decision of his life to a number that he heard at a study club. That happens constantly in this business.

So today, we're going to fix it. By the end of this episode, you'll understand exactly how a dental practice is actually valued, not the rumors, not the rules of thumb, the real methodology, and what actually moves that number up and down Welcome to the Be- Dental Business Podcast. I'm Phil Cole. This show is for dentists who's brilliant at dentistry, but was never taught the business side: buying, building, growing, and one day selling the practice you've poured your life into.

This is the first episode in a four-part series on practice transitions. We're going to walk the whole journey, what your practice is worth, how to buy one without getting burned, how to sell on your terms, and how to actually survive the handoff once the ink is dry. If transitions are anywhere on your horizon, and for most of you, they are, even it's, even if it's years out, this series is built for you.

So let's start where every transition starts, the number. That's today's episode, and in- today's episode is brought to you by your PNC Bank. For 25 years, PNC dedicated healthcare bankers have helped dentists finance, buy, and grow their practices with lending and cash flow solutions built for how your practice actually runs.

Learn more at pnc.com/healthcare. We're proud to have them support this show. Now, before I tell you how valuations actually work, I wanna be clear or clear out the three myths that cause the most damage, because most dentists are operating on at least one of them. Myth one: a practice is worth percentage of collections.

You've heard it all the time, "Practices sell for 70% of collections." It's the most repeated number in dentistry, and I will also say it's the laziest one. Collections tell you how much money came in the door. They tell you nothing about how much of that money the owner actually keeps. So just think about this.

Two practices can reach or collect a million dollars a year. One nets $400,000 to the owner. The other nets $120,000 because the overhead is bloated and the lease is maybe brutal. Those two practices are not worth the same, even though we hear this all the time, and it's not even close. A buyer isn't buying revenue.

They're buying what is left over after the bills are all paid. Myth number two: my equipment is worth a fortune. Oh, man, if I had five bucks for every time I heard this. I love that you're invested in your CBCT, in your scanners, in your nice chairs. Your patients benefit from it, of course. But in a practice sale, the hard assets are usually just a small slice of the value, often well under 20%.

The real value, the part buyers pay a premium for, is the cash flow and the goodwill, the patient base, the reputation, the systems the team has, and if the team stays. Your equipment depreciates. Your goodwill, well, you've built it. If you've built it right, it is the engine. And myth three I'll just figure out the value when I'm ready to sell.

This is the most expensive myth of all. By the time you're ready to sell, the levers that drive value have mostly already moved. Value is built over years, not at a closing table. And the dentist who understands valuation at forty-five sells far better at fifty-eight than the one who's first thinks about it weeks, uh, to a call to the broker.

A valuation isn't a verdict handed down at the end. It's a scoreboard you can read and influence the entire time you own the practice. So, okay, let's get into the real methodology. There are three primary approaches to valuing a dental practice, and a credible valuation, uh, considers all three rather than just cherry-picking the one that gives the, the prettiest number.

You have a lot of times what is called the income approach. Uh, this is, uh, what some people feel is the heart of it. The income approach asks a simple question: How much money does this practice re-reliably put in the owner's pocket year after year? To answer that, we calculate something called an adjusted net cash flow.

Sometimes you'll hear it, uh, called seller's discretionary earnings, or, uh, if people wanna throw out some big terms, by normalized EBITDA. We start with the practice's profit, then we add back expenses that are really owner's perks or one-time items, the owner's above-market sal-salary, the car the practice pays for, the conu-continuing education trip to Hawaii, the family member that's on the payroll who doesn't really work there.

We strip all that out to find the true transferable earning power of the business. Then we apply a multiple to that number based on risk and growth. So that's the foundation of almost every serious dental valuation. Then there's the market approach. This one looks at what comparable practices have actually sold for, similar size, similar specialty, similar region.

It's the reality check The income approach can produce a beautiful theor- theoretical number, but if practices like yours are actually trading at a certain range in the market, well, that matters. The market doesn't care about your spreadsheet sometimes. It cares about what is happening in that area. And then you have the asset approach.

Uh, this is the floor. It adds up the tangible assets, the equipment, supplies, leasehold improvements, uh, less depreciation, and then adds the goodwill. For a healthy, profitable practice, the asset approach almost always comes in the lowest because it ignores the earnings power that makes the practice valuable.

Where it matters most is struggling practices where the assets may be worth more than the actual cash flow. A real valuation triangulates all three. So when I deliver a valuation at KLAS, you're not getting just one number pulled f- from thin air. You're getting a defensible range supported by methodology that holds up under scrutiny from a buyer, a lender, and the IRS.

That's the difference between guess and evaluation. One other part of that too is we will bring in, in our valuations, our coaches to show the profitability that is still available in that practice to help once again with the defensibility of where this practice is moving towards. Now, the part you can actually act on, if values come mostly from cash flow and goodwill, then anything that improves cash flow or reduces a buyer's risk improves your value.

So just here's the biggest levers when it comes to that. So sellers, think about this. Overhead discipline. Every dollar you cut from unnecessary overhead is roughly a dollar of additional profit, and then it gets multiplied in that valuation. So bringing your overhead from seventy-five percent down to sixty-five percent doesn't just put more in your pocket each year, which should be nice, but it can add a meaningful premium to your sale price.

Overhead control is the single most underused value lever in dentistry, and many brokers out there, I feel, just don't understand how to reduce that overhead properly that can fix those- Problems, I guess, if you wanna call them, over a sh- short period of time to re- to produce a better value. Production mis- mix and fee schedule.

A practice healthy dependent on low margin, low reimbursement insurance is worth less than one that's a healthier mix and well-managed fees. I'm not telling you to drop every PPO tomorrow. That's a strategy conversation that we can have at another time, but understand that your payer mix is directly tied to your value and is something that you can shape over time.

Owner dependence. Here's a hard truth. If the practice, if the practice is you, if every relationship, every big case, every decision runs through the owner, then a buyer is taking on enormous risk because the day you walk out the door, the practice could walk with you. The more your practice runs on systems and a strong team instead of your personality, the lower the risk and the higher the value.

The best thing you can do for your eventual sales price is build a practice that doesn't need you Clean books and clean documentation. This one, I tell you, is amazing. I can't overstate this because messy financials deal, uh, uh, kill deals, and they kill value. If a buyer's lender can't make sense of your books, they discount the practice for all of the uncertainty that lays inside of it.

Clean, well-organized, uh, financials, ideally reviewed for years before a sale, let you command the top of your price range. This is exactly why we built the accounting and tax division inside KLAS, so your books are sale-ready long before you ever think about selling. The lease and the real estate. A short or unfavorable lease with no option can scare buyers and taint financing.

A clean, assignable long-term lease or owning the building yourself adds stability and value. This is where having transitions, real estate, and finance under one roof actually changes outcomes. So whether you're five years out or five months out, here's what I want you to do this week. First, separate collections from profit in your own mind.

Stop measuring your practice by the top line and start watching what you are actually keeping. This is the number one mistake that we get calls on all the time. Second, get a baseline. Get a real valuation, even if you're nowhere near selling, so you know your starting score, and you can watch it improve.

Hence the reason why we started the KLAS Lifetime Practice Valuation. Get it now, and we'll update it on a yearly basis for you so that you can continually watch and improve. Third, pick one lever: overhead, owner dependency, clean books. Start working on it. Value is built in years, not weeks, and the dentist who starts today always wins.

Before we wrap, a quick thank you to our sponsors, PNC Bank. Whether you're buying your first practice or planning your exit, PNC's healthcare banking team brings real financing expertise to every step, so the money side keeps pace with your goals. So visit pnc.com and forward slash healthcare division. To connect with the healthcare banker, tell them the Dental Business Podcast sent you Here's the bottom line now.

Your practice is almost certainly worth more or less than the number you have in your head, and the gap between those two is real money. The only way to know is a real defensible valuation built on real methodology, not a rule of thumb you heard at lunch or what your buddy got for his. At KLAS Solutions, valuations are what we do, and we do them the same rigorous way every time.

Whether you're buying, selling, or just planning, if you want to know your number, your real number, reach out for a confidential conversation. There's no pressure, there's no obligation, but get some clarity. You'll find everything at our website at klassolutions.com, or you can mes- message me directly. Uh, my information is on the website as well.

Our next episode, we're gonna flip to the other side of the table, how to buy your first practice without getting burned. And if you've got an associate dreaming of ownership, or you are that associate, then you don't wanna miss that. I'm Phil Cole. Thanks for listening, and remember, your practice is a business worth building well.

We'll see you next time