When selling your dental practice, determining the enterprise value (EV) is one of the most critical steps. EV doesn’t just provide a snapshot of what your practice might be worth; it offers a comprehensive look at its total value, accounting for income-generating assets, liabilities, and other factors. Here’s how EV is calculated and why it’s essential for evaluating and maximizing your practice’s potential during a sale.
What is Enterprise Value?
Enterprise Value represents the total value of a business a dental entrepreneur receives at the sale of their practice. It is calculated by adding the market value of equity and any outstanding debt, then subtracting cash and cash equivalents. Unlike standalone profit metrics, EV considers all aspects of the business, making it a pivotal measure for practice owners who want to maximize their value in a transition.
In simpler terms, EV answers the question: “What’s the true value of everything my practice encompasses?”
How is Enterprise Value Calculated?
Enterprise Value reflects the buyer’s willingness to pay, payment terms, and the type of capital used (cash, debt, or equity). This value is often distilled into a practice’s EBITDA (earnings before interest, taxes, depreciation, and amortization) and a multiple applied to that cash flow.
For example:
EV = EBITDA × Multiple
Together, these components form a figure that represents the total value of the transaction—a crucial number for both buyers and sellers.
Why Enterprise Value Matters in Your Transition
When dental service organizations (DSOs) or investors make an offer, their goal is similar to a buyer purchasing a car or house: to secure the best possible deal. While this approach isn’t inherently misleading, it’s important to recognize how adjusted EBITDA can influence perceived value.
For instance, investors may adjust EBITDA to account for costs the current owner doesn’t incur—such as new management expenses, changes in doctor compensation, or rent if the seller owns the building. This adjustment can create the illusion of a higher multiple, even if the actual enterprise value remains unchanged.
Consider this example:
A practice with $400,000 EBITDA might receive a 6x offer, equating to $2.4 million. The same practice, adjusted to $280,000 EBITDA, might get an 8x offer, equating to $2.24 million.
While the 8x multiple may sound more appealing, the true enterprise value was higher in the first case. Understanding this distinction helps ensure you make informed decisions about your practice’s sale.
Making Enterprise Value Work for You
Enterprise Value is more than just a number; it’s a tool to accurately represent your practice’s worth. An experienced broker or advisor can help you calculate and interpret EV, empowering you to negotiate with confidence and clarity.
Whether selling to another dentist, a DSO, or private equity, understanding EV ensures you recognize the true potential in every offer. Use this vital metric to unlock your practice’s full value and secure the future you’ve worked tirelessly to build.