If you’re considering selling to a Dental Service Organization (DSO), understanding what influences their decision to buy is crucial. A key metric DSOs use to evaluate the value and potential of a practice is EBITDA—Earnings Before Interest, Taxes, Depreciation, and Amortization. But what exactly is EBITDA, and how does it affect buying decisions?

What is EBITDA?

EBITDA is a measure of a practice’s financial performance that gives a snapshot of its operating profitability. By excluding non-operational expenses like taxes, interest, and depreciation, EBITDA provides a clearer picture of the practice’s cash flow potential. This metric is particularly attractive to DSOs because it simplifies comparisons between practices, focusing on pure profitability and allowing them to gauge how much revenue a practice could generate without heavy financial restructuring.

Why DSOs Focus on EBITDA

DSOs are looking for efficient, profitable practices that align with their model of streamlined operations and scalability. Here’s why EBITDA is central to their buying strategy:

Standardized Profitability Metric: EBITDA enables DSOs to evaluate a practice’s performance without factoring in financial elements that vary widely between practices, such as interest payments on loans or tax rates. This helps them identify practices that are inherently profitable.

Scalability Potential: DSOs typically have established systems to improve operational efficiencies. A solid EBITDA indicates that the practice has foundational profitability that can be scaled with DSO resources.

Revenue Growth Forecasts: EBITDA provides DSOs with an estimate of potential ROI. By focusing on practices with strong EBITDA, DSOs can more accurately forecast growth and prioritize acquisitions based on financial returns.

How EBITDA Influences Valuation

For practice owners, understanding EBITDA’s role in valuation can help set realistic expectations. Generally, the higher the EBITDA, the more attractive the practice is to DSOs, which can translate to a higher sale price. DSOs typically apply a multiple to EBITDA—usually between 3x and 7x, but sometimes even higher for exceptionally profitable practices—to arrive at a valuation. This multiple reflects the DSO’s confidence in their ability to enhance the practice’s performance and maximize its value within their portfolio.

Maximizing Your Practice’s EBITDA

It makes sense, then, that before talking to a DSO, that you should spend time increasing your practice’s EBITDA so you can get the highest possible offer. Here are few things that you should focus on:

Streamline Expenses: Reducing unnecessary overhead costs can have a direct positive impact on EBITDA. Evaluate administrative expenses, supply costs, and staffing models for areas of potential savings.

Enhance Revenue Streams: Diversifying services or improving patient retention rates can drive revenue and, consequently, EBITDA. Investing in technology, expanding services, or optimizing appointment scheduling can all contribute.

Monitor Operational Efficiency: Efficient practices are naturally more profitable. Regularly review workflows to minimize bottlenecks and maximize productivity, leading to increased EBITDA.

Should You Sell to a DSO?

While a DSO acquisition can be financially rewarding, it’s not the right path for every practice. Here are some considerations:

• Financial Goals: Evaluate how the DSO’s offer aligns with your financial goals and retirement plans.
• Practice Legacy: Selling to a DSO may mean adjustments in branding, patient care approach, and operational changes that could shift your practice’s culture.
• Future Involvement: Many DSOs retain practice owners as associates for a few years post-sale, which might appeal to owners who aren’t ready to fully retire.

Partnering with a Dental Practice Coach

Understanding EBITDA and its role in practice acquisitions can help practice owners make informed decisions and position their practices for the best possible outcome. DSOs value high-EBITDA practices for their profitability, scalability, and growth potential, making EBITDA a critical component in the valuation process.

If you’re considering a DSO sale, working with a NextLevel dental practice coach can be invaluable. Our 90 Day Practice Sale Program was specifically designed to help you enhance your EBITDA, navigate negotiation tactics, and set you up for a successful transition…in just three months. We can also guide you on the many factors that influence the sale price beyond just financials. Schedule a free consultation today to get started.