This article by ADS member Earl Douglas will be featured in the October issue of Dental Entrepreneur.
Boy, talk about being dealt a bad hand, and that’s definitely an understatement. Who could imagine that just as I’m finishing an eight year journey to becoming a licensed dentist that the country would experience the most dire pandemic it has seen in over a hundred years and a recession as severe as this country has ever seen. We now find ourselves battered by this perfect storm of adversity.
As we seek guidance from our best experts, we discover that they are no more clairvoyant than anyone else. Our search for medical, political and economic insights results in more confusion than clarity. Then there are the friendly and helpful advisors that have great confidence in their predictions and how they can help you avoid failure and help you to achieve success. Be careful with this group as they are probably trying to engage you for their profit at your cost. However convincing they may be, they are no more accurate in their predictions than the next person.
I realize that up to this point, I have not said anything that would give you any optimism. But, we need this reality check to build some hypotheses to help create the best road map for survival and ultimate success. I do not have a crystal ball though, and anything I say, other than relaying actual observation of things that I have actually seen, may be absolutely wrong.
What am I seeing? First, I’m seeing a little uptick in the number of practices going on the market. I’ve been told by many buyers that the market will soon be flooded with many practices that sellers will practically give away. I understand the wishful thinking behind this prophesy but have yet to see any evidence of that happening. Sellers still want to get as much for their practices as they can.
Many dentists have had substantial losses in their retirement funds due to the recession. I don’t expect them to sell their practices, but rather expect that they will keep on practicing in order to earn and save money and restore their savings. That is what I saw happen in the 2008 recession. The takeaway is don’t expect to see huge numbers of practices for sale at bargain basement prices.
Another observation that I am seeing is an increasing number of associate dentists deciding to buy and own their own practices. They have discovered in the past months that their positions are quite vulnerable. One dentist I spoke with told me of the layoff of dentists in the clinic where she works. Associate dentists are concerned that they will lose their jobs and they are beginning to realize that the solution to that danger is to own their own practice. That way they will be the last man or woman standing, and not the first to fall. They realize that owning a practice that even drops in productivity and profitability is still a better alternative than being fired from a job and having no income at all.
A third observation is how practice acquisition lenders are dealing with this dilemma. The dental-specific lenders I work with have all drawn back somewhat since they are unsure of the immediate future of dental practice economics. While you might think it’s risky on your part to buy a practice now, consider that it is the lenders who are actually putting up 110% of the money for a purchase and you will realize where the risk really lies.
Different dental lenders have a widely varying approach to current approval and funding. Each lender is grappling with deciding what additional information they need and what to do with that information in order to come up with good credit decisions. Currently they want to see how the first quarter of 2020 compares to the first quarter of 2019. They realize that many states had virtually closed practice operations during March and April and now they are looking at production and collection reports for May and June of 2020 to see how practices are recovering from the shut down. Obviously, this puts a lot of strain on sellers and their accountants to prepare more statements and reports and this will consequently slow down the borrowing process. At the present time several lenders are suspending their lending operations while others are still approving and funding loans for purchasers.
Most lenders are now offering interest-only payments for the first six months of the payback, making buyers’ initial practice cash flow much better. When the pandemic started turning the profession upside down, lenders were quick to abate payments in order to lower cash flow pressure for new buyers. This was not only generous on their part, but also a measure of self preservation. Dental acquisition loans are based on the buyer’s cash flow ability to pay their overhead, pay their loan payments (debt service) and pay themselves a good living wage and the lenders did not want to be the reason for a buyer’s, and subsequently their own, failure.
Dental practice loans are not collateralized anywhere near the value of the loan since the greatest part of the practice price is for goodwill which is intangible. It is impossible for lenders to collateralize the goodwill of the practice, HIPAA regulations being what they are. The bottom line is that lenders are depending on the success of the borrower to be repaid and they will go to any length to prevent a foreclosure which would preclude that repayment. Lenders have done whatever it takes to help buyers survive and be successful rather than take a loss on a loan. The takeaway here is don’t be afraid of your lender because your lender is dependent on your success for their survival and will do whatever they can to help get you through this and any other crisis.
Now you might ask me, “What would you do if you were in my shoes?”. Well, here’s the process that I would follow, as much as reality allows.
1. I would immediately start lining up a job, even if I hadn’t taken my boards yet. I would avoid signing an employment contract that cannot be terminated with thirty or sixty days notice if possible, and particularly avoid signing a covenant not to compete, particularly if the job were in an area where I would like to practice in the future. You would be wise to seek the aid of a qualified consultant in reviewing such contracts.
2. I would immediately start a search for a practice to purchase, even if I hadn’t yet taken my boards.
3. I would get to know the practice brokers who handled sales in my preferred area and literally beg them to notify me first of any and all opportunities.
4. I would pull my credit report and if there were any issues pulling my score down, I would get help in getting my score as high as possible.
5. I would pray for a miracle that a practice would come available when and where I wanted it.
6. If that ideal practice were to come available I would instantly do whatever it took to tie it down. Finding what you want, where you want it and when you want it is exceedingly difficult and it’s doubtful that you’ll see many such opportunities. Brokers remember prospects who don’t follow through when offered the perfect practice and those buyers may slip in priority when new listings appear.
This is the same advice I gave myself and followed when I got out of the US Army Dental Corps, so I consider this advice to be as sincere and valuable as any you will ever receive. I have shared some trade secrets in this article and in these times you will need all of the critical facts that you can get. Now I just wish you good luck, health, and success.
