These are unprecedented times with dental offices closed for weeks and social distancing. Sadly, until 2020, social distancing was not a mainstream term. But here we are and social distancing is an everyday reality that permeates the news and our lives. What does this mean for your dental practice value going forward?
The reality is, very few practices are changing hands at this time. Who wants to take over a dental practice that cannot be open? Or, in the case of an endodontic office, even one that is open is most likely limited to emergencies. Surprisingly, there is a very small percentage of transitions that does make sense at this time. If you are interested in making aesthetic changes to your new practice purchase, this is a great time to do it. Or, perhaps you are adding a satellite and want to integrate the two offices together; the doctor and staff are available to work on the non-clinical aspects while social distancing, and this gives you an opportunity to have everything ready to go when your market opens up. Fortunately, for some of you, the COVID-19 closure time may already be passed and your practice has returned to normal. For the rest of you, hopefully this issue is coming to an end. So, what happens to the value of your practice?
Prior to COVID-19, the economy was thriving and sound. It was a time of economic boom and robust markets. While we cannot assume that while coming out of COVID-19, the economy will be as strong, the good news is that your practice value should not have decreased much, if at all. Yes, you will have a dip in collections during your closed period, but that should not reflect poorly, nor affect the value of your practice. Rather, we will refer to this closed time, and thus reduced collections, as an outlier to your practice.
The main consideration for practice value should be based on the cash flow of the practice. While your collections, and thus your cash flow, will obviously be affected during the COVID-19 closures, the anticipation is that the closures will be short term and your practice will be back to business as usual. The short-term practice closures associated with COVID-19 and the following outlier months should not reduce the value of your practice. Banks are aware of and understand that social distancing and short-term closures are the reason for decreased collections, and that it has nothing to do with your practice being less desirable than it was.
If COVID-19 does have a further negative impact on the economy, will your practice be worth less? What if we enter a recession? Is your practice worth less then? George Santayana said, “Those who cannot remember the past are condemned to repeat it.” With that in mind, let’s look at what happened to practice values during the 2009 recession. Back then, practices with healthy cash flows were actually more in demand than they were during times of economic prosperity. Due to the demand to find a quality practice to purchase in 2009-2010, practice values did not decrease during the 2009 recession. Associate jobs were hard to obtain during this recession, and many associates were let go as the practices simply didn’t have enough work for two or more dentists. Plus, dentists were more willing to consider practice opportunities outside of metropolitan areas, and practices in more remote areas were in demand. These additional factors kept practice values from decreasing, as many associates made the choice during this economic recession to purchase a practice and be in control of their own futures.
So, how should your practice value be calculated? A purchase price based heavily on cash flow should represent a fair number to both seller and purchaser. This should be the main consideration when calculating practice values. If you have an endodontic practice, there are additional items worth considering, including the age of your referrals. There are obviously other factors for an endodontic practice, general practices and, of course, other specialty practices, but cash flow should be the main consideration. During these COVID-19 months, cash flow will be disrupted, but the reality is that much dental work that is not being done at this time still needs to be performed. The expectation is that once the social distancing guidelines are relaxed and dentistry can open again, there will be an increased need for dental services.
Many dentists throw around a percentage of collections to determine value. Yes, it’s a much easier calculation and anyone can do it, but it most likely doesn’t represent the value of your practice. If you are using an arbitrary percentage of collections, you are assuming that all practices are equal, or that your practice is average, which is likely not the case. This is a typical technique for practices that aren’t being managed properly, because the resulting price is likely higher than what the practice is worth. It is also a typical action for those unwilling to take the time to consult a specialist in practice valuations to figure out the true value of the practice.
As a purchaser, it would seem the important number to know is how much will be deposited in my bank account after purchasing the practice and paying the expenses. That number should be of much greater value and importance than a percentage rule of thumb that is arbitrarily calculated. The amount of money taken home after all expenses is the important figure. Does it matter what the percentage of collections is? Certainly, that number is not important in comparison to the money that will be profit.
Fortunately, the expectation is that during these uncertain times, dental practice values should not be impacted by COVID-19. And if our economy cannot recover as quickly as everyone would like, that should not have a negative impact on your dental practice either.