The most common dental practice valuation myths

Dental Tribune International

Wed. 3. September 2025

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Selling a dental practice is a watershed moment for any clinician, and it is essential that they avoid costly pitfalls in the transition process. According to Jennifer Sims, a certified public accountant and executive vice president of valuation services at Professional Transition Strategies, one area where clinicians can falter is gaining a strategic understanding of how much their practice is worth. She says it is essential for sellers to have a clear and accurate valuation, even if a potential sale may be years down the track.

Jennifer Sims, a certified public accountant and executive vice president of valuation services at Professional Transition Strategies. (Image: Professional Transition Strategies)

Ms Sims, what are the most common valuation myths you encounter, and how much can they potentially cost dentists?
Quite a few myths do negatively affect the practice valuation process. One of the most common is the notion that a dental practice can be simply valued based on 70%–80% of its collections. That was a common practice in the past; however, it is no longer relevant today, regardless of who is purchasing the practice. This oversimplification overlooks critical nuances that can be leveraged to raise a valuation, such as profitability, location, specialty, payer mix and buyer type.

Another common myth is that a practice’s value is based on potential, such as future production or what a new owner may accomplish. In reality, experienced buyers, especially dental support organisations (DSOs) and private equity groups, pay based on current performance. Such a misunderstanding can lead to misaligned expectations, delay a transaction or even lower the final offer. These myths can cost sellers hundreds of thousands of dollars—sometimes even millions—if they go to market unprepared or misrepresent the actual value of a practice.

How does the choice between selling to an independent buyer or a DSO change the valuation approach?
Different types of buyers value different things, making it essential to consider different metrics to determine an accurate valuation. The key distinction lies in whether the buyer is evaluating the seller’s discretionary earnings (SDE) or earnings before interest, taxes, depreciation and amortisation (EBITDA), two metrics that reflect very different transition models.

Individual buyers typically use SDE because the buyer is stepping into the owner’s clinical role and banking his or her former earnings. SDE captures total owner benefit, including salary, perks and discretionary expenses, making it more relevant for solo practitioners.

In contrast, DSOs and private equity groups consider EBITDA, which reflects a practice’s operating profit independent of the owner. Since the selling dentist will eventually transition out of the practice, DSOs will replace the selling dentist. In these scenarios, DSOs evaluate the investment potential of the business by focussing on its scalable, transferable earnings. This is because DSOs are typically backed by private equity firms, which invest based on expected returns and require a clear picture of sustainable cash flow. By contrast, individual buyers often finance the purchase through bank loans and rely on the practice’s total owner benefit to ensure that they can support both their personal income and debts.

As a result, practices transitioning to DSO partnerships or private equity groups often achieve higher valuations based on their EBITDA and growth potential, depending on the strategic deal structure. Conversely, an individual buyer may be more concerned with whether the practice supports his or her income needs. One-size-fits-all approaches to valuations ignore these differences and risk leaving money on the table or pricing out the right buyer.

Which factors have the biggest effect on valuations?
Currently, valuations are heavily influenced by practice location, profitability, growth trajectory up to the point of sale, and the presence or lack of specialty services. An additional factor that plays an important role is payer mix—fee for service versus Medicaid, for example.

There being more than 375 qualified DSOs active in the market, competitive pressure is driving higher valuations, providing owner dentists with more leverage than ever. On the other side of that coin, many dentists assume that macroeconomic factors, such as interest rates and inflation, are making lenders and buyers more cautious. This is most apparent when transitioning to an individual buyer, owing to greater constraints on interest rates and lending caps. Individual buyers often require bank financing, while private-equity backed DSOs have access to more flexible funding. However, regardless of the transition type, clean financials, strong staff retention and operational efficiency are more important than ever because they help to ease concerns related to macroeconomic factors.

What operational or financial areas do sellers often overlook that can boost value?
The impact of lease terms is often under-estimated: assignability, duration and renewal options can make or break a deal. For example, the lease rate that owner dentists charge themselves can affect the adjusted EBITDA. For those leasing in an expensive area, rent that is higher than the industry average can drive profitability down.

Staff retention is another factor that is often overlooked. A practice with stable, long-tenured team members tends to command a premium, especially for DSOs, who desire thriving practices that can operate with continuity from day one. Staff are very valuable, but it is worth noting that older and more experienced staff may be paid above industry benchmarks. Additionally, it is important to assess not just staff wages but also staff productivity. Buyers will look closely at operational efficiency before they can justify above-average compensation.

Finally, cross-collateralisation of assets or debt can complicate transactions and delay closings. Clean books, up-to-date credentials and well documented systems all help reduce perceived risk and boost buyer confidence.

“There is no time like the present to get a formal valuation.”

When is the ideal time to initiate a valuation?
There is no time like the present to get a formal valuation. While many dentists think that a valuation is only necessary when they are gearing up to transition their practice, this is simply not true. If dentists have aspirations for a future exit, regardless of time frame, a comprehensive practice valuation will arm them with the knowledge needed to understand their practice’s current health and opportunities for growth. Moreover, the sooner a valuation is completed, the sooner the owner can begin addressing any red flags and improving financial performance.

Does the seller staying on during transition materially affect valuations or sale terms?
When a practice is sold to an individual, the seller will typically stay on for a short transition period, and this will not materially affect the value. However, it can make a difference when partnering with a DSO.

Depending on the deal structure, a DSO may require the seller to stay on for a transition period, which is typically a period of three to five years. This is common because it helps to secure the investment by securing continuity of care. It can result in more favourable terms or a higher enterprise value. However, if the seller is unwilling or unable to stay, it may limit the pool of buyers or result in a reduced offer.

Sometimes, the owner staying on can hurt rather than help the transition process. For example, when there is no clear communication or alignment of expectations between buyer and seller.

What key qualifications should dentists look for in a valuation broker, and what red flags warn against unqualified professionals?
Each situation is different, which is why it is always important to work with a dental practice broker with deep real estate experience. A broker or adviser must understand both the clinical and financial sides of dentistry, as well as the current consolidation wave that is driving higher valuations.

Dentists should look for someone who takes a holistic, advisory approach rather than pushing a one-size-fits-all solution. We often see certified public accountants without dental experience conflating SDE and EBITDA when transitioning to a DSO, causing significant variations in the valuation.

When it comes to red flags, dentists should be cautious if a broker defers entirely to the buyer to determine valuation metrics. Such a lack of advocacy can skew negotiations and undercut the seller’s position. Furthermore, dentists should be wary when there is a lack of transparency about the valuation methodology or an over-emphasis on potential rather than actual performance, or both.