Your Buyer’s Lender Sets the Ceiling on Your Practice Price
You think the buyer sets your practice price. The buyer’s lender does.
If you are selling a dental practice with an SBA loan on the other side of the table, the rules changed on October 1, 2026. The buyer’s offer is a wish. The lender’s valuation and its coverage test are the verdict. And the test runs on numbers you have already filed.
What changed on October 1
The SBA replaced its lending rulebook with SOP 50 10 8.1. It applies to any loan that receives an SBA loan number on or after October 1, 2026. Most practice sales to a first-time owner now fall in a category the SBA calls an Initial Acquisition.
For that buyer, four things now hold. The practice’s cash flow must cover the new loan payments 1.25 times, up from 1.15. That coverage is measured on your last fiscal year or the average of your last two, and projections cannot cure a shortfall. Total debt cannot exceed an independent valuation the lender orders. And once the price reaches $3 million, the lender must order a Quality of Earnings report and use its earnings figure, not yours.
A practice at four times $800,000 of EBITDA is a $3.2 million deal. It is already past that line.
The arithmetic every seller should run
Start with what is verifiably true. The lender divides your historical cash flow by the buyer’s annual loan payments. That ratio must be at least 1.25.
Turn it around. The most a buyer can pay the bank each year is your cash flow divided by 1.25. Under the old rule it was cash flow divided by 1.15. Divide one by the other, and you get 0.92. On the same earnings, your buyer can now carry 8% less debt.
A real example. Annual loan payments of $280,000 used to need $322,000 of verified cash flow. They now need $350,000. That $28,000 must already be in your books.
Now the number that should change how you keep them. Every $10,000 of add-back you cannot document removes $8,000 of annual debt-service capacity. On an illustrative 10-year loan at 10%, $8,000 a year carries about $50,000 of principal. If the buyer finances 90% of the price, that is roughly $56,000 off what the deal can support.
The undocumented add-back does not just fail to help. It costs you about five and a half times itself.
Why your empty chairs are worth zero
Sellers love to talk about upside. Open hygiene days. A schedule with room. “The next owner could easily add a day.”
The lender does not finance upside. It finances history.
That matters more this year. In the ADA Health Policy Institute’s Q3 2026 survey of 704 private-practice dentists, 38% said they were not busy enough. Fees are not keeping pace with costs either. Chairs, rent and payroll cost the same whether the schedule is booked or not, so a quiet schedule drops straight out of EBITDA.
Hygiene is the other squeeze. Fewer than half the dentists recruiting a hygienist filled the seat, and about one in five filled positions had sat open six months or more. A hygiene chair you cannot staff produces no recall revenue to put in front of a buyer. Open capacity is a cost you carry. It is not income anyone will lend against.
Your sale price is being written this year
Here is the part most sellers miss. The test uses your last fiscal year, or the average of your last two.
A chair you fill in 2027 does not count until your 2027 books close and your return is filed. If you plan to sell in 2028, the numbers that set your price are the ones you are producing right now. If you plan to sell next spring, they are mostly already written.
That is the decision before the decision. The time to fix earnings is two years before anyone asks to see them.
The buyer you have not considered
Not every buyer faces the same test. The SBA sets 1.25x for a first-time buyer, but only 1.15x for a Business Expansion: an existing business buying another in the same industry. An established practice owner across town who wants a second location is that buyer.
Run the same arithmetic in reverse. 1.25 divided by 1.15 is about 1.087. On identical earnings, the expansion buyer can carry roughly 8.7% more debt. Who you sell to now changes what you can be paid.
The fair counterpoint: that buyer pool is smaller, may want an associate-heavy transition, and may negotiate harder because they know the market. Corporate and private-equity buyers skip the SBA entirely and bring a different ceiling, often with earnouts or rolled equity that carry their own risk. The point is not that one buyer is best. The financing behind the offer is part of the offer.
The seller note is a loan to your buyer
When the numbers do not clear, someone suggests a seller note. Know what you are signing.
The buyer must put 10% of the project in as equity, and for a first-time buyer, that cannot be reduced. Seller debt on full standby and money from passive minority investors can together cover at most half of it. On a $2.2 million project, that is $110,000 of the $220,000 down payment.
Full standby means no principal and no interest for the life of the SBA loan, which for a practice is often ten years. You are behind the bank. You are lending to the person who just bought your practice, and you are paid last.
The add-back the analyst will challenge first
Your own compensation is usually the largest add-back on a dental P&L, and it’s also the most misunderstood.
When you leave, someone still has to produce the dentistry. If a dentist must be paid to replace your chairside production, that dentist’s cost is not earnings. Expect the analyst to ask what your production costs to replace, and to subtract it. Add back what you take above that, and document it.
One tax trap before a transition-era buildout
Cost segregation reclassifies chairs, medical gas lines and specialty wiring from a 39-year schedule to 5- and 15-year lives, so 100% bonus depreciation can pull the deduction into year one. In one CPA firm’s examples, an oral surgery renovation saved about 34 cents per dollar in year one and a new building about 12 cents.
Two cautions. The deduction only helps if you have taxable income to absorb it. And you can recapture depreciation when you sell, often at ordinary rates. A buildout two years before a sale can hand back at closing what it saved you on the return. Ask your CPA to model the sale, not just the deduction.
What to do this quarter
Reconcile your bank deposits to your tax returns and your P&L. Any gap is a question the lender’s analyst will ask; better that you answer it first.
Document every add-back with a source document: a statement, an invoice, a payroll record. No document, no add-back.
Fill the chairs you already have. Staff hygiene now, because it takes a full fiscal year to show up in the only numbers that count.
Decide which buyer you are building for before you list. And if your practice is near $3 million, consider commissioning your own Quality of Earnings review first, so the lender’s version holds no surprises.
Frequently asked questions
What is the SBA 1.25x rule for buying a dental practice?
Under SOP 50 10 8.1, for loans numbered on or after October 1, 2026, a first-time buyer’s practice cash flow must cover the new annual loan payments at least 1.25 times, measured on historical results, not projections.
Does the new SBA rule lower what my dental practice is worth?
It lowers what an SBA-financed first-time buyer can borrow on the same earnings — about 8% less debt than under the old 1.15x test. Unless the buyer brings more cash or you carry more risk, that caps the price.
Can I use a seller note to close the gap?
Partly. Seller debt on full standby, combined with passive investor money, can cover at most half of the buyer’s required 10% equity, and it is paid only after the SBA loan.
When does a dental practice sale need a Quality of Earnings report?
For initial acquisitions and business expansions priced at $3 million or more, the lender must order one and use its earnings figure in the coverage test.
If a lender’s analyst reconciled your deposits to your tax returns tomorrow, what earnings number would survive?
That is the question I help owners answer before a buyer does. Take the What’s Next Assessment.
Dr. David Darab, DDS, MS, MBA, CEPA, is The Cash Flow Surgeon™. He owned and ran a multi-doctor oral surgery group for 33 years. This article is general information, not legal, tax, or lending advice. Your lender, CPA, and attorney decide what applies to your deal.
Sources
- Selling a Business with SBA Financing — KatzAbosch, Sept. 8, 2026
- Selling Your Business? The SBA Just Changed the Math — Cantrell Law Firm, Sept. 25, 2026
- The State of the U.S. Dental Economy: Q3 2026 — ADA Health Policy Institute
- Q3 dental data show softer demand and persistent hygiene vacancies — Dental Economics, Oct. 9, 2026
- SBA Quality of Earnings Requirement — EisnerAmper
- Cost Segregation for Dental Practices — EisnerAmper, Oct. 20, 2026
The Cash Flow Surgeon™, The 4 S’s Framework™ (Stay, Scale, Slow Down, Sell), and The Decision Before the Decision™ are trademarks of Dr. David Darab and Darab Business Advisors. All rights reserved.