Business, Main Street / SMB

How to Underwrite a Dental Practice or DSO

Underwrite a dental practice by reconciling production to collections, then analyzing payer mix, hygiene recall and active patient trends. For DSOs, focus on same-store growth and doctor retention. The metrics that matter most are collections per dentist, hygiene share of production, adjusted EBITDA after market dentist pay, and dependence on the selling doctor.

What makes dental practice and dso underwriting different

A dental practice generates revenue from dentists and hygienists treating patients, billed to insurers, government programs and patients. Production is the gross value of procedures, but collections after insurer write-offs and bad debt are what pay debt. Hygiene recall drives recurring visits and feeds restorative work. Payer mix strongly affects margin, since fee-for-service patients pay full fees and PPO or Medicaid plans pay less. The selling dentist often produces a large share of revenue. Dental service organizations aggregate many practices, centralize billing and support, and live or die on doctor recruitment and same-store growth.

Practice lenders treat dentist acquisitions as relatively low risk because patients usually remain with a practice under new ownership and professionals tend to repay. They lend at high percentages of purchase price and focus on collections, overhead and the buyer's credentials. DSO investors look at platform economics: adjusted EBITDA after market dentist compensation, de novo performance, affiliation pipeline, and how many dentists have rolled equity. Lenders to DSOs scrutinize pro forma adjustments for acquired practices and doctor retention, while equity often pays for growth that depends on recruiting dentists in a tight market.

Key metrics

Collections ratio

Collections divided by net production show billing effectiveness and the gap between scheduled fees and cash received.

Practices often target collection of nearly all adjusted production after contractual write-offs.

Collections per dentist

Shows doctor productivity and owner dependence.

Hygiene production share

Hygiene recall drives recurring visits and future treatment.

Payer mix

Fee-for-service, PPO and Medicaid reimbursement levels differ, affecting margin and fee schedule risk.

Overhead ratio

Staff, supplies, lab and facility costs relative to collections show profitability before doctor pay.

Adjusted EBITDA after market dentist compensation

Particularly for DSOs, EBITDA must reflect paying all dentists market compensation.

Active patient count

Patients seen recently and new patient flow show the durability of the base.

How to underwrite it, step by step

Reconcile production, adjustments and collections from practice management software to bank deposits.
Analyze payer mix, fee schedules and insurer contracts.
Measure active patients, new patients and hygiene recall effectiveness.
Allocate production by provider and identify revenue dependent on the selling dentist.
Normalize EBITDA for market dentist compensation and owner expenses.
Review equipment, imaging, operatory count and lease terms.
For DSOs, test same-store growth, de novo ramp and acquired practice adjustments.
Size debt with transition and retention structures for selling dentists.

Due diligence checklist

Practice management production and collections reports
Payer mix and insurer contract list
Fee schedules
Active patient and recall reports
Provider production reports
Accounts receivable aging by payer
Dentist and hygienist employment agreements
Facility lease
Equipment list and imaging systems
Licensing and regulatory compliance records
Three years of tax returns and P&L

Key risks and mitigants

Selling dentist leaves and patients follow.

Use transition agreements, non-competes where enforceable and seller financing or rollover equity.

Insurer fee schedule cuts.

Analyze payer concentration and stress reimbursement reductions.

Dentist recruitment and retention difficulties at DSOs.

Review doctor turnover, compensation models and equity participation.

Billing and coding compliance issues.

Audit claims and documentation, especially for government payers.

Overstated pro forma EBITDA for DSO acquisitions.

Commission a quality of earnings review and haircut unrealized synergies.

Typical financing and deal structure

Individual dentists commonly use practice acquisition loans from banks that specialize in healthcare professionals, which often finance most of the purchase price with long terms, or SBA 7(a) loans. Seller transition agreements and occasionally seller notes are part of the deal. DSOs are typically financed with senior or unitranche credit facilities from private credit lenders, including delayed draw term loans for acquisitions. Selling dentists frequently roll equity into the DSO and sign employment agreements. Covenants include leverage tests with negotiated add-backs for acquired practices and limits on pro forma adjustments.

Red flags

Production reported but collections much lower without explanation.
Heavy Medicaid concentration with recent reimbursement changes.
Selling dentist produces most revenue and will leave right away.
DSO EBITDA heavily dependent on pro forma acquisition add-backs.
Billing audits or overpayment demands from payers.

Frequently asked questions

How is a dental practice valued?

Dental practices are often valued on a percentage of collections or a multiple of adjusted EBITDA. Buyers review collections, overhead, payer mix, active patients and hygiene production. DSOs value practices on adjusted EBITDA after market compensation for all dentists. Practices with strong fee-for-service revenue and hygiene recall generally command higher values.

What is the difference between production and collections?

Production is the value of procedures performed at the practice's fees. Collections are the amounts actually received after insurer contractual adjustments and bad debt. Underwriters focus on collections because they represent real cash, and large gaps between production and collections can signal billing problems. Collections trends over time matter more than any single month.

How do lenders view DSO financing?

Lenders evaluate DSOs on aggregated EBITDA, same-store growth, doctor retention and the quality of acquisition add-backs. They often provide senior or unitranche facilities with delayed draw capacity for acquisitions. Leverage limits and quality of earnings work help ensure the platform can support debt as it grows.

Can a new dentist buy a practice with no down payment?

Specialized dental practice lenders sometimes finance a very high share of the purchase price for qualified dentists, since practice acquisitions have historically performed well. Terms depend on the buyer's experience, the practice's cash flow and the transition plan. SBA 7(a) loans generally require some equity injection.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.