Dental practice appraisal: how a practice is valued
Short answer
A dental practice appraisal values the practice mainly on normalized cash flow after paying a market wage for the dentist's clinical work, cross-checked against the value of equipment and the strength of the patient base. Key drivers are collections (not production), hygiene revenue, payer mix, active patient counts, new patient flow, staff stability and the lease. For an SBA acquisition, the lender orders the appraisal from a credentialed Qualified Source.
What drives value
| Driver | What the appraiser checks |
|---|---|
| Collections trend | Three years plus TTM; ties to deposits and tax returns |
| Owner clinical pay | Replaced with market dentist compensation |
| Hygiene | Share of revenue; recall system; hygienist retention |
| Payer mix | Fee-for-service vs PPO vs government plans; fee schedules |
| Patient base | Active patients, new patients per month, attrition |
| Facility | Operatories, equipment age, lease term and assignment |
| Transition | Seller willing to introduce patients; staff staying |
Illustration, not a real deal. Normalizing owner pay.
| Collections | $1,400,000 |
| Operating expenses excluding owner | -$850,000 |
| Owner's total take (pay and profit) | $550,000 |
| Market pay for owner's clinical work | -$300,000 |
| Normalized cash flow to a buyer | $250,000 |
Reading the numbers a dental appraiser asks for
Production vs collections. Production is the value of work done at the practice's full fees; collections are what actually came in after insurance write-offs, discounts and bad debt. A practice with $1.6 million of production and $1.3 million of collections has an 81% collection ratio. A low ratio can mean heavy PPO participation (contractual write-offs), weak billing, or both. The appraiser values on collections, then asks why the gap is what it is, because a buyer who fixes billing may do better, and a buyer who drops a PPO plan may lose patients.
Hygiene. Hygiene visits bring patients back on a schedule and feed restorative work. Appraisers look at hygiene revenue as a share of collections, the number of hygiene days per week, the recall system and whether hygienists will stay. A practice where the owner does most cleanings has less transferable value than one with an established hygiene department.
Active patients and new patients. Counts of patients seen in the last 18 to 24 months, and new patients per month, show whether the patient base is growing, stable or shrinking. They also help test the collections trend: rising collections with falling active patients usually means fee increases, which may not repeat.
Associates and specialists. If associates produce a big share of revenue, their contracts, pay structure and intentions matter. Revenue from specialists who visit part-time may not stay.
Facility, equipment and lease
Equipment in dental practices ages quickly: chairs, imaging, sterilization and practice software. Appraisers note the age and condition and whether a buyer will need to spend soon; an imminent capital need either reduces value or belongs in the lender's coverage analysis. The lease is often as important as the equipment: remaining term and options should comfortably cover the loan period, and the landlord's consent to assignment is a closing condition. If the practice owns its building, it's appraised separately and taken out of the Business Purchase Price.
What the lender checks on a dental deal
- Collections tie to bank deposits and tax returns.
- Owner pay normalized to a market associate wage for the clinical work the buyer will do.
- Buyer holds, or will hold at closing, the licence to practise in the state.
- Seller transition: consulting for up to 24 months to introduce patients, within SBA's limits.
- Lease term and assignment, or a separate real estate appraisal.
- Debt service coverage at 1.25x using normalized cash flow, after the buyer's own living costs are considered in the global analysis.
Common reasons dental valuations come in below the asking price
Sellers often price from a rule of thumb they heard from a colleague. Appraisals come in lower for predictable reasons: collections have been flat while costs rose; the owner produces most of the dentistry and is retiring; the active patient count is falling; a major PPO fee schedule was cut; equipment needs replacing; or the lease has two years left with no renewal option. Each of these is visible in the documents, so a buyer who looks early can price for it instead of finding out from the lender. When the valuation comes in under the price on an SBA deal, the gap has to be funded with equity, not a larger loan.
Financing a dental practice purchase with SBA
Dental practice purchases can be financed with SBA 7(a) loans, and they're usually goodwill-heavy, so the independent valuation and 1.25x historical coverage do most of the work. The SBA-specific constraint is the seller's role: in a full purchase the selling dentist can't stay as owner or employee and can consult for at most 24 months, which matters for patient retention. Many specialty dental lenders also make conventional practice loans, so compare both.
What lenders look at
- Collections (not just production) for three years, verified to returns.
- Active patients, new patients per month, hygiene recall.
- Payer mix: fee-for-service, PPO, government programs.
- Overhead: staff, lab, supplies, rent.
- Associate dentists and hygienists staying.
- Your license and clinical experience.
Structure notes
Practices often include a seller note; putting part on full standby helps with equity. If the practice owns its office, consider a separate real estate loan or a blended term. Because value is mostly goodwill, a valuation that separates personal from practice goodwill can matter. See dental practice appraisal and personal goodwill.
A lender's coverage test on a dental deal
Illustration, not a real deal. Using the normalized figures above: collections $1,400,000; cash flow after a market wage for the buyer's clinical work $250,000. The buyer will do that clinical work and draw the wage, so the lender looks at two things. First, business-level coverage: $250,000 against proposed annual debt service of $190,000 gives 1.32x, above the 1.25x minimum for an Initial Acquisition. Second, the buyer's personal picture: the $300,000 clinical wage has to cover the buyer's living costs and personal debts, which the lender checks in a global cash flow analysis.
The two tests protect against different failures. Business coverage protects against a practice that can't carry its debt; the global analysis protects against a buyer who can't live on the wage the valuation assumed. Lenders who see the owner-pay normalization in the valuation should make sure the same wage appears in both tests.
Associate buy-ins and partial sales
Not every dental transaction is a full sale. An associate buying into a practice over time, or a founder selling part of the practice to a younger dentist, is a partial change of ownership under SBA rules, with its own guaranty requirements: an original owner remains and guarantees, new owners join as co-borrowers, and a selling owner who keeps less than 20% gives a full guaranty for at least two years. The valuation in a partial sale should state whether it values the whole practice and then a share of it, or the specific interest being bought, because discounts for lack of control can apply to a minority stake.
Buyers can read OKtoBuy's guide to buying a dental practice for the buyer's side of the process. For lenders, the summary is that a dental valuation stands or falls on three things: collections that tie to deposits and tax returns, an honest market wage for the clinical work, and a credible plan to keep patients and hygienists through the transition.
Illustrations on this page are not real deals.
Common questions
Why collections rather than production?
Production is what was billed at full fee; collections are what was actually received after write-offs and insurance adjustments. Cash flow comes from collections.
Do I need to normalize the owner dentist's pay?
Yes. Owner pay is replaced with a market wage for the clinical work they do, so earnings reflect what a buyer gets after paying a dentist.
Does SBA lend on dental practices?
Yes; dental practice acquisitions are a common use of 7(a) loans, subject to the usual change-of-ownership rules.
Can the selling dentist keep working part-time?
Not as an employee in an Initial Acquisition. A consulting agreement up to 24 months is allowed; a partial sale where the seller keeps equity follows the partial change rules.
What drives a dental practice's value?
Collections, hygiene production, active patient count, payer mix, overhead and the dentist's personal role. See dental practice appraisal.
Related guides
Sources
This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.