When it comes to transitioning a dental practice, many buyers and sellers focus on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a key indicator of value. While EBITDA is certainly a useful metric for understanding profitability, relying on it too heavily during practice transitions can sometimes lead to issues down the line. At KLAS Solutions, we’ve seen firsthand how a narrow focus on EBITDA can sometimes mislead both buyers and sellers. Here’s why it’s important to take a broader view when considering the sale or purchase of a dental practice.

EBITDA Doesn't Tell the Whole Story

EBITDA provides a snapshot of profitability, but it doesn’t account for several critical factors that can impact a dental practice’s true value. Things like capital expenditures, equipment upgrades, and long-term maintenance costs aren’t reflected in EBITDA. A practice might show strong profitability on paper, but if equipment is outdated or in need of repair, the buyer may face substantial costs soon after purchase.

Ignoring these "hidden" costs when making decisions based solely on EBITDA can lead to financial strain for a new owner and a practice that needs more investment than anticipated.

Misleading Valuations

Relying on EBITDA can make a company seem more valuable than it really is. When analysts use valuation ratios like EV/EBITDA (enterprise value divided by EBITDA), it can give the illusion that a company is cheaper or more profitable than it truly is. By excluding key expenses, EBITDA may produce lower multiples, but these figures don’t reflect the company's actual earnings or financial obligations.

Take the historical example of Sprint Nextel: in 2006, the company’s stock was trading at 7.3 times its forecasted EBITDA, which might seem like a bargain. However, when considering more relevant figures like operating profits and net income, Sprint was trading at much higher multiples, revealing that the company wasn’t as inexpensive as it appeared.

Earnings Figures May Be Questionable

While EBITDA may seem straightforward to calculate, the reality is more complicated. Since companies can use different starting points for earnings, EBITDA is susceptible to accounting games. This can make it difficult to trust the earnings figures that are used to calculate EBITDA, adding another layer of potential confusion for investors.

Patient Relationships and Retention

EBITDA focuses strictly on financial performance, but the real strength of a dental practice lies in its patients and their loyalty. High patient turnover, poor patient satisfaction, or a shaky recare system aren’t reflected in EBITDA. When transitioning a dental practice, buyers must consider patient relationships, retention rates, and reputation in the community. A practice with solid patient loyalty and an effective recall system is more likely to sustain profitability, even if its current EBITDA doesn’t look outstanding.

Staffing Stability and Team Culture

Just like with patients, the strength of a practice's team is another area overlooked by EBITDA. A highly skilled, stable team with great leadership can be the backbone of a successful transition. However, if the practice has high turnover rates, disengaged staff, or toxic office culture, it can negatively impact long-term performance. A buyer relying solely on EBITDA won’t see these potential landmines, which can lead to staffing disruptions post-transition.

Team stability is especially important in dentistry because patients often develop long-standing relationships with front-office staff, hygienists, and dental assistants. These relationships directly affect patient retention and practice success.

Overlooking Doctor’s Personal Impact

For practices where the selling doctor is highly involved, their departure can lead to a significant drop in patient retention and overall revenue. EBITDA doesn’t account for the “personal brand” of the doctor and how their exit may impact the practice’s performance. In a transition, losing a well-loved doctor can have serious repercussions. When evaluating a practice’s value, it’s crucial to consider how reliant the practice is on the current dentist and whether patients will stick around after the sale.

Changes in Practice Overhead

EBITDA doesn’t capture future fluctuations in expenses. When a practice transitions, there may be changes in cost structures that aren’t immediately visible. For example, if the buyer plans to upgrade technology, expand services, or hire additional staff, these costs can erode profits over time. Even subtle changes like increased rent, new software systems, or additional compliance costs can significantly affect the bottom line, despite EBITDA painting a healthy financial picture at the time of sale.

Practice Growth Potential Isn’t Measured by EBITDA

Finally, EBITDA is a backward-looking metric. While it shows how a practice has performed in the past, it doesn’t reflect future growth potential. A practice with a modest EBITDA today might have significant room for growth if it’s in a high-demand area, has the potential for expanded services, or can improve its patient acquisition strategies. On the flip side, a practice with a strong EBITDA today might have already reached its growth ceiling. Evaluating future potential is just as important as looking at historical financial performance when considering a transition.

Take a Broader Approach to Practice Transitions

While EBITDA is a valuable tool in assessing a dental practice’s profitability, it shouldn’t be the only metric used to evaluate its worth. Sellers must ensure they understand the full picture of their practice’s value, including patient relationships, team dynamics, and potential future costs. Buyers need to dig deeper into factors beyond EBITDA to ensure they’re purchasing a practice that aligns with their long-term goals and not just their short-term financial expectations.

At KLAS Solutions, we guide dentists through the complex process of practice transitions. We help ensure all factors—financial and beyond—are taken into account so that both buyers and sellers walk away with a smooth transition and a bright future ahead. If you’re preparing for a dental practice transition or simply want to explore your options, reach out to us. We’re here to help every step of the way.

Ready to get started with your transition?

Connect with KLAS Solutions today for a free consultation on your practice’s transition strategy!  [email protected] or 844-552-7100.