Your CPA’s Bottom Line vs. What Your Dental Practice Is Really Worth

Jennifer Arsenault, Founder & CEO, Executive Valuations

If you’re a dental practice owner, you may have looked at your tax return and wondered how your practice could possibly be worth what you’ve heard other practices are selling for.

Perhaps your accountant reported very little taxable income. Maybe your practice even showed a loss for the year.

Does that mean your practice has no EBITDA? Or worse, that your business has little or no value?

Not necessarily.

Having worked with more than 350 healthcare practice owners since 2017, I’ve encountered this concern many times. Owners are often surprised—and relieved—to discover that the income reported on their tax returns and the earnings used to evaluate their practice are not necessarily the same.

Understanding why those numbers differ is an important first step toward understanding what your dental practice may actually be worth.

Your Tax Return and Your Practice Valuation Serve Different Purposes

A common misconception is that EBITDA is simply the income a practice reports to the government.

It isn’t.

Your CPA’s tax preparation work generally focuses on accurately reporting income and expenses, complying with tax regulations, and identifying legitimate opportunities to minimize tax liability.

A business valuation asks a different question: What is the practice’s underlying earning capacity, and how might a potential buyer evaluate that performance?

Both perspectives are important. But they are not interchangeable.

A practice owner may have legitimately used depreciation, retirement plan contributions, interest deductions, or other tax-planning strategies that reduce taxable income.

Those decisions may make sense from a tax perspective without necessarily reflecting the practice’s ongoing operating earnings.

That is why a tax return showing a loss does not automatically mean a dental practice has negative EBITDA.

Of course, it doesn’t automatically mean the practice has positive EBITDA, either. The underlying financial statements need to be analyzed.

What Is Normalized EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

It is commonly used as a starting point for evaluating a business’s operating performance.

But when a buyer evaluates a dental practice, the analysis often goes further.

Normalized EBITDA attempts to reflect the practice’s sustainable earnings after considering expenses, compensation arrangements, and unusual circumstances that may not represent ordinary ongoing operations.

The goal isn’t to make the practice look more profitable than it really is.

The goal is to understand its earnings accurately.

That requires much more than adding back a few expenses or applying a standard formula.

Six Key Areas to Examine When Normalizing a Dental Practice’s EBITDA

Every dental practice is different. A sound normalization analysis does not assume that certain expenses automatically qualify as adjustments.

Instead, the analysis considers how the practice operates, how the owner is compensated, and what may have affected its financial performance.

1. Owner-Doctor Compensation

One of the first areas to evaluate is how the practice owner is compensated.

This is also one of the most misunderstood aspects of normalized EBITDA.

A practice owner may receive compensation through salary, distributions, or a combination of arrangements.

But a buyer needs to understand what it would cost to replace the owner’s clinical production and other necessary responsibilities.

If the owner is undercompensated relative to the work they perform, normalization may actually reduce EBITDA.

If the owner is paid more than an appropriate market-based amount, an adjustment in the other direction may be warranted.

The important point is that owner compensation cannot simply be added back in full without considering the services the owner provides.

2. Real Estate Ownership and Fair Market Rent

Does the practice owner also own the building?

If so, the rental arrangement deserves closer examination.

Some owners charge their practices below-market rent. Others may charge above-market rent.

For valuation purposes, it’s important to consider what the practice would reasonably pay to occupy comparable space under a market-based arrangement.

That adjustment can increase or decrease normalized EBITDA.

3. Temporary Disruptions to Revenue

Another important question is whether anything unusual happened during the preceding 12 months that affected the practice’s ability to generate revenue.

For example:

• Did a revenue-producing associate take maternity leave?
• Was a key provider absent for an extended period?
• Did an unexpected staffing disruption affect patient appointments or collections?
• Were there other temporary circumstances that interrupted normal production?

These events may warrant further investigation because historical financial results do not always tell the complete story.

However, a temporary disruption is not automatically an EBITDA add-back. Its financial impact, whether it has been resolved, and whether the practice’s earnings are likely to recover all require careful evaluation.

Not every adjustment is an all-or-nothing decision.

Consider a revenue-producing associate who was absent for several months. Although the practice may have experienced a decline in revenue, some patients may have been treated by other providers, appointments may have been rescheduled, and certain operating expenses may have decreased.

It may be tempting to rely on an AI-generated EBITDA analysis to identify and calculate these adjustments. However, determining whether an adjustment is warranted—and how much is supportable—requires a deeper understanding of the circumstances behind the numbers.

In some cases, a partial adjustment may be appropriate. In others, no adjustment may be justified. This is where careful investigation, financial scrutiny, and experienced human judgment become essential to developing a credible, defensible normalized EBITDA.

4. Personal Expenses Paid Through the Practice

Some practice owners pay personal or discretionary expenses through their businesses.

Depending on the nature of those expenses, certain amounts may qualify as normalization adjustments.

But not every expense an owner considers personal is necessarily an appropriate add-back.

The expense must be examined in context, including whether it is genuinely unrelated to ongoing practice operations.

5. Family Members on Payroll

Another area to investigate is whether family members receive compensation from the practice.

The key question isn’t simply whether a spouse or relative is on payroll.

It’s whether that person performs necessary work and whether their compensation reflects the services provided.

If a family member receives compensation without performing meaningful services, an adjustment may be appropriate.

But if that family member performs an essential role, the practice may need to incur replacement compensation after a sale.

That distinction matters.

6. Retirement and Cash Balance Plans

Owner-specific retirement benefits, including certain cash balance plan contributions, can also affect reported earnings.

The analysis should consider the nature of those contributions, who benefits from them, and whether the expense represents an ongoing operating obligation.

As with other adjustments, the answer depends on the facts.

Why Normalized EBITDA Isn’t Just a Collection of Add-Backs

A common misconception is that every expense a practice owner believes is unusual should automatically increase EBITDA.

That isn’t how a defensible normalization analysis works.

Some adjustments increase earnings. Others decrease them. And, as the example of temporary revenue disruptions illustrates, some adjustments may be only partially supportable.

For example, an owner who pays themselves substantially less than the market value of their clinical services may be surprised to learn that properly accounting for their compensation reduces normalized EBITDA.

That isn’t a mistake in the calculation.

It’s part of accurately representing the economics of the practice.

A credible EBITDA analysis needs to account for both favorable and unfavorable adjustments, supported by appropriate documentation and professional judgment. The objective is not to maximize add-backs, but to determine which adjustments—and what amounts—can be reasonably supported.

Why Your Colleague’s EBITDA Multiple May Not Apply to Your Practice

Dental practice owners understandably talk with friends and colleagues about transactions.

One doctor hears that a friend received a certain multiple of EBITDA and naturally wonders whether their own practice should command the same valuation.

But a multiple without context can be misleading.

Two practices with similar revenues can have very different normalized earnings.

And even practices with similar EBITDA may differ in important ways, including:

• Provider dependence and the owner’s clinical role
• Staffing stability and operating costs
• Growth prospects and revenue composition
• Geographic market conditions
• Buyer interest and perceived risk
• Transaction structure and the owner’s expected role after closing

A headline multiple doesn’t necessarily reveal the full economics of a transaction.

For that reason, owners are better served by understanding their own practice’s financial performance before relying on comparisons with other dentists.

Every practice is unique, and every transaction is unique.

Most importantly, practice owners should remember that they are in the driver’s seat.

Understanding their numbers helps them assess opportunities from a position of knowledge rather than reacting to someone else’s valuation assumptions.

Why an Independent EBITDA Assessment Matters

Before founding Executive Valuations, I spent years working in corporate finance and sell-side healthcare transactions.

That experience gave me insight into how potential buyers analyze businesses and how transaction-related incentives can influence the process.

Even a firm representing the seller may have a financial interest in whether a transaction closes and the price it achieves.

That doesn’t mean its analysis is necessarily incorrect. It means practice owners should understand the role and incentives of the professionals advising them.

My approach at Executive Valuations is different.

I provide independent, third-party valuation services. I don’t represent the buyer, and my compensation isn’t contingent on a practice selling.

I have no financial incentive to inflate or minimize a practice’s normalized EBITDA to achieve a particular transaction outcome.

My responsibility is to examine the financial facts, apply professional judgment, and help the owner understand how their practice may be perceived in the marketplace.

After years of working in this industry, I recognized a need for someone who could advocate for practice owners’ understanding of their business without a competing transaction agenda.

That’s the role I want Executive Valuations to fulfill.

Understanding Your EBITDA Before You Sell

Your tax return tells one story about your dental practice.

Your normalized EBITDA may tell another.

Neither should be interpreted without understanding the underlying financial details.

A reported tax loss doesn’t necessarily mean your practice lacks meaningful earnings. And a strong reported profit doesn’t automatically mean every dollar will translate into normalized EBITDA.

The difference lies in the details: owner compensation, market rent, staffing disruptions, discretionary expenses, retirement benefits, and the other financial circumstances unique to your practice.

The guidance for dental practice owners is simple: Don’t wait until a buyer presents an offer to learn how your practice’s earnings are being assessed.

Understand your numbers first.

Because the more you understand about your practice’s financial performance, the better prepared you’ll be to make informed decisions about its future.

Executive Valuations helps dental practice owners understand their normalized EBITDA and business value through independent, third-party valuations.

If you’re considering a future transition—or simply want a clearer understanding of what you’ve built—I welcome the opportunity to have a conversation.

Visit executivevaluations.com to learn more or schedule a complimentary introductory consultation.