What Comes Off Your Number: The 14 Ways a Buyer Reprices a Dental Practice's EBITDA

Every owner who searches “add-backs” is thinking about additions. The CPA’s list of expenses to put back on top of the profit: the car, the conference in Hawaii, the spouse on payroll, the one-time equipment repair. Add them back, multiply by seven, and that is the number the broker puts on the first page.

In diligence the same list runs in reverse. The buyer’s team starts from your number and subtracts, and they don’t stop at the accounting. Eighty-five percent of lower-middle-market deals see the price adjusted after the letter of intent, and almost none of those adjustments is a surprise to the people making them. They are working from a list, a set of benchmarks, and curiosity.

Fourteen adjustments, grouped by what they come off: the price, the terms, or the cash at close. For each, what triggers it, what the team does with it, and what it costs on a practice priced at seven times EBITDA. Practice A, the example throughout, is the one I have written about for the last couple of months: about $10 million in collections, clean books, a thorough CPA. A real practice, anonymized, with an owner who takes pride in how well they know their business.

Part One: What Comes Off the Price

These are the accounting adjustments. Every dollar here is multiplied by the multiple, which is why a $125,000 reduction in EBITDA is an $875,000 reduction in price.

1. Owner compensation to replacement cost. You pay yourself what the practice can afford; the buyer pays what it would cost to replace you with a dentist producing the same dentistry. The gap comes off EBITDA. Practice A’s owner was paying themselves about $50,000 below that cost. At seven times, $350,000 off the price, before the buyer learned anything else.

2. Contractor reclassification. Associates and hygienists on 1099s doing employee work get re-costed as employees: payroll taxes, benefits, the works. Practice A carried about $155,000 of this, which is roughly $1.1 million at the multiple, and it carries a second cost: the buyer inherits the misclassification exposure, and prices that too.

3. Related-party rent to market. If you own the building and rent it to the practice below market, the difference is EBITDA the buyer will never earn, because the lease it signs will be at market. Practice A: about $40,000 a year, $280,000 at seven times. The reverse is also true: rent above market is an add-back the buyer will grant, which is the only line on this list that can go your way.

4. The add-backs that don’t survive. Personal expenses survive if they are documented and truly personal. The ones that fail: the family member on payroll who actually works (the buyer has to replace them), the marketing you say you’ll cut (the buyer assumes the patients came from it), the “one-time” expense that appears in three consecutive years. Every add-back the team strikes is multiplied the same way the ones they grant are.

5. Run-rate and timing. The trailing twelve months get adjusted to what the practice will actually do next year. A large case that won’t repeat comes out. Deferred maintenance that the buyer will have to fund comes in. Cash-basis timing gets normalized to accrual-basis. A strong last quarter does not alter your annual trajectory; a weak one sometimes will.

6. The market reclassification. This one is not an adjustment to EBITDA but to what EBITDA is worth. Once the five adjustments above are made, the normalized margin is what it is. Below about fifteen percent, the institutional buyers who pay seven times stop bidding, and the practice is not priced lower; it is priced in a different market, by an individual buyer, off collections. Practice A reported about seven percent. For that practice, the first five adjustments did not reduce the price. They removed the buyer’s appetite.

Part Two: What Comes Off the Terms

The next five rarely change the headline price. They change how much of it you actually get, and when. Buyers price these as structure: employment term, earnout, holdback, equity instead of cash.

7. Owner-originated diagnosis. The team reads who creates the treatment plans, not just who produces them. Practice A’s owner performed 4.4% of the exams and originated 24.6% of everything diagnosed. A buyer doesn’t cut the price for that; it keeps you working longer and ties a larger share of the price to production after you’ve sold. The point guard doesn’t score, they distribute, and the buyer wants them on the floor until the plays run without them.

8. Key-person concentration beyond the owner. One associate producing a disproportionate share of the practice, with no stated commitment to stay, is a retention problem the buyer funds from your price: a retention bonus, a longer transition, or a discount for the risk that they leave the week after close.

9. Hygiene reappointment. The team measures whether next year’s hygiene base is already on the schedule: of the patients who completed an eligible hygiene visit, how many left with the next one booked. The standard is ninety percent; the average across the practices I read is about seventy-eight. The gap is next year’s revenue that the buyer will have to go and find, and it is priced as durability, usually in the earnout.

10. The completion gap. Case acceptance is a decision at a moment. Completion is the proof. A practice with strong presented-and-accepted numbers and weak completed numbers has a pipeline the buyer will not pay for, because the production it implies never arrived. The team discounts forward production to what historically completed, by provider. Cases presented above $10,000 get read one at a time.

11. New-patient dependence. Where the new patients come from, and whether that source survives you. A practice whose new-patient flow is the owner’s referral relationships, or paid acquisition the owner has been under-reporting, gets its marketing cost normalized up and its growth story discounted. If the practice software never recorded referral source consistently, the buyer assumes the worst, because they can.

Part Three: What Comes Off the Cash at Close

The last three don’t touch EBITDA or the multiple. They come straight out of the wire, as working-capital deductions, holdbacks, and escrows, which is why sellers who negotiated the price perfectly still walk away with less than they expected.

12. Credit balances and refunds. Patient and insurance overpayments sitting in the practice software that were never refunded. The buyer treats them as a liability it is inheriting and deducts them from working capital, or asks for a special indemnity. Past two to three years, depending on the state, those balances are unclaimed property under state law, which is the buyer’s second reason to price them.

13. Coding exposure. The team reads procedure utilization by code and provider against payer norms, and it reads the clean-claim rate as a warning, not a credential. Practice A collected 107% of its insurance estimates with under $500 of rejected claims ever, and underneath that sat about $680,000 of coding patterns a payer can claw back after close. Payers pay first and audit the pattern twelve to eighteen months later, which means after the sale. The buyer sizes a holdback to it.

14. Payer concentration and fee exposure. One carrier over roughly thirty percent of collections, a fee schedule that hasn’t been touched in years, contracts the buyer will have to renegotiate on different terms. These are quantified as exposure and handled in escrow or as an earnout contingency, because the buyer cannot know whether the carrier will re-paper the practice after the change of ownership.

How to Read the List

Add it up for Practice A. The accounting face took $125,000 off EBITDA, about $875,000 off the price, and then removed the institutional buyer entirely by dropping the margin below the floor. The operational face would have added years to the employment term and moved a large share of any price into an earnout. The clinical face would have deducted the refunds from working capital and held back the coding exposure. The owner would have negotiated a price and received a fraction of it.

None of the fourteen was hidden. The P&L was accurate. Almost every line was sitting in the practice-management software, where the owner never looked and the buyer’s team always does.

That is the asymmetry in every dental transaction: the buyer spends $50,000 to $200,000 running this list against your practice, and most sellers spend nothing running it first. The sellers who report no surprises between the LOI and the wire are the ones who had already read the list on themselves, fixed what was worth fixing, documented the rest, and went to market with a number that had already been through diligence.

Run the fourteen on your own practice before anyone else does. Done two years out, every line on it is a fix. Done inside the exclusivity window, every line is a reason the price moved.

The Sell-Side Baseline runs all fourteen on a practice before a buyer does.

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About the author — James DeLuca is the founder of Precision Dental Analytics and works in clinical data forensics and M&A defense: the independent Clinical Quality of Earnings for sellers, buyers, and lenders, run before the buyer’s team runs theirs. He is the author of Phantom EBITDA, The Dental Data Playbook, Hidden Levers, and Spartan Leadership. Meet the team →