One thing for certain in our industry, nobody could have foreseen the impact and chaos that COVID-19 caused all of us. But, with that said, and as the dust of the pandemic’s initial assault settles, a lot of practice owners are coming out of their quarantines with questions about what the market is for those looking to buy or sell a dental practice.
To help, all of us at ADS® Dental Transitions™ have put together five common questions a lot of dentists have on their minds about practice value. From valuation to financing to questions about selling a practice at this time, you may be surprised by what the market is doing and how you can take advantage of the current situation.
A: There is one indisputable fact to remember: people will always have teeth and need dental care. I graduated from dental school in 1983. More dentists graduated that year than any previous year. Interest rates were 17% at the time and our instructors felt we were graduating during one of the worst times ever. Many instructors feared that most of us would go bankrupt within the next five years. I set up practice anyway in 1986 with an incredible low interest loan of 12%. I suffered the stock market crash of 1987, the AIDS crisis and OSHA freak-out of 1990 and the last stock market crash of 2008. Hindsight is great, but the actual results of the past 35 years are:
1. I believe my classmates and I practiced through some of the best times ever to be a dentist.
2. Dentistry proved, as always, to be one of the best recession-proof businesses to be in, as most downturns normally result in a 5% or so percentage drop.
3. While the debt of newer graduates is truly greater than my debt was after adjusting for inflation, the current interest rates at less than 4% help make up for that in comparison to my era.
With that said, I believe that dentistry will still remain a profession that, while not totally recession-proof, will persevere and remain one of the better health care professions to aspire to. In the long run, the current crisis will not be any different than the major three events mentioned above. In the immediate short run, of course, there will be some temporary “turmoil” as uncertainty always creates havoc in any market. I have experienced several calls from clients that enjoyed their “temporary retirement” the past eight weeks, and requested me to lower their asking prices to help facilitate that. I don’t believe that this will cause any long-term negative valuation pressures, as this will wash itself out in 45 days or so. As stated above, while this crisis might precipitate something similar to the past three crises, people will always have teeth and need dental care. Obviously, the sooner a practice can show that it is viable and even “close” to producing the same numbers as pre-COVID, the better.
A: Yes, many associates have now realized that job security might be best secured with ownership. My last white paper went over all the reasons that a reasonably producing associate will always make more money as an owner than as an associate. Large practices and corporate dentistry will always be with us, and they exist as they are making a profit off their associates. The best way to retire student debt is to buy a practice once your skill sets and hand speed get developed, usually at least 12 to 24 months after you graduate from dental school. Experienced buyers that were around during the last crisis of 2008 know that whatever recession may occur now, if any, since the government seems willing to invest in the economy, will be temporary. Of course, they are going to ask for a “COVID discount” or some sort of “earn out” perhaps, but a profitable practice ALWAYS has value.
A: Of course, 2020 will look awful for EVERY practice. While everybody understands that this is a temporary setback of the previous three crises, there is obvious uncertainty in the short run. Therefore, as stated above, the sooner a practice can show three or four months of near “pre-COVID” production, the better. Practices that throw off more profit will have fewer problems than those that don’t.
A: Yes, but as always, they do it on a case-by-case basis and take into account the practice profitability and the buyer’s skill sets, both clinical and managerial, and the buyer’s financial strength. Most do want to see at least several weeks of proof that the patients are returning.
A: I do think that we are seeing more associates considering practice ownership after this crisis. No one knows just how long it will take for small businesses to rebound from the financial destruction of this lock-down. Many states are allowing their citizens to make informed choices on how to go about their lives. Some states believe that they should dictate those choices for the good of all. Depending on where you are and once routine dentistry is finally restored to your area, I believe you can put your practice on the market and make an “all-out” effort to get your production numbers close, or surpass the pre-COVID numbers. I believe that just a few months will suffice to be able to value a practice at its previous 2019 performance. I don’t think some trailing 12-month period starting in July will be necessary to show that once again, dentistry will prevail!
It is definitely a frantic and frustrating period we’re living through right now. But, as the old saying goes, “cooler heads will prevail.” I believe recovery from the COVID-19 crisis is not only possible for practices, but will occur quickly because, like I said before, people will always have teeth and need dental care.