A defensible number, not a guess.
Every Practice Worth valuation follows the same four-step methodology a broker, DSO buyer, or buyer’s lender would apply when evaluating your practice. Nothing about the math is opaque; this page walks through exactly how your number is produced, what rules we apply, and where our multiples come from.
The methodology is designed to survive due diligence. When your practice eventually sits across from a buyer, the numbers in your Practice Worth report should align with what their team computes independently — not because we’ve invented anything novel, but because we apply well-established dental-industry valuation conventions conservatively and transparently.
The four-step calculation
We start with your reported Net Income from the profit-and-loss statement and add back four categories of non-operating and non-cash expenses: Interest expense, income Taxes (not payroll or sales taxes — those are real operating costs), Depreciation, and Amortization. The result is Reported EBITDA — a standard accounting reconstruction of what the practice earned before financial-structure and tax decisions.
This step follows GAAP convention. No judgment applied; the formula is simply Net Income + I + T + D + A.
Here we fork into two paths depending on who is likely to buy the practice.
DSO mode (default for most paths). A DSO, private-equity group, or institutional buyer retains the existing clinical team and normalizes owner compensation to a market-rate replacement-doctor salary — typically 30% of the owner’s clinical production for general dentistry, with specialists (oral surgery, endodontics, periodontics) running 35–50%. The wizard exposes a slider so the rate can be tuned to the practice. If your current W-2 is already at that market rate, no adjustment is made; if your W-2 is below market (common in S-corp practices where the owner takes distributions), we subtract the shortfall from EBITDA. If above market, we add back the excess.
SDE mode. For owner-operator sales — where the incoming buyer is another dentist who intends to work in the practice — we add back the owner’s full compensation instead of normalizing to market. This produces Seller’s Discretionary Earnings, a larger number than DSO EBITDA but one that attracts lower multiples by convention.
Which path your report uses depends on your practice size and your expected buyer profile. The wizard helps you choose; the rule of thumb is DSO methodology for practices at or above $2M in revenue (where consolidator buyers compete most aggressively) and for smaller practices where the owner has already stepped back from chairside, SDE for owner-operator single-location practices under that threshold.
Practice financials typically include legitimate business expenses mixed with owner-discretionary spending that will not continue under new ownership. We apply sixteen add-back rules to identify and remove the discretionary portion, grouped below. Each rule is applied conservatively — if a line item could reasonably be operational, it stays in the expense base.
Each matched line item appears on the detailed add-back schedule in your report. You can toggle any rule off or uncheck specific lines during the review screens in the wizard if a flagged item is actually a real operating cost in your practice.
Adjusted EBITDA is multiplied by a range of industry multiples to produce your valuation range. We use a three-tier structure (Discount / Market / Premium) rather than a single number because the realistic selling price for a practice with your specific characteristics occupies a corridor, not a point.
DSO multiples — practices under $2M revenue
DSO multiples — practices at or above $2M revenue
SDE multiples — owner-operator sale context
These tiers are calibrated against observed dental-practice transactions in the trailing twenty-four months. SDE multiples are lower than DSO multiples because the earnings base is larger (all owner comp added back instead of normalized).
Practice Profile Indicators
The headline range above answers the question “what range of multiples do practices like yours actually trade at.” It does not by itself answer “where in that range will my specific practice land.” The Practice Profile screen in the wizard captures the qualitative factors that move a real buyer offer toward the discount end of your range or toward the premium end.
The screen organizes those factors into three groups:
Risk Profile
Eleven factors that determine where in the range a buyer is likely to land based on transaction risk. These cover payer mix (Medicaid share, fee-for-service concentration), market type (rural through metro), physical plant location, owner production share, number of producing providers, lease security, equipment and technology state, collections trend, specialty mix, and hygiene program strength.
Growth Optionality
Five factors that primarily lift the premium-side ceiling because a strategic buyer can extract additional value through growth: operatory capacity for expansion, demographic trajectory in the immediate trade area, specialty referral out-flow that could be recaptured, underserved-market indicators, and patient acquisition channel strength.
Deal Structure
Four factors that affect what the seller walks away with at close but do not modify the headline multiple: cash at close versus equity rollover mix, owner transition commitment, real estate transaction structure, and earnout acceptance.
How the indicators feed the report
The wizard sums the directional signal of the Risk Profile and Growth Optionality selections into a soft tier-lean indicator: Discount-leaning, Mid-range, or Premium-leaning for sub-$2M practices, and a five-band variant for $2M+ practices that adds Conservative-leaning and Top-tier-leaning. The tier-lean is interpretive context only. Your published headline range stays the range above. Deal Structure selections do not feed the tier-lean; they appear in a separately presented Effective Proceeds Considerations section because they affect realized cash to the seller rather than the headline multiple.
Every Practice Profile question is optional. A user can skip the entire screen and the headline range is unaffected. The selections that are made appear as narrative bullet points in the printable report, explaining which factors typically pull toward the discount end and which support the premium end.
The directional weights for v1 are calibrated against published dental M&A practitioner literature and broker-conversation patterns. The five strongest-weighted factors are Medicaid mix, owner production share, equipment and facility state, collections trend, and operatory capacity for expansion, which the literature consistently identifies as primary drivers. As Practice Worth accumulates customer transaction data, these directional weights are refined against observed outcomes.
Special cases
Real estate and rent normalization
When the practice owner also owns the building (directly or through a related LLC), rent on the P&L often does not reflect what an arm’s-length tenant would pay. A buyer will normalize this, and so do we. The wizard asks whether you own the building; if you do, we compute rent adjustment = current P&L rent − estimated market rent (signed). Below-market rent or zero rent on the P&L produces a negative adjustment to EBITDA (the buyer will have to pay the real rent post-close). Above-market rent produces a positive add-back.
Market rent for dental practices typically runs 5–8% of collections. The wizard offers a one-click helper that seeds the midpoint (6.5% of your collections) as a reference.
High-margin SDE compression
Most dental practices have SDE margins of 25–40%. Fixed SDE multiples of 2.5×–4.0× produce realistic valuations across that band. But unusually lean or specialty practices (oral surgery, perio, lean owner-operator solos) can post 50%+ SDE margins, where the fixed multiples would generate unrealistic revenue multiples that real buyers won’t pay.
When SDE margin exceeds 50%, we blend the fixed multiples toward revenue anchors (0.80×, 1.00×, 1.20× of revenue for the three tiers). The blend starts at 45% margin and reaches full revenue anchoring at 60% margin, so there is no cliff — a practice at 52% margin receives a gentle haircut, a practice at 62% margin receives the full anchor treatment. DSO mode is not compressed because replacement-doctor normalization already caps margins by construction.
What this is not
Practice Worth produces a valuation range, not a binding appraisal.
The report is an informational estimate. It is not a USPAP-compliant appraisal, a broker’s opinion of value, a fairness opinion, or a binding valuation for legal, tax, regulatory, insurance, financing, divorce, estate, or transaction purposes. Do not rely on the report as a substitute for advice from a qualified appraiser, business broker, attorney, or accountant.
Some specific things we don’t do:
- We don’t audit your inputs. The report reflects the data you provide. Miscategorized expense lines, inaccurate revenue, or omitted add-backs will produce incorrect output.
- We don’t model your specific buyer. Actual DSO offers can vary based on strategic fit, geographic density, platform-level synergies, and negotiation leverage that no algorithm captures.
- We don’t score intangibles. Lease terms, patient transferability, staff tenure, and local competitive dynamics matter; your report reflects them only in aggregate (through the Discount / Market / Premium spread).
- We don’t predict the future. The valuation is a point-in-time snapshot based on trailing-twelve-month data. Growth trajectory, specialty tailwinds, and MSA-level dynamics are not forecast.
What makes it defensible
A valuation is worth something to you only if a real buyer will recognize it. Three choices in our methodology make our numbers audit-ready:
- Conservative rule application. When a line item could reasonably be operational, it stays in the expense base. We err toward leaving value on the table rather than inflating Adjusted EBITDA with aggressive add-backs a buyer’s analyst will strip back out.
- Full line-by-line audit trail. Every add-back applied in your report appears on the detailed schedule with its category, the matched P&L line, and the amount. Your broker, accountant, or potential buyer can review the logic directly — nothing is opaque.
- Industry-aligned multiples. Our tier ranges track the actual transaction corridor Practice Worth observes in published dental-practice sales. We don’t use custom proprietary multiples that no buyer recognizes.
If a buyer’s team ever pushes back on a number in your Practice Worth report, point them at this methodology page. The math should tie out to the dollar.
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