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The Value of a Dental Practice: Why Tracking “Attributable” Expenses Matters by Daniel P. Welch

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The most common way for a dentist to ascertain value of his or her dental practice is by utilizing a Gross Revenue Multiplier, often referred to as the "Rule of Thumb" method. This method allows for the analysis of actual completed transactions of comparable dental practices and a comparison, in the aggregate, to the subject entity using a historically based multiple. It is the most common because it's easy to calculate and works fairly well for traditional single-provider practices.

For general dental practices, we have seen that percentage rising over the past several years. We are now regularly seeing general dental practices sell for 70 percent to 80 percent of gross revenue and higher. The rise relates to the very basic economic principal of supply and demand. The fewer the practices listed for sale, the more they will cost.

Why have there been fewer practices for sale over the past several years?

As the economy slowed toward the end of 2007, the Dow Jones Industrial Average began a precipitous but extended decline from a little over 14,000 in October of 2007 to just 6,600 in March of 2009. The Dow had lost more than half its value and as a result, significantly reduced the balance contained within owner dentist's retirement plans. While markets began to slowly rebound in 2009, it wasn't until 2011 that the Dow Jones exceeded the October 2007 figure. The market crash coincided with a housing bubble burst and the failures of large financial institutions. Many areas in the United States saw real-estate values decline by as much as 40 percent. The combination of these factors persuaded many dentists who were considering a sale of their practice, to instead hold on to generate additional retirement savings and wait for home or business prices to rise.

While the simplest, using the gross revenue multiplier approach is also the most problematic. Since "gross" methods do not take into consideration the actual overhead or differences of individual practices. Nor do they consider revenue generated by unconventional sources such as placing implants, or perhaps by a specialist who provides services in the office. They cannot or should not be used for analyzing a practice with multiple providers with one owner.

By example, using the gross-revenue-multiplier method would provide that two practices, A and B, each collecting $800,000, would have the same value even if Practice A's overhead is $400,000 and Practice B's overhead is $500,000. Using a multiple of 70 percent to determine value indicates that both Practice A and Practice B each have a value of $560,000 even though Practice A generates annual cash flow to the owner of $400,000, and Practice B only $300,000.

Therefore, dental practice valuators and the banks prefer using a "net" or a method based on discretionary cash flow. Doing so allows the valuator to extrapolate the practice value based on the actual cash flow of the business. Using historical actual cash flow provides the ability to more accurately project future available cash flow. Using the above example, a multiple of 1.5x the "net" or income to the owner dictates that Practice A's intangible value would be $600,000 ($400,000 x 1.5) and Practice B, because of the higher expenses, has an intangible value of only $450,000 ($300,000 x 1.5). Dentists should pay more for a practice that generates more cash flow and vice versa.

This type of valuation is not quite as quick and easy as multiplying revenue by a percentage. It requires adjustments to the reported financial statements in order to obtain "Adjusted Practice Cash Flow." Adjustments are made to financial statements for income and expense items not representative or necessary for the ordinary operations of the business. These can also include adjustments for the elimination of discontinued operations, elimination of non-recurring events.

Sometimes dentists have an aggressive accountant who understands and implements strategies throughout the year to cut taxes. Some of these strategies are focused on converting personal expenditures, or expenses that the dentist would have regardless of whether he or she owned a dental practice, into business tax deductions. With tax brackets that top out near 40 percent, being aggressive with tax deductions can certainly save a lot of money. However, since the value of the practice is determined using adjusted cash flow, it becomes paramount to have a system that allows you to accurately track these expenses so that they can be added back to profit and thus, increase value.

It is also important from a bank standpoint. As anyone who has been through the process of refinancing or purchasing a home can tell you, taking those deductions can make it more difficult to obtain financing at the most attractive and available rates. Banks or underwriters generally focus only on the tax returns filed and corresponding income reported. When income or cash flow received from the dental practice is reduced, the banks often lend only on reported income. Having the ability to provide the bank with a list of those expenses can often be the difference in getting declined, or getting approved at the best rates available.

Most often, the adjustments represent perks and benefits paid to or on behalf of the owner. These include but are certainly not limited to:
  • Salary in excess of FMV wages to a spouse, child or relative
  • Pension or profit-sharing contributions for the owner and his/her family
  • Excess or less than FMV rent if the building is owned by seller
  • Payroll taxes on owner salary and related parties
  • Continuing education and travel expenses
  • Dues outside of normal dental organizations
  • Automobile expenses
  • Meals and entertainment
  • Shareholder health, life and disability insurance
  • Cell phone
In addition, adjustments would be made for associate fees paid to the associate dentist working in the practice.

When completing a valuation we also make adjustments for nonrecurring expenses.

These could include the one-time payment of lawyers or consultants, or a major overhaul of the office that increased repairs and maintenance expenses significantly during a particular year.

Because most practice sales represent an asset sale, adjustments are also necessary for items of a capital nature. These include:
  • Interest paid
  • Depreciation
The ultimate goal of the adjustments is to accurately reflect the entity's financial position as of the valuation date as well as present an accurate picture of the operations for the periods being considered as part of the valuation.

To do so, it is extremely important to have financial statements or records that can easily segregate or track personal or attributable or non-recurring expenses and/or be translated by a bank or prospective buyer.


Mr. Daniel P. Welch, CPA, is the president and founder of Professional Practice Consultants, Inc., (PPC). PPC is a specialized accounting, tax and operational consulting firm that provides services only to dentists and dental specialists. Welch provides advice to dentists regarding the purchase, sale or start-up of a dental practice. He provides expert analysis of the practice in question and how the marketplace is trending.


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September 2025
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