Key Takeaways
- A dental practice valuation multiple is the factor applied to normalized earnings. The applicable multiple depends on buyer type and earnings basis (SDE vs. adjusted EBITDA), so a quoted number without both details is incomplete.
- SDE is used by private doctor-to-doctor buyers and is larger than adjusted EBITDA. DSOs and private-equity platforms use adjusted EBITDA after subtracting a market-rate replacement-doctor salary, which produces different multiples on the same practice.
- Quality-of-earnings diligence can reset the earnings base after an LOI. The headline multiple is only as reliable as the documented, defensible EBITDA that survives buyer scrutiny.
- Deal structure, including cash at close, rollover equity, and earnouts, determines how much of the quoted value reaches the seller’s bank account. Structure-adjusted modeling can be essential.
- McLerran & Associates delivers side-by-side valuations on both private-buyer and DSO paths, builds CPA-led diligence-grade EBITDA analyses, and runs competitive processes that help owners capture the top of the range rather than the middle.
Talk with McLerran & Associates about your practice’s current market value.
SDE vs. Adjusted EBITDA: Why the Same Practice Gets Two Different Multiples
Seller’s discretionary earnings (SDE) is the earnings basis used in most private doctor-to-doctor transactions. It starts with net income and adds back the owner’s full compensation, including salary, benefits, and employer-side payroll taxes. It also adds back interest, taxes, depreciation, amortization, and any discretionary or non-recurring expenses. Because the owner’s entire pay is added back, SDE represents the total financial benefit available to a single incoming dentist who will personally work in the practice. SDE is a larger number than adjusted EBITDA on the same practice.
Adjusted EBITDA is the earnings basis used by DSOs and private-equity-backed platforms. It begins with standard EBITDA, then adds back legitimate discretionary and one-time expenses such as personal vehicle costs, above-market continuing education, family memberships, owner-directed charitable giving, and one-time consulting fees. The buyer then subtracts a market-rate replacement-doctor salary rather than adding back the owner’s full pay. In adjusted EBITDA, the buyer adds back the owner’s compensation and then subtracts a market-rate replacement-doctor salary, typically about 30% of the owner’s clinical production for general dentistry. The result is a smaller earnings base that reflects what the practice earns as an independent business after covering the cost of staffing the clinical chair.
The practical formula: Adjusted EBITDA = EBITDA + owner and discretionary add-backs − normalized owner compensation.
Because SDE is larger and adjusted EBITDA is smaller on the same practice, SDE multiples are conventionally lower than EBITDA multiples. Comparing headline multiples without identifying the earnings basis creates a false impression of value. A quoted “5x” means something very different depending on whether the denominator is SDE or adjusted EBITDA. This difference is a common source of confusion when an owner holds a number from a broker, a DSO recruiter, or a colleague.
The EBITDA normalization process, particularly the owner-compensation adjustment, is the most contested add-back in quality-of-earnings diligence. Normalizing owner-doctor production compensation to a market clinical rate often produces $80,000–$300,000 in normalized EBITDA uplift for solo-producer dental practices. Getting this number right, and defending it, is where a CPA-led analysis can earn its value.
The Buyer-Type Multiple Map: Private Buyer vs. DSO vs. Private-Equity Platform
Private Doctor-To-Doctor Buyers
Individual dentists buying a practice to work in it usually price on SDE or as a percentage of annual collections. Private buyers acquiring solo and two-doctor dental practices paid in a range of approximately 4.0x–6.5x SDE in 2025–2026. On a collections basis, most private doctor-to-doctor dental practice sales closed at 70%–85% of annual collections in 2025–2026, within a full range of 60%–95% of collections. These buyers almost always finance the purchase, so the price must leave enough cash flow to cover loan payments and pay the new owner a living wage. That lending constraint creates a ceiling on how high a private-buyer multiple can go, even for strong practices.
DSO Add-On Buyers
Dental service organizations price on adjusted EBITDA. The applicable range shifts with the size of the practice’s EBITDA. DSO add-on acquisitions of practices with 1–3 locations and smaller EBITDA paid approximately 5x–8x adjusted EBITDA in 2025–2026, while regional DSO add-ons acquiring practices with $1 million–$3 million of adjusted EBITDA paid approximately 7x–9x adjusted EBITDA. The DSO buyer pool for a practice largely disappears below roughly $250,000 in adjusted EBITDA. At that level, practices are typically priced on collections or SDE by individual dentists instead.
Private-Equity Platform Buyers
Platform-level transactions, where a practice or group becomes the anchor acquisition for a new private-equity sponsor, command the highest multiples. Emerging platforms with $3 million–$5 million of adjusted EBITDA, and PE-backed platform transactions generally, paid approximately 9x–11x adjusted EBITDA in 2025–2026, with select platform acquisitions above $5 million of adjusted EBITDA reported at 10x–12x EBITDA. These transactions are rare and require a practice or group with the scale, management depth, and systems to serve as the foundation of a new DSO rather than simply adding to an existing one.
For practices in the $1.5–$3 million revenue range, which McLerran & Associates calls the “Venn diagram middle,” both the private-buyer and DSO paths are genuinely available. The only way to know which path produces the better outcome for a specific practice is to run a side-by-side valuation on both bases. McLerran & Associates delivers that comparison by quantifying the practice’s worth in both markets, so the owner chooses a path with full information rather than a guess.
Dental practice valuation multiples are calculated differently depending on which of these buyer categories is in the room. A dental-specific sell-side advisor who works both markets in roughly equal measure is positioned to show an owner the complete picture.
Dental practice clients who go through a marketed process with multiple buyer solicitation receive final transaction values averaging 50% above initial unsolicited offers. A marketed process with multiple bidders consistently outperforms a single-buyer negotiation.
See what your practice could sell for with both private and DSO buyers at the table.
Quoted Vs. Paid: How Quality-Of-Earnings Diligence Re-Trades The Multiple
An owner holding a quoted multiple needs to recognize that the LOI (letter of intent) is the starting point, not the final deal. It opens a forensic review of the earnings figure the multiple is applied to.
A buyer can preserve the stated multiple while reducing normalized EBITDA, which lowers enterprise value by hundreds of thousands of dollars without changing the headline multiple. This mechanism creates the quoted-versus-paid gap. The buyer lowers the EBITDA baseline instead, and the multiple does the rest of the math.
Quality-of-earnings (QoE) diligence, a financial review commissioned by the buyer, tests whether reported earnings are sustainable and transferable. EBITDA normalization in a QoE review removes non-recurring items and eliminates personal expenses run through the practice. It also adjusts owner compensation to market and reverses related-party rent to fair market value. Every add-back the seller claimed is re-examined. Unsupported add-backs are removed. The resulting EBITDA, not the seller’s version, is the number the multiple is applied to at close.
Quality-of-earnings studies have found that a significant percentage of lower-middle-market transactions face post-LOI purchase-price adjustments after the buyer’s quality-of-earnings review. In dental, common QoE findings include rejected spouse-salary add-backs, reclassification of continuing education as an operating expense, and revenue adjustments tied to coding patterns outside benchmarks.
Working capital adjustments can also reduce proceeds dollar-for-dollar at the closing table. A working capital peg sets the target level of net working capital the buyer expects at close. Delivering above or below the peg results in a dollar-for-dollar purchase price adjustment. Escrow holdbacks, typically 10%–15% of the purchase price and held for 18–24 months, further separate the headline number from what lands in the seller’s account.
The defense against re-trading is doing the homework before the buyer does. McLerran & Associates builds a CPA-led, diligence-grade EBITDA analysis up front, with every add-back unpacked, every discretionary expense documented, and every normalization tied to a supporting record. Because the work is done before the practice goes to market, McLerran’s valuations tend to hold up under buyer scrutiny and the agreed value is defended through close. When a buyer’s QoE team pushes back, McLerran’s advisors respond with data and remind buyers, politely, that other vetted bidders are waiting.
Dr. William Pena’s experience illustrates what this defense can be worth. When he engaged McLerran & Associates, there were already offers on the table for his seven-location pediatric group. McLerran educated him on proper valuation, established true profitability and EBITDA, and controlled the narrative around those numbers throughout the negotiation. The result was a valuation roughly 20% higher than the offers already in hand when he hired the firm.
The Value Drivers That Move Your Multiple
Within any buyer-type tier, the multiple can move based on practice-specific factors that buyers use to assess risk and durability. Knowing these levers can help an owner focus improvement efforts.
Owner dependence is the single most repeated valuation-discount theme across the dental M&A market. Practices where the selling doctor produces 90% or more of clinical revenue consistently see valuation haircuts of 10%–20%, because a DSO cannot underwrite production revenue that walks out the door with the seller. Reducing owner dependence through associate recruitment and integration can shift a practice into a higher multiple tier.
Hygiene production is one of the highest-leverage value drivers available to an owner before a sale. Hygiene revenue above 30% of collections can be worth an estimated +0.5x–1.0x multiple, because buyers treat a strong hygiene department as recurring, durable revenue that does not depend on the selling dentist’s hands.
Overhead directly determines the earnings base the multiple is applied to. A well-run general dental practice typically runs adjusted EBITDA of about 22% of collections, with overhead around 60% of collections. Practices in the mid-50s overhead range tend to excite buyers, while overhead above 70% can make them cautious.
Payer mix can be one of the main drivers of multiple variation. Payer mix is identified by some analysts as the single largest driver of dental practice valuation multiples, alongside owner-dependence and profitability, with 60%+ fee-for-service revenue potentially worth several full multiple turns more than equivalent Medicaid or HMO earnings. A Medicaid payer mix above 40% of revenue can cost an estimated 1–2 EBITDA turns in valuation, and many institutional buyers exclude Medicaid-heavy practices from their acquisition criteria entirely.
Scale and number of doctors can move a practice from one multiple tier to another. Scale often moves the dental practice multiple more than specialty. A general dentistry group with $3 million or more in EBITDA can outprice a small specialty practice. Crossing from the $1 million–$3 million adjusted EBITDA tier into the $3 million–$5 million tier can add approximately 2 turns to the multiple.
Revenue durability, including same-store production growth, active patient counts, recall rates, and new patient flow, signals to buyers that the practice’s earnings can persist after the owner transitions out. Same-store production growth over a trailing 24–36 month period can matter more to DSO acquirers than total revenue.
Specialty mix also shapes buyer demand and the applicable multiple range. Different specialties can attract different buyer pools and structures, and those dynamics vary by region. McLerran & Associates tracks these patterns specialty by specialty and region by region, which can give owners a more precise read than a multi-vertical advisor or generalist broker.
Discuss which value drivers matter most for your specific practice profile.
Structure-Adjusted Multiple: What A Headline Multiple Is Really Worth
Even after the earnings basis is agreed and the multiple is set, the headline enterprise value rarely matches what lands in the seller’s account. Cash at close, rollover equity, and earnout each carry different risk, and their mix determines the risk-adjusted value of the quoted number.
Cash at close is the only component of a DSO deal that is certain. Dental DSO deals typically close with 60%–75% cash at close, 15%–30% rollover equity (effectively mandatory in DSO structures), and 5%–15% earnout tied to retained EBITDA over 12–36 months. The headline multiple applies to the full enterprise value, but a meaningful share of that value can be contingent or illiquid.
Rollover equity, the portion of proceeds reinvested as ownership in the acquiring DSO platform, can represent up to approximately 40% of a deal’s total consideration. Rollover equity comes in two forms. JV-level or sub-DSO equity tracks how the seller’s own practice or regional group performs after closing, typically with distributions and a higher floor but a lower ceiling. HoldCo equity, often called “the second bite,” sits at the platform level, carries no distributions, and can multiply several times over if the platform recapitalizes at a higher multiple. It can also return less than par if the platform underperforms, carries heavy debt, or takes longer than expected to exit. Sellers should know how much debt sits above the equity and when that debt matures. They should also check whether rates are fixed or floating, what rights investors hold, and whether previous dentists have actually converted their equity into cash.
Earnouts are deferred payments contingent on post-close performance targets. Earnouts are paid only if future targets are hit, and the buyer usually calculates post-close EBITDA. Sellers should confirm that targets are realistic and understand exactly how they are measured before counting earnout dollars.
McLerran & Associates produces multi-year, multi-structure financial forecasting that models what each deal structure can net the owner over time across 3-, 5-, 7-, and 10-year horizons. This approach lets the owner compare real after-tax cash across deal structures rather than headline numbers. A lower all-cash offer may deliver less total nominal value but allow a faster, more complete, and less risky exit than a higher offer containing contingent or illiquid consideration. Comparing both scenarios requires modeling each one.
Decoding the Rules of Thumb (Collections Percentage, 80/20, and the 3-3-3 Myth)
Several shorthand rules circulate in dental practice valuation conversations. Each captures a real pattern or misconception, and each has limits.
The collections percentage rule, pricing a practice at roughly 60%–85% of annual gross collections, is the most widely cited benchmark for private doctor-to-doctor sales. Rules of thumb pricing dental practices as a percentage of annual collections miss profitability differences, since a high-overhead and a low-overhead practice can collect the same amount and earn very different profits. Buyers and lenders price on normalized SDE or EBITDA instead. The collections rule can be a useful starting reference, not a full valuation.
The 3-3-3 rule in dentistry is not a standardized guideline; where the phrase is used, it typically refers to a brushing mnemonic. That mnemonic suggests brushing three times a day, for three minutes each session, and replacing your toothbrush every three months. It does not describe a business benchmark about collections, providers, or locations. Owners can treat any attempt to use it as a pricing formula with caution.
The 80/20 rule in dentistry typically refers to the observation that a small share of patients, roughly 20%, can generate a disproportionate share of revenue, roughly 80%. In a valuation context, heavy concentration in a small patient base or a single referral source is a risk factor buyers price into the deal. That risk can appear as a lower multiple or as earnout provisions tied to patient retention.
None of these rules accounts for buyer type, earnings basis, diligence defense, or structure. They can help start a conversation, but they do not replace a full valuation.
How To Raise Your Dental Practice Valuation Multiple Before You Sell
Most of the factors that move a multiple sit within the owner’s control, but they usually require lead time. Owner-dentists are advised to begin preparing for a sale 2–3 years in advance. Every dollar of additional sustainable EBITDA is multiplied at sale, and many of the moves that raise the multiple also improve current practice health.
The levers an owner controls include:
- Clean add-back documentation. Every discretionary expense claimed as an add-back needs a supporting record such as an invoice, payroll file, or bank statement. Undocumented add-backs are often removed in diligence, and every dollar removed is multiplied by the negotiated multiple.
- Reducing owner dependence. Recruiting and integrating an associate who produces independently is one of the highest-leverage de-risking moves available to most owners. Adding one producing associate generating $600,000 or more annually can shift a general practice from the individual-dentist buyer market into DSO eligibility, with a materially higher multiple tier.
- Tightening overhead. Overhead in the mid-50s as a percentage of collections tends to excite buyers. Every percentage point of overhead reduction flows directly into the earnings base the multiple is applied to.
- Building durable revenue. A strong hygiene department, active recall system, and consistent new patient flow signal to buyers that earnings can persist after the transition.
- Running a competitive process. As noted earlier, the spread between top and middle-tier offers is wide, which is why the process matters as much as the fundamentals. A structured, auction-like process among multiple vetted buyers can help capture the top of the range.
McLerran & Associates quantifies a practice’s worth on both the private-buyer and DSO paths side by side, so owners see which levers matter most for their specific situation before they go to market. If an owner is not ready to sell today, McLerran will update the valuation for free a year later, rather than pushing a client into a deal before the timing feels right.
A generic valuation-resource advisor, one that publishes range tables and educational content but does not run a structured sell-side process, cannot deliver the same outcome. The difference between a published range and a defended, bid-tested number is the difference between a starting point and a closing price. McLerran & Associates has evaluated more than 10,000 practices, completed approximately 2,000 successful sales, and closed roughly $2 billion in transaction volume by actively selling practices rather than simply listing them.
Frequently Asked Questions
What Multiple Will My Practice Sell For?
The applicable multiple depends on the buyer type and the earnings basis. Private doctor-to-doctor buyers price on SDE or as a percentage of collections. DSOs and private-equity platforms price on adjusted EBITDA, with the multiple rising with the size of the practice’s EBITDA. Within any tier, the multiple can move based on owner dependence, hygiene production, overhead, payer mix, scale, and revenue durability. Your multiple is shaped by your specific numbers, your market, and the quality of the process used to surface buyers, which a comprehensive valuation and a competitive bid process are designed to establish.
Why Do EBITDA Multiples Differ From Revenue Multiples?
Revenue multiples and EBITDA multiples measure different things. A revenue multiple, such as a percentage of annual collections, ignores profitability. Two practices collecting the same amount can have very different earnings depending on overhead, staffing, and payer mix, and therefore very different values. An EBITDA multiple is applied to normalized earnings after expenses, which more closely reflects what a buyer is actually purchasing: the practice’s ability to generate profit after the owner transitions out. Institutional buyers use EBITDA multiples because they are underwriting a business, not a revenue line. Revenue multiples can be a useful shorthand for private doctor-to-doctor deals but do not replace an earnings-based valuation when DSO or private-equity buyers are in the room.
What Is the 3-3-3 Rule for Dental Practices?
The “3-3-3 rule” in dentistry is not a standardized guideline; where the phrase is used, it typically refers to a brushing mnemonic. That mnemonic suggests brushing three times a day, for three minutes each session, and replacing your toothbrush every three months. It does not describe a business benchmark about collections, providers, or locations, and it should not be treated as a scale threshold or a valuation method. Owners evaluating whether their practice is positioned for institutional buyer interest can focus instead on earnings quality, payer mix, owner dependence, and the process used to surface buyers, because those factors actually drive the multiple.
What Is the 80/20 Rule in Dentistry?
In a dental practice context, the 80/20 rule refers to the pattern where a small share of patients generates a disproportionate share of revenue. In a valuation context, heavy concentration in a small patient base or a single referral source is a risk factor. Buyers price concentration risk into the deal, either through a lower multiple, through earnout provisions tied to patient retention after the transition, or through a larger escrow holdback. A practice with a broad, distributed active patient base and a strong recall system is a materially different asset than one dependent on a handful of high-value patients or a single referring provider.
Are DSO Deals All Cash, or Is There Stock Involved?
DSO deals are almost always a mix of cash, rollover equity, and sometimes an earnout. The cash-at-close component typically represents 60%–75% of the total enterprise value, with the remainder in rollover equity held at either the joint-venture level or the holding-company level, plus any earnout tied to post-close performance targets. As much as approximately 40% of a deal can be paid in equity rather than cash, which is why sellers often need to underwrite the DSO like an investment. That review can include assessing the platform’s profitability, growth, management quality, and financial backing before accepting equity as a meaningful share of proceeds. A higher headline multiple that includes a large illiquid equity component may net less certain value than a lower multiple paid mostly in cash.
Why Pay for a Valuation When Some Firms Do It for Free?
A free valuation is typically a lead-generation tool, a back-of-the-napkin number designed to attract a listing rather than to survive buyer scrutiny. When a weak or buyer-set valuation enters diligence, unsupported add-backs are removed, the earnings base shrinks, and the deal can be re-traded down. The owner may walk away with less than the quoted number. McLerran & Associates builds a CPA-led, diligence-grade EBITDA analysis up front, with every add-back documented and every normalization tied to a supporting record. That work is done before the practice goes to market, so the number is more likely to hold when buyers look under the hood. In one case, a free valuation pegged a practice at $2.5 million; McLerran valued it at $4.5 million and it sold for $5.25 million after a competitive process. The cost of a rigorous valuation can be recovered many times over in the difference between a defended number and a re-traded one.
Should I Sell to a Private Buyer or a DSO?
The right path depends on the practice’s size, profitability, and the owner’s personal goals. Smaller premier practices, roughly $1 million–$1.5 million in revenue, often fit a doctor-to-doctor sale, where the buyer is a dentist who will work in the practice and pay for the total cash flow available to a working owner. Larger practices, generally $1.5 million in revenue and above, attract DSO and private-equity interest, where the buyer is underwriting transferable business earnings and the multiple is applied to adjusted EBITDA. Practices in the $1.5–$3 million revenue range can genuinely go either way. Because McLerran & Associates works both markets in roughly equal measure, it produces a true side-by-side valuation, quantifying the practice’s worth on both paths so the owner chooses with full information rather than a guess driven by whichever buyer happened to call first.
Conclusion: How Buyer Type, Earnings, Diligence, and Structure Shape Your Real Multiple
A quoted dental practice valuation multiple is a starting point. The real multiple, the one that determines what actually lands in your account, reflects four variables: the buyer type that applies to your practice, the earnings basis that buyer uses to underwrite it, whether that earnings figure survives quality-of-earnings diligence, and how much of the headline value is cash at close versus contingent or illiquid consideration. McLerran & Associates helps owners understand and manage each of these variables so the number on the LOI more closely matches the number at closing.
