9 Key Market Factors for Dental Practice Valuations

What are Market Factors?

What Is a Dental Practice Valuation?

A dental practice valuation is how you decide how much you’re willing to pay for a specific practice. It’s sort of an important step in your timeline. You don’t want to overpay, but neither do you want to lowball and lose the deal to a more realistic buyer.

Dental practice valuations just happen to be our specialty. Contact us if you’d like some help getting this crucial step just right.

5 Market Factors to Watch

 Along with intrinsic factors (such as revenue and expenses), the following market factors are helpful in determining a practice’s earning potential.

1. Location
2. Competition
3. Patient demographics
4. Economic conditions
5. Staffing pool

If you’d like some help in the valuation process, we’ll steer you away from bad deals and help you identify a great practice to propel your career forward.

Factor One: Location

A good location is like rocket fuel, while a bad one is like a strong wind blowing you backward. Here’s what to consider:

Convenience and Proximity to the Target Patient Demographic

You want a practice that is close to your target customers, and convenient for them to visit. Patients are much more likely to regularly visit offices that are close to their home or workplace. Practices situated in residential areas or near office buildings have built-in patient flows. Shorter commutes and quick access encourage patients to keep appointments.

Visibility and Accessibility

If your practice is highly visible, you’ll attract more new patients. If it is easy to access, you’ll keep patients coming back.

Here are favorable factors to look for:

Visibility

• Located on main road or highway with high traffic volumes
• Visible signage and branding easily seen from street
• Not obscured by trees, powerlines, or other buildings
• Eye-catching exterior décor, colors, or architecture
• Interior décor and lobby visible through front windows
• Exposure to foot traffic in high-density areas
• Marketing geared toward drive-by or walk-in patients

Accessibility

• Convenient access from major roads and highways
• Easy to enter and exit parking lot and driveways
• Sufficient parking spaces close to entrance
• Accessible by public transportation or shuttle routes
• Accommodations for pedestrian access (e.g. sidewalks)
• Entry and exits compliant with ADA requirements
• Ample handicapped parking spaces
• Clear signage and directions to office entrance
• Minimal stairs, elevators to upper levels if multi-story

A dental practice that maximizes both visibility and accessibility will be  top-of-mind for community members seeking care.

Neighborhood Demographics and Economic Factors

Want a thriving practice? Choose your community wisely.

Target areas with rising incomes and lots of young families moving in. These market growth hotspots mean built-in demand from patients with disposable income.

Scope the age range and population density too. Retirees need dental care but may have limited budgets. And enough households must be within reach to sustain your practice.

Overall economic health matters as well. Patients skimp on elective treatments when money gets tight. But vibrant economies fuel community spending.

So scan local economic trends like household income, housing costs, and employment rates. This reveals patient mindsets and wallets.

In the end, you want a neighborhood where potential patients are steadily increasing, earning a good living, and feeling financially secure. Choose the right community demographic and economic mix, and your practice will flourish.

Room for Future Expansion

Got big plans for your new practice? Then set up shop where you’ve got room to grow.

Choose a space that can be extended to add chairs, staff, and equipment. Even better if you can take over adjacent suites when you’re ready to expand.

Multi-story buildings where you can take over upstairs space are ideal. Just ensure accessibility if patients can’t do stairs.

Also consider extending hours into the evenings or weekends when demand warrants. Can parking and accessibility accommodate increased traffic?

You want flexibility to ramp up patient capacity when the time is right. Ample room for expansion means your practice’s value can steadily rise over time.

Anticipate future needs and don’t limit yourself. Seek out space with stretch and growth in mind from day one.

Factor Two: Competition from Other Practices

Proximity to other dental practices can be good or bad. Nearby offices that offer similar services can siphon away potential patients. But non-competing clusters can be awesome: for example, a general dentist, an orthodontist, and an endodontist in the same area can refer business to one another.

Ultimately, choose areas aligned with your patient base and services, target underserved populations, or claim a niche to stand out from the competition.

Number of Other Practices

How many other dental practices are around? Spot competitors before you sign any lease. Target areas with needs that exceed current capacity.

A crowded zone with lots of dentists leaves little room to grow. Patients split between many close options, so fewer rivals within a reasonable radius opens doors for patients to give your practice a chance.

Direct neighbors pose big threats. They steal patients who live and work near your practice. But, clusters of specialized dental practices can create destinations people know and frequent. Isolated practices own whole areas but also lose out on the recognition that comes with a cluster.

Range of Services Offered

Consider what nearby practices offer. Do they provide the same services you plan to offer? A lot of overlap means direct competition for your ideal patients. Practices that do the same mix of general, cosmetic, and specialty dentistry all fish from the same pool. Greater similarity in services offered can cause practices to compete for the same people.

But specialization matters. Specialties reduce competition by meeting unique needs.

Patients with crooked teeth seek braces experts, while those who need gum surgery go to periodontists. If you are the only dental practice around to offer these services, they will likely choose you over the competition for other dental work, too.

General dentists who offer one-stop shops for all needs compete broadly. Patients who want comprehensive care can choose among them. 

So review local services carefully before you move into the neighborhood. Find gaps you can fill or specialties you can own. Use difference to stand apart, not similarity.

Insurance Coverage

Review insurance overlaps and gaps before you buy the practice. Patients want in-network dentists to maximize coverage. So see what plans nearby practices take. A lot of overlap in insurance networks means you all compete for the same patients. 

Accept plans not taken elsewhere nearby. This gives you an edge for folks on those plans who need in-network care. Some differences in insurance networks help differentiate you. It lets you corner patients that other practices exclude.

Don’t just duplicate what everyone around you accepts. Use insurance acceptance strategically to stand apart, not blend in. This reduces head-to-head competition.

Reputation and Marketing

Scope out how rivals promote themselves. Are nearby practices well-known with extensive advertising? Established names and aggressive outreach make it hard to gain a foothold. Competitors with stronger community presence and promotion pose bigger hurdles.

Passive marketing by local practices opens doors. Weak name recognition for current dentists gives you a chance to make inroads. Low community engagement by competitors provides opportunities to build a reputation.

Target areas where you can make a name despite limited efforts so far. Join clusters with marketing gaps you can fill. Use smart outreach to stand out, not just blend into the noise.

Factor Three: Patient Demographics

Consider who lives around the practice and their likely needs and abilities to pay. Practices with patient demographics in need of complex restorative, orthodontic, or cosmetic dental work and the ability to pay higher out-of-pocket fees for elective procedures have greater profit potential.

Age Distribution

Situate near schools, colleges, and senior communities to tap built-in demand. Locations with lots of school kids see demand for pediatric services like cleanings, sealants, and orthodontics. Retirement spots need more complex work like dentures, implants, crowns, and bridges.

Adults in their prime may prioritize cosmetic treatments like teeth whitening and veneers. Balance across age ranges brings a steady flow. 

Income Level

Target higher income areas for maximum profit potential. Wealthy areas provide patients with the ability and eagerness to spend on elective upgrades and cosmetic treatments beyond basic prevention. High disposable incomes enable spending on veneers, Invisalign, whitening, and implants.

Lower income neighborhoods see more focus on necessity based cleanings, fillings, and extractions. 

Population Growth

Growth zones are prime targets, with expanding populations needing more dentists to serve them. New housing, malls, and office parks can lead to influxes of potential patients as people move into the area. Steady community expansion through residential and commercial development signals strong acquisition opportunities.

Education Level

Education level predicts patient priorities. Graduates value lifetime dental health, understand the benefits of elective procedures, and have enough money to invest in dental health. They invest in prevention and cosmetic treatments. Less educated groups may neglect checkups or opt for lower cost options. Seek out college-educated populations.

Insurance Coverage

Insured people get discounted rates and lower out-of-pocket costs. More coverage options in the area mean more patients can afford your menu of services. Choose dental practices that accept popular local plans and avoid uninsured areas, as they limit affordability.

Factor Four: Local Economic Conditions

Thoroughly analyze local economic conditions before you commit to a location. Prioritize areas with strong employment, incomes, sustained development, solid growth forecasts, and confidence. These conditions produce loyal patients willing to spend on dental care.

Employment Rates

Lower unemployment rates and higher levels of full-time employment indicate more area residents with steady incomes and benefits like dental insurance. This provides them with the means to spend more on dental services.

Locations with abundant job opportunities across various industries have a robust employment base.

Household Income Levels

High household income levels show patients have the capacity to spend on dental procedures beyond basic checkups and cleanings. Areas with incomes that grow faster than inflation convey that patients adequately cover the cost of living plus added dental investment.

Development Activity

Signs of new development like the construction of residential, office, and retail spaces signal an overall economic momentum. Locations that frequently add new housing and businesses have growth tailwinds from higher population and commerce needs. Long, ongoing projects indicate economic vitality.

Forecasted Growth

Projections for continued population, job, and income growth provide positive economic signals and demonstrate a fundamentally sound economy. You should look at locations where economists forecast steady growth and have strong fundamental outlooks and avoid areas projected to stagnate.

Consumer Confidence

High consumer confidence levels reflect households’ financial optimism and comfort with spending on non-essential services. This supports their ability to spend on elective dental procedures. Areas where people feel secure in their finances and employment prospects are economically robust.

Factor Five: Staffing Pool

A robust local staffing pool provides a talent pipeline for future hiring needs. Seek locations with robust talent pipelines and retention rates. 

Dental School Proximity

Want a steady pipeline of fresh talent? Locating near dental and hygiene programs ensures access for new graduates eager to enter the field.

Recent grads provide energy and enthusiasm, plus openness to training. Proximity enables the recruitment of new dentists, hygienists, and assistants.

Commutable distance is key. If the commute is lengthy, attracting student applicants becomes difficult. Remote areas lacking academic hubs also struggle to recruit and retain talent.

Positioning your practice within a training hub provides a perpetual talent source. You can continually bring bright, motivated graduates on board and shape them from day one. It’s an advantage for staffing and growth.

License Renewal Rates

High dental license renewal rates signal greater numbers of professionals who actively participate and reside in the state. Robust renewal levels show seasoned talent remains licensed to work and is not leaving the field.

Specialist Concentration

An ample presence and variety of dental specialists in the area expands staffing options for referrals, interdisciplinary collaboration, and your ability to hire for specialist expertise if you expand services. Varied experts nearby provide depth across specialties.

Cost of Living

Reasonable area cost of living enables competitive compensation packages when you recruit from other regions. Locations with affordable housing, transportation, and overall living costs can attract talent because they provide an economically viable place to reside.

Other Qualitative Factors that Affect Dental Practice Valuations

In addition to the hard quantitative aspects of a practice (such as financials and inventory), here are some intrinsic qualitative things to take a look at.

• Practice reputation and goodwill
• Patient retention and loyalty
• Referral patterns and sources
• Location and accessibility
• Services, procedures, and specialties
• Future expansion potential
• Staff skills, credentials, and retention
• Office environment and patient experience
• Operational processes and workflows
• Practice management and leadership
• Marketing and advertising effectiveness
• Patient base demographics
• Cosmetic appearance and curb appeal
• Culture and team dynamics
• Record-keeping and organization

We can help you get a realistic 360-degree perspective on that practice’s worth to you. Contact us to learn more. 

Facility

The size, layout, equipment, appearance, and decor of a facility all contribute to the practice environment and capacity.

Size, Layout, and Configuration of the Clinical Space

Look for open floor plans allowing fluid movement between operatories, lab, sterilization, and reception. This facilitates collaboration and efficient care delivery.

You want the number, size, and setup of treatment rooms and hygiene bays to match patient demand. This prevents bottlenecks and downtime.

Single floor practices enable seamless patient flow. Multilevel offices disrupt workflows and accessibility.

The right clinical space size and configuration optimize provider teamwork. Patients benefit from expedited care in comfortable surroundings. Thoroughly evaluate clinical spaces when assessing practices.

Number of Chairs, Rooms, and Equipment

Practices with more operatories and cutting-edge dental equipment and technology can treat a higher patient volume and perform more complex, profitable procedures.

Advanced handpieces, intraoral cameras, 3D imaging scanners, and CAD/CAM systems enable sophisticated dentistry. Invest in new technological advancements to boost the practice’s value.

Condition and Appearance of the Office and Equipment

A picture-perfect office makes positive first impressions. Patients feel at ease in bright, tidy spaces with natural light and stylish decor. A fresh coat of paint and plants liven up stale ambiance.

Well-kept equipment avoids disruptive breakdowns and costly repairs. Assess the condition of clinical technologies as part of due diligence. State-of-the-art tools retain value.

But worn, outdated operatories signal needed investments. Cosmetic issues like scuffs or stains reflect poorly too. Prioritize furnishings and technologies in good working order to preserve your acquisition.

A clean, ordered reception area and decluttered work spaces also boost professionalism. You want patients focused on your care, not distracted by deficiencies. 

Branding, Interior Design, and Decor

What’s the vibe of your future practice? Make sure it aligns with your brand and philosophy.

Craft cohesive aesthetics with lighting, colors, and décor that reinforce your image. Add stylish custom touches like signage and art.

Comfort anxious patients with relaxing music, reading nooks, or water features in waiting areas. Use operatories to focus attention on treatments.

A warm, welcoming atmosphere brings patients back.

Services Offered

Evaluate the service mix: does it fulfill patient needs profitably?

Breadth of Services

The breadth of services should align with patient demand. General practices that offer preventive, restorative, and cosmetic dentistry have a broader appeal than specialty practices that focus on a single field like orthodontics. However, specialists earn higher revenues for complex niche procedures. 

Complexity of Services and Procedures

Practices that offer advanced cosmetic dentistry, dental implants, oral and maxillofacial surgery, sedation dentistry, and medical devices can charge higher fees, increasing profitability. Specialized training and cutting-edge technology enable complex procedures. This expanded capability boosts both revenue and valuation.

Demand and Profitability of Services

A dental practice should provide in-demand services that patients want and need. Preventive dental care, tooth-colored fillings, clear aligner orthodontics, and cosmetic treatments are popular services that drive high revenues.

Ability to Meet Patient Needs In-house

Practices able to provide complete dental care in-house have more value than those that refer complex cases out. Patients prefer the convenience and continuity of having specialists like oral surgeons on staff rather than being referred elsewhere.

Staff

The dentists, hygienists, assistants, and administration all influence operations. Look for practices where all staff have extensive skill and experience in their field.

Hygienists and Assistants

Higher staff-to-dentist ratios reduce instances of setbacks that slow or delay the process. Well-trained hygienists and certified assistants optimize dentist productivity. Practices with more skilled hygienists can provide more cleanings and simple procedures independently, which increases patient flow. Certified assistants improve efficiency with tasks like digital impressions. 

Leadership and Management Personnel

Experienced practice leaders set the vision and strategic direction to take the business to the next level. Office managers that effectively handle scheduling, human resources, accounting, and compliance enable dentists to focus on patients. 

Team Cohesion, Morale, and Retention

A cohesive team with sustained morale and staff retention is more productive. High retention preserves institutional knowledge and reduces the resources needed to train new employees.

Poor team dynamics and turnover disrupt operations, while stable teams enhance care quality. Practice management strategies like continuing education, incentives, and adequate staffing nurture engagement. 

Patients

The number of active patients, demographics, loyalty, referrals, patient attrition, and growth patterns provide key insights.

Number of Active Patients

The total number of active patient files indicates the size of the practice and its revenue capacity. Larger rosters with many established patients mean more consistent recurring business. High patient volumes and dominant market share warrant substantially higher valuations than practices with fewer active patients.

Loyalty and Referral Rates

Dedicated patients who frequently visit, comply with recommended treatment plans, and refer family and friends indicate practice health and growth potential. Strong patient loyalty and positive word-of-mouth referrals steadily drive new business.

Client portals with regularly updated patient bases, positive online reviews, and client testimonials boost engagement and increase valuations.

Goodwill

Goodwill represents the value of a practice’s reputation, patient relationships, and other intangible assets. It’s a major factor in practice valuations, even though it can be difficult to place a precise value on it.

Quantitative Factors that Affect Dental Practice Valuations

In the realm of quantitative analysis, here are the main things to scrutinize:

• Discounted cash flow analysis
• Gross revenue and collections
• Overhead expenses
• Profit and loss statements
• Profit margins
• Owner compensation
• Accounts receivable
• Tax records and liabilities
• Hard assets like equipment and technology
• Accounts payable and liabilities
• Rent and mortgages
• Financial ratios like debt-to-equity
• Earnings before interest, taxes, depreciation, and amortization (EBITDA)
• Patient volume metrics
• Growth trends and projections

We dig deep into the numbers to assess the fair market value of a dental practice. Don’t leave money on the table. Contact us today to quantify your practice’s upside potential.

Financials

You should look at a dental practice’s historical and projected financial performance for a thorough valuation. Revenue, expenses, profitability, accounts receivable, cash flow, collections, and growth trends provide critical insights.

Income-based valuation methods factoring gross revenue, taxes, expenses, and cash flow enable fair practice appraisals. Common methods for financial evaluations include discounted cash flow analysis, price to earnings ratios, and payback period calculations.

Revenue, Expenses, and Profitability

Higher gross revenues signal greater profit generation ability. Dental practices with consistently strong annual revenues in excess of $500,000 or more warrant substantially higher valuations. Sophisticated financial planning factors into projections. Appropriate expense management, resulting in sustained profitability over time, also lifts the practice’s worth.

Cash Flow and Collections

Consistent cash flow generation, reliable insurance reimbursements and patient collections, and low account delinquency rates demonstrate overall financial health. With adequate owner draws, smooth, predictable cash flows should cover debt payments comfortably. 

Accounts Receivable and Outstanding Debt

Higher accounts receivable signify greater untapped revenue. The current dollar amount of total accounts receivable and outstanding unpaid patient debt affects short-term cash flow, although higher balances also represent future collections.

Excessive uncollected receivables or unrecouped insurance claims strain current finances. Efficient billing and collections minimize unpaid balances. 

Growth Trends and Profit Margins

Sustained success attracts potential buyers. Accelerating revenue growth and rising profit margins indicate unmet patient demand and untapped earnings potential. Practices that exhibit steady 5-10% annual revenue growth and maintain high 35-45%+ profit margins will achieve substantially higher valuations and sales prices. 

Do You Want to Purchase a Dental Practice?

Contact our team for a free consultation today!

With decades of combined experience, we quarterback the entire practice purchase so you can invest in a thriving business with confidence. Our white-glove service and proven process enable smooth acquisitions on the best possible terms.

• Initial valuation and cash flow analysis
• Comprehensive due diligence
• Financing coordination and terms negotiation
• Purchase agreement optimization
• Transition planning and support

To get the lay of the land, check out our 27-step dental practice acquisition checklist.

FAQ on Dental Practice Values

What are environmental factors in a dental practice?

Key environmental factors include population demographics, competition from other local dentists, the insurance climate and reimbursement rates, and broader economic conditions influencing patient demand. These factors shape the dental landscape.

What is the market size of the dental industry?

The global dental market size was estimated to be around $32 billion in 2022. The market is projected to grow to $50.5 billion by 2028, with much of the growth occurring within North America, indicating strong industry expansion ahead.

How do dentists find clients?

Dentists find new clients through advertising, insurance provider listings, positive online reviews, social media presence, and word-of-mouth referrals from satisfied existing patients. The ability to retain patients long-term also builds a client base.

What is the dental practice valuation rule of thumb?

A common valuation rule of thumb is to multiply the practice’s annual cash flow by 95% to get a general valuation range, adjusted for other factors. This provides a starting point, but you will need to dig deeper for a proper valuation.

What is a dental practice’s EBITDA?

EBITDA is an abbreviation for “earnings before interest, taxes, depreciation, and amortization.” It’s calculated by taking the dental practice’s net income and adding back interest, taxes, depreciation, and amortization expenses. This gives a truer picture of core operating profitability.

How does workers compensation insurance factor into dental practice valuations?

Workers compensation insurance is a mandatory expense that must be incorporated into financial projections and valuations of dental practices. This insurance protects employees in the event of work-related injuries.