An acquisitions associate at a regional dental group opens a deal book on a Tuesday in June. Two practices, same market, both general dentistry, both collecting $2.4 million, both showing $650,000 of EBITDA on the seller's presentation. The group prices add-ons at 6x, so both files read as $3.9 million deals, and the development lead wants indications out by Friday. By Thursday the associate has killed one of them. The case figures below are a composite of files we've read this year; the market data around them is published and cited.
Both $650,000 figures are real. Both practices collected the money, paid the bills, banked the difference. What neither number discloses is the price it used for the most expensive input in the building, which is the owner's own clinical work. A dental P&L prices every input at market except that one. Staff wages are market. Rent gets restated to market in about a minute, buyers routinely reset related-party rent to the 5 to 7% of collections that market leases run, per McLerran & Associates' 2026 valuation guidance, and nobody argues about it for long. Supplies are market. The owner's chair time is priced at whatever the owner's accountant decided was optimal that year. A buyer who bids off the presented EBITDA is bidding on the seller's tax plan.
None of this is obscure. FOCUS Investment Banking's 2026 dental valuation work lists owner compensation adjustment to fair-market provider rates as part of the standardized normalization every general dentistry deal runs through, and McLerran calls that adjustment the largest single add-back in dental valuations, bigger than personal expenses, which typically run $30,000 to $150,000 a year, bigger than related-party rent. The correction is standard. What varies is when a buyer runs it. Before the indication, or after the LOI has already anchored the price.
Same bid, two deals
Both owners personally produce $1.4 million of the $2.4 million in collections. A general dentist producing at that level costs 30 to 35% of collections to employ; the ADA's associate compensation guidance and the recruiting market both put the range there, and it's held for years. Call it 32%, fully loaded. $448,000 is what the acquirer will pay a contracted dentist to keep that production after close, and nothing in either seller's P&L can change it.
Practice A's owner pays herself like an employee: $500,000 in W-2 comp, above the line, eaten by the P&L before EBITDA is computed. Add it back, deduct the $448,000 replacement cost, and EBITDA at replacement cost comes to $702,000. Her presentation understated the practice. The $3.9 million bid is 5.6x real earnings, inside the 5 to 8x add-on band FOCUS publishes for general dentistry.
Practice B's owner pays himself like a tax plan. Salary set at $140,000, defensible as reasonable compensation, and the rest of his take flowing out as distributions below the line, where EBITDA never sees it. So his P&L carried $140,000 of cost for $1.4 million of clinical production, year after year, and the margin everyone in his life has praised, his banker, his study club, the brokers who cold-call him, was partly his own unpaid wages. Add back the $140,000, deduct the same $448,000, and EBITDA at replacement cost is $342,000. The same $3.9 million bid is now 11.4x real earnings. That's above the 9 to 11x FOCUS publishes for institutional-grade platforms, paid for a single-location add-on whose owner still produces 58% of collections.
Same bid, two deals. One is a fair add-on at 5.6x. The other overpays by roughly $1.8 million against the group's own 6x applied to the real number, and both answers were sitting in the payroll register and the production report, two documents that arrive with the CIM.
Where the margin came from
Start with why the number exists. The S corporation election that dominates practice ownership rewards a low W-2 salary, since payroll tax applies to salary and spares distributions, and every year the election runs it writes a labor subsidy straight into the margin. Nobody is hiding anything. The number was built by the seller's accountant for a specific audience, the IRS, and it did its job. It's now being read by a second audience it was never built for, and the second audience has a spreadsheet.
That spreadsheet carries one cell for the owner's clinical labor: what the production costs to replace, because the day after close it has to be bought from a dentist with a contract and a market rate. McLerran puts the sensitivity plainly. A $100,000 difference in adjusted EBITDA moves enterprise value by $700,000 to $900,000 at the 7 to 9x range where competitive processes land. Practice B's gap was $360,000.
There's a second exposure riding on the first. The owner whose underpriced labor inflated the margin is usually also the owner whose production concentration threatens it, and that one is priced separately. Sofer Advisors' provider risk analysis, carried in FOCUS's 2026 work, puts practices with owner production of 90% or more at valuation reductions of 10 to 20%, and provider risk moved from a consideration to a primary decision driver this cycle. Miss the compensation subsidy and you've probably also mispriced the person the subsidy walks out with.
Then there's sequence, which decides who pays for the error. Run before the indication, the normalization costs an afternoon and reprices the bid. Run after the LOI, it's a retrade. Exclusivity burning, the seller anchored to the headline number, the diligence spend committed. The ADA Health Policy Institute has corporate dental affiliation at 16.1% of U.S. dentists in 2024, up from 7.2% in 2015, which is a market full of institutional buyers running this same playbook, and the one who normalizes late is the one funding the seller's anchor. RIDA, the proprietary economic discipline B.L. Sheets & Co. runs on, treats this as Stage 1 work, cost separation: the owner's labor priced as labor before the margin gets read as margin.
The number the CIM will never hand you
EBITDA at replacement cost. It's computable before the bid, from documents already in the data room. Take presented EBITDA. Add back every dollar of owner clinical compensation expensed above the line, salary, payroll taxes, benefits. Deduct the market cost of replacing the owner's clinical collections, 30 to 35% of them for a general dentist, fully loaded, more for specialists. Per owner, if there's more than one. The result has no fixed relationship to the presented figure. It sat above it at Practice A and 47% below it at Practice B, and the direction was knowable from the payroll register before anyone drafted an LOI.
Run it and the question changes. A buyer arrives at a deal book asking whether the margin is real. One layer under that sits the question that decides the deal: whose price list computed it. A margin computed on the owner's tax elections answers a question the IRS asked. A margin computed at replacement cost answers the one the acquisition is asking. Until the second computation exists, the bid is priced on the first, and only the seller's accountant knows by how much. An indication priced on the second number costs nothing extra to produce. Sellers with real earnings clear it untouched, and sellers whose margin was a payroll election get repriced on paper instead of in exclusivity.
What the bid was buying
The practice was profitable at the owner's price for the owner's labor. The buyer inherits the market's price on day one. A bid built before that repricing buys the subsidy at a multiple, and the subsidy resigns at close.
This essay describes general transaction structure. It is general in nature and does not constitute legal advice, a valuation, or investment advice. Figures drawn from published sources are attributed in the text; the two-case figures are illustrative composites and describe no identifiable practice.
Sources. FOCUS Investment Banking, Dental Practice EBITDA Multiples 2026 report and 2026 dental valuation guidance, on multiple ranges, standardized normalization, and provider concentration discounts. McLerran & Associates 2026 DSO valuation guides, on owner compensation as the largest single add-back, personal expense and related-party rent adjustment ranges, and EBITDA-to-enterprise-value sensitivity. Sofer Advisors provider risk analysis, as carried in FOCUS's 2026 work, on owner production concentration and valuation reductions. ADA Health Policy Institute, on corporate dental affiliation, 2015 to 2024. ADA associate compensation guidance, on the associate market at 30 to 35% of collections. Two-case figures are composites.
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