Key Factors PE-Backed Firms Consider When Assessing Dental Practices for Investment
“How do you value a dental practice for sale?” If you’re an owner of a large multi-location dental practice looking to merge with a private equity-funded DSO (Dental Support Organization), this would be one of your questions. After all, knowing how industry experts define their practice valuations is vital to understanding the current value of your life’s work.
Key Performance Indicators that Affect the Value of a Dental Practice
Revenue Growth
Growing revenues indicate opportunities for future value growth. For this reason, interested firms won’t hesitate to pay a premium for dental practices with growing revenues.
However, most of these firms won’t fall for unproven growth even if the owner boasts about their practice’s significant growth potential. If the practice’s growth is sustainable into the future, it will be valued in the mid-range of market pricing. Conversely, negative growth practices are valued at a discount.
Profitability and Cash Flow
PE-backed entities want a return on investment proportionate to the riskiness of the investment. The five-year industry average net income was around 9.10% as a percentage of revenue.
Likewise, the five-year industry average of EBITDA (earnings before interest, taxes, depreciation, and amortization) was about 18.30%. Although EBITDA usually serves as a substitute for cash flow, DSOs still consider cash flow the most significant value indicator.
Fixed Expenses vs Variable Expenses
Since utilities, rent, insurance, and labor costs don’t change based on your practice’s production level, they’re fixed expenses. Ideally, fixed expenses should be less than 60% of all expenses.
The potential for higher cash flow is more significant as revenues grow if the percentage of fixed cost relative to variable cost is lower. Additionally, dental practices with lower relative fixed expenses are less risky than those with high relative fixed expenses.
Average Profit Per Patient
It’s vital for dental practice owners and senior practice staff to be aware of the profitability of their services to each patient. Prioritizing high-profit services and high-profit patients is one of the best ways to maximize profits. Moreover, onboarding new patients must also be a top priority because the profitability of new patients often exceeds existing patients.
Collections
Since a practice’s collection rate is a big deal to interested firms, it’s best to ensure a collection rate of 98% of all money owed to the dental practice after insurance adjustments and various discounts.
Staff Compensation and Turnover
Did you know that the five-year industry average for salaries and wages, excluding owner compensation, is around 20.6% of revenue and 16.7% for 2020? However, it’s important to note that employee turnover is just as important as the percentage of salaries and wages.
Tenured employees have also adapted to the office's culture besides understanding a dental practice's policies and processes. As a result, they get higher compensation than newer employees because they create more value.
“How Do You Value a Dental Practice for Sale?”
When it comes to determining value, PE-funded DSOs look at a dental practice's quantitative and qualitative aspects. Consolidations happen when these firms see a profitable opportunity.
If you’re looking to merge your large dental practice with a PE-backed DSO, get in touch with America’s leading transition consultation firm for the medical industry – Viper Equity Partners. Our experienced team of M&A professionals work with dentists, plastic surgeons, and dermatologists from contracting to the closing table with high integrity, efficiency, velocity, and a one-of-a-kind value-added approach. Schedule your free consultation today!