This is Part 4 of a four-part series examining the values of dental and optometry practices. The current (Spring 2025) thinking in Canada is that dental practices are worth considerably more than optometric practices. In this article, we are going to challenge that thinking. This is the fourth part of a four-part series, and to fully understand this article, you should read articles one through three first. We are going to look at the Earnings Valuation Methodology applied to both dental and optometry practices. Our analysis will pay particular attention to the profitability, return on Investment (ROI), and risk associated with both professions. Profitability and risk-related ROI are the main functions of the generally accepted earnings valuation formula:
Value = Profit X Earnings Multiple (Risk Factor)
Where Profit = Adjusted EBITDA, &
Earnings Multiple = the Inverse of the Target ROI
Virtually all investments, be they stock market or professional practice investments, are made with the expectation of some level of financial return (ROI). The riskier the investment, the greater the return demanded by investors. Current rates of return for dental practices range from 16.5% to 17.5% (multiple of 5.75 to 6.50), while the suggested multiples for optometric practices are somewhat lower; however, we will look at these a little more carefully below.
In this article, we will compare the Normalized EBITDA and the Earnings Multiples for both dental and optometric practices. As set out in Articles 2 and 3, the calculation of Normalized EBITDA will have followed similar protocols for both practice types. Our analysis of the Earnings Multiples will follow the Build-Up methodology, which has also been thoroughly outlined in Article 2 for optometry and Article 3 for dentistry. Once we have established a comparative framework for Normalized EBITDA and Earnings Multiples, we will apply these metrics to our Article 2 and 3 hypothetical practices. This will provide a clear and structured comparison of the valuation process and values for optometric and dental practices.
Comparing Dental and Optometry Adjusted (Normalized) EBITDA
For a detailed reference to the methodology of determining Normalized EBITDA, please refer to articles 2 or 3. The overall gross revenues for both practice types have been assumed to be $1,800,000.
Gross Revenue
Dental Practice: Dental fees have been allocated on a 65/35 split between dental fees and hygiene fees, which is consistent with average dental practices. This results in dental fees of $1,170,000 and hygiene fees of $630,000, for a total of $1,800,000.
Optometry Practice: Optometry fees have been allocated on a 60/40 split between Product sales and professional fees, which is consistent with average optometric practices. This results in product sales of $1,080,000 and professional fees of $720,000 for a total of $1,800,000.
Difference: There is no monetary difference between the hypothetical gross revenues.
Cost of Operations
Dental: ($729,000 – 40.5%): The dental cost of operations includes laboratory costs, dental supply costs, and wages and benefits as follows;
Laboratory costs: $72,000
Dental Supplies: $153,000
Wages & Benefits: $504,000
Optometry: ($756,000 – 42.0%): The optometry cost of operations includes cost of goods sold and wages and benefits as follows;
Cost of Goods Sold: $432,000
Wages & Benefits: $324,000
Difference: Overall, optometry cost of operations is slightly higher ($27,000 – 1.5%) than dental. While optometry wages are lower, the cost of goods sold (frames, lenses, and contacts) is higher than the combination of dental laboratory and supply costs.
Facility and Administrative Costs
The optometry and dental Facility ($156,600 – 7.0%) and Administrative ($78,000 – 4.3%) costs are the same for each practice type. These expense categories do not impact the relative values of either practice type.
Doctors’ Compensation
Dental: ($427,200 – 24.4%): Dental Professional Compensation is usually calculated as 40% of dental fees after deducting lab costs.
Optometry: ($360,000 – 20.0%): Optometry Professional Compensation is usually calculated as 50% of professional fees.
Difference: Overall optometry professional compensation is materially lower ($79,000 – 4.4%) than dental professional compensation.
EBITDA: Given equal gross revenues in most cases, the optometry EBITDA ($479,400 – 26.65) will be slightly higher than the dental EBITDA ($427,200 – 23.7%). It is important to remember that this calculation assumes that both practices have the same gross revenues. The average gross revenues of dental practices will be higher than the average gross revenues of an optometric practice.
Comparing Dental and Optometric Earnings Multiple (Risk)
Articles 2 and 3 explored the various risk components of both the dental and optometric Earnings Multiple, which were as follows:
Risk-Free Rate – 3.22%
Equity Risk Rate – 4.22%
Size Risk Rate – 0%
Industry Risk Rate – (Dental 10%, Optometry 12%)
Specific Practice Risk Rate (10%)
Less Assumed Growth (-10%)
ROI (Capitalization) Rate – (Dental 17.44%, Optometry 19.44%)
Earnings Multiple (ROI Inverse) – (Dental 5.73, Optometry 5.14)
Difference: The risk associated with an optometry practice is higher than that associated with a dental practice. This is attributed to the fact that for reasons set out in Article 2, optometry practice ownership is considered to be slightly more risky than the ownership of a dental practice.
How This Affects Value
While optometry practices have a higher Normalized EBITDA, dental practices have a higher Earnings Multiple. Applying the Value Formula to both sets of metrics, we have the following.
Value = Normalized EBITDA X Earnings Multiple
Dental, $427,200 X 5.73 = $2,450,000 (rounded)
Optometry, $479,400 X 5.14 = $2,466,000 (rounded)
Based on the above, the optometry practice would be worth marginally more than the dental office (less than 1%).
Conclusions
Two Value Equation factors significantly affect the appraised value of dental and optometric practices. These are as follows:
- The profession of optometry has a riskier industry profile (Industry Risk Premium) than dentistry. The riskier the investment the less investors are prepared to pay. The higher optometric Industry Risk Premium has a negative effect on the appraised value of an optometry practice.
- Dental practices tend to have a lower Normalized EBITDA percentage than optometry practices. This has a very positive effect on the comparative appraised value of an optometry practice.
In real terms, both of these factors tend to be present in every dental or optometric practice appraisal. The 2% increased Industry Risk Premium is standard, but the Normalized EBITDA will be unique to each practice. The other factor that has a role in determining value is the Practice Specific Risk Premium, which will also be unique to each practice but will not necessarily favour one profession over another. The relative practice values will be very dependent on the relative Normalized EBITDA. Optometry practices with a high Normalized EBITDA will have values that, in many respects, will be comparable to the values of dental practices with a similar gross (one reason why valuing any practice based on gross is not a good idea). In most cases, the effects of the greater Industry Risk Premium associated with optometric practices are offset by the higher Normalized EBITDA.
While we have compared two practices with similar gross revenues, it should be noted that dental practices will usually have higher gross revenues on average than their optometric counterparts. Perhaps the most important observation here (as per Article 2) is that many optometric appraisers/brokers value optometric practices with an Earnings Multiple closer to 3.25 than 5.14. In our opinion, this is ascribing a much higher risk factor to optometric practices than is reasonable, thus appraising optometric practice at a lower-than-reasonable value.
Whether buying, selling, or just planning, a current practice appraisal is a very valuable tool. If you would like an appraisal of your optometry practice or a second opinion of a third-party optometric or dental practice appraisal, please reach out to me. You are likely to review your financial and income operations annually with your accountant. Similarly, you should always have a current appraisal on hand to establish your operational and value baseline, identify your unrealized potential, and monitor the growth of your practice. We have been doing this for 40 years, so we know how. For more information, contact me, Derek Hill (derek@derekhill.ca), or review my website at www.derekhill.ca. I am always happy to chat.