Owner’s discretionary income (ODI) is the total amount of money a dental practice produces for one full-time owner-dentist each year. It is the clearest answer to the question every buyer asks: “If I buy this practice and work in it, how much will I earn?”
You may also see it called seller’s discretionary earnings (SDE) or owner’s cash flow. The name changes, but the idea is the same: start with the practice’s profit and add back everything the current owner takes out of the practice for themselves, plus non-cash and financing costs.
ODI is the main earnings measure when one dentist sells to another dentist. Buyers use it to judge what they can afford, and lenders use it to decide how much they will lend.
How Owner’s Discretionary Income Is Calculated
Start with the practice’s pre-tax profit, the ordinary business income on the tax return or net income on the P&L, and add back the following:
ODI = Pre-tax profit + Owner compensation + Owner benefits and perks + Interest + Depreciation and amortization + One-time expenses
| Add-back | Why it is added back | Typical documents |
|---|---|---|
| Compensation of officers | The owner’s own W-2 salary; a new owner decides their own pay | W-2, Form 1125-E |
| Pension and profit-sharing | Retirement contributions are an owner’s discretionary choice | Plan allocation report |
| Health insurance | Benefit cost set at the owner’s discretion | Premium invoices, W-2 box 14 |
| Vehicle expenses | Owner’s car run through the practice | Lease or loan, mileage log |
| Continuing education | The owner’s own courses and travel | Course invoices |
| Interest | The seller’s financing; the buyer brings their own | Loan statements |
| Depreciation and amortization | Non-cash charges | Depreciation schedule |
| One-time expenses | Costs that will not recur, such as a lawsuit or a major repair | Invoices with an explanation |
What is not added back: staff wages and benefits, supplies, lab, rent, marketing and any other cost the next owner will keep paying. Every add-back must be supported by documents; a buyer’s CPA will remove any that are not.
A Worked Example
Take a hypothetical general practice collecting $1,200,000 a year.
| Step | Amount |
|---|---|
| Pre-tax profit (tax return) | $250,000 |
| + Compensation of officers | $150,000 |
| + Pension and profit-sharing | $40,000 |
| + Health insurance | $20,000 |
| + Vehicle expenses | $10,000 |
| + Continuing education | $5,000 |
| + Interest | $10,000 |
| + Depreciation | $25,000 |
| Owner’s discretionary income | $510,000 |
The tax return shows $250,000 of profit, but the practice actually produces $510,000 a year for its owner, more than twice as much.
What the buyer keeps. Suppose a buyer pays $1,000,000, fully financed over 10 years at 8%. The loan payment is about $146,000 a year. That leaves about $364,000 a year, before the buyer’s personal income taxes, to pay themselves and set aside for equipment replacement. The practice covers its loan payment about 3.5 times over, which is the kind of cushion lenders look for.
Figures are illustrative only.
Owner’s Discretionary Income vs. Adjusted EBITDA
Both measures start from the same profit and the same add-backs. The difference is one line: adjusted EBITDA subtracts a market-rate salary for a dentist to do the owner’s clinical work, typically 25% to 35% of the collections from the owner’s own production. ODI does not, because the buyer will be that dentist.
| Owner’s discretionary income | Adjusted EBITDA | |
|---|---|---|
| Doctor pay | Not deducted; it is part of what the owner earns | Deducted at market rate |
| Main question | How much will I earn as the owner-dentist? | What does the practice earn as an investment? |
| Typical buyer | An individual dentist who will work in the practice | DSOs, private equity groups |
| Who else uses it | Banks lending to dentist-buyers | Lenders to groups, investors |
In the example above, if the owner’s own production brings in $700,000 of collections and a replacement dentist would cost 30% of that, adjusted EBITDA would be $510,000 minus $210,000, or $300,000. Same practice, same year: $510,000 of ODI and $300,000 of adjusted EBITDA. Knowing which number your buyer will use is essential before you set a price.
Mistakes That Shrink Your ODI, and How to Avoid Them
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Undocumented personal expenses. If you run personal costs through the practice but cannot prove them, a buyer will not add them back. Keep receipts and a simple log.
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Counting two owners. ODI is earnings for one owner. If two doctors share the profit, only one owner’s pay and benefits are added back; the other is a cost of running the practice.
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Adding back real operating costs. Staff bonuses, ongoing marketing and normal repairs are not one-time items. Overstating add-backs damages your credibility with buyers.
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Ignoring rent. If you own the building and charge the practice above- or below-market rent, the buyer will adjust rent to market, which can raise or lower your ODI.
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Overhead out of range. Supplies, lab and staff costs well above dental benchmarks reduce ODI dollar for dollar. Find the cause before you go to market.
Prepare two to three years ahead. Buyers and lenders usually review three years of tax returns, so clean books and steady results over that period support a stronger price.
Your owner’s discretionary income is the figure most dentist-buyers and their lenders will rely on. If you are planning a transition, schedule a practice valuation to see your ODI the way a buyer will.