How To Determine The Purchase Price When Acquiring An Existing Dental Practice

To determine the purchase price of an existing dental practice, a young dentist can consider several valuation methods:

Capitalized Excess Earnings: This income-based approach considers the practice’s collections and operating expenses to derive value. It calculates the excess earnings by subtracting the expected return on tangible assets from the net income and then capitalizes the result at a rate that reflects the risk of the practice [2].
Discounted Cash Flows: Future cash flows are projected based on historical data and then discounted to present value. This method requires an understanding of the practice’s cash flow potential and the time value of money [3].
Percentage of Collections: A rough rule of thumb is to apply a percentage (e.g., 70%-85%) to the previous year’s collections. This simple method is commonly known but may not always accurately reflect the practice’s true value [6].
Multiples of Earnings: Some may determine valuation by taking a multiple (e.g., 1.5 times) of the past three years’ collections, but this is less common and not as detailed as other methods [4].

When buying a specialty practice, such as a periodontal practice, versus a general dental practice, the valuation may differ due to factors like the nature of the specialty, the client base, referral patterns, and the earnings potential. Specialty practices may command higher prices if they offer unique services that can generate higher revenue and if they have established referral networks.

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