Investing in a Dental Practice is a Smart Investing Move
The United States had the best economy it’s seen with the lowest unemployment OF ALL TIME prior to the 2020 Coronavirus Pandemic. Many economists predicted the stimulus package would result in several years of better-than-average growth in the US economy.
I personally have had private conversations with bullish DSO/corporate executives on dental revenues for 2021. Most were able to weather the pandemic storm through PPP loans and managing their expenses. Often, that meant putting their associate dentists on furlough.
As world economies return to normal, I believe long-standing dental practice owners will emerge from the pandemic better off than any associate dentist.
Dentistry has always been one of the best small businesses during times of economic downturn and especially during the times when a slow economy bounces back.
Fortunately, most of the revenue “lost” during the pandemic was not really lost, but deferred. Except for perhaps hygiene revenue, all deferred dental treatment will need to be done, and unfortunately for many patients, some of that deferred treatment might lead to more extensive treatment.
Investing in a Dental Practice During in the Current State of Dental Practice Transitions
The effects of the Coronavirus Pandemic forced businesses to rethink their business models, as many have discovered their employees working from home can be more efficient than the costs of renting large office space. Obviously, dentistry cannot be done remotely, but the shutdowns have triggered an event that many of us have been expecting for several years.
Increased Number of Dental Practices for Sale
The pandemic, combined with record stock market numbers, has spurred all boomers to consider retirement. I am personally seeing a 30% increase in the number of listings in my inventory, and this number is 50% higher than the 2010 levels of practices on the market. The basic supply/demand economic balance is getting weighted on the supply side, which historically will pressure pricing downward.
Increased Number of Dental School Graduates
Since the mid-2000s, many dental schools have opened up across the country. And, since 2017, we are producing more dentists than the number that graduated in 1983.
Demand for Dental Practices Have Decreased
While the growth in dental practice listings and recent graduates sounds encouraging as far as numbers go, the demand for dental practices has waned since the 2009 economic downturn for many reasons:
- The current average debt of dental graduates is now between $400K and $500K and they are fearful of going into more debt.
- The millennial mindset of these graduates is totally different than the boomer mindset. Boomers went into dentistry to own their own practices and be their own boss. Investing in a dental practice can be a tough choice for many Millennials as they generally are more interested in “quality of life issues.” They do not necessarily want the responsibility of owning one’s practice, making the decisions that are required, and carrying the worries that come with ownership. Because of this, Corporate dentistry like DSOs have little problems finding associate dentists.
- The percentage of female graduates are now about 50%. My wife and daughter are both dentists, so this is not a negative comment on female dentists, but many female dentists rightfully put having a family above the perceived, all-encompassing stress of owning a practice. In 1983, females accounted for only 10% of the dental school class. Corporate dentistry did not exist, but those women dentists found a way to own practices and raise families.
What Sellers Should Know Before Investing in a Dental Practice in the Current Market
Supply and Demand is Trending Lower:
Both sides of the supply/demand scale are trending toward lower practice valuations. Even in the best of times, your practice sale only generates 1.5 to 2 times your annual take-home profit.
Large Dental Practices Sell Easier:
Mostly due to the large school debts of the new graduates, large dental practices are now easier to sell than smaller practices, Smaller practice owners should consider short-term leases as a buyer may want to merge the smaller practice into another to meet the new debt and cash flow needs.
Location, Location, Location:
There are some locations that will demand a premium, no matter what the supply/demand scale dictates. Note that even a 5-mile difference in any area might generate a huge difference in demand. Your local dental broker should be able to tell you what the current demand is in your area.
Be Patient When Selling a Dental Practice:
Most buyers now are still expecting some type of “COVID-19 discount.” Frustrated, furloughed associates are entering the transition market and patients are returning to dental practices. Increased revenues, combined with more demand, should help practice values later this year.
Dental Brokers May Be Necessary Now More Than Ever:
Transferring your dental practice assets is more difficult than selling a home. Saving a few percentage points on a commission with a non-local broker, or one that does not have exposure in your market is pure folly. Even hiring the best broker cannot guarantee finding the perfect buyer in short order, but not hiring the best can certainly lessen your success by a great amount.
What Buyers Should Know Before Investing in a Dental Practice
Large practices that employ associate dentists, do so for the profit potential. There is nothing wrong with this, but it should be common sense that a productive associate is making money for the “house.”
Associate Dentists should make enough to be able to retire, make debt payments, and feed their family better if they took home that extra profit.
The best way to pay off debt is to own your own practice.
As soon as you are producing $2,000 to $3,000 a day on a normal fee schedule, you should be able to take home almost twice the amount of money as an owner. Practice debt should not be looked at as a “return on investment and not the same as dental school debt.
100% financing plus working capital is available at 4% or less.
The smart “return on investment” is to buy a practice that covers your financial needs, as the greater profits translate into the best return on investment.
The greater the profits, the more the practice will cost, but the low interest rates will always show that your take-home amount after debt service will be more with the larger practice.
Don’t get caught up in the “price” of the practice.
During your “due diligence” period, you should identify whether you may be able to increase revenues, or perhaps, won’t even be able to meet what the seller produced. Based on your skill sets compared to the seller’s skill sets, you will find practices that you might double when you take over, compared to practices you might be lucky to produce half of what the seller did.
Dental practices will be priced at market value for gross receipts and cash flow for the CURRENT doctor’s skill sets. Getting a “steal” on a practice where you cannot replicate the seller’s production, for whatever reason, could be a disaster.
Start-Up Dental Practices Can Be a Daunting Experience.
Building out and equipping a new, two-operatory practice now costs around $500Kand may not start with any patients. For $500K, you can buy a practice that already throws off several hundred thousand or more as a profit,. You will most likely have to spend money on upgrades and marketing to get to the size practice you desire.
It may make more sense to buy a dental practice that an old boomer is ready to let go of, knowing you will have to upgrade much of the office. Most older doctors ready to retire with smaller-producing offices are way underperforming on their current patient base. These are usually diamonds in the rough, but again, only your own personal due diligence can determine this.
Navigating these new times and exposing your practice to the greatest number of potential buyers is what we do here at ADS Transitions. We are a consortium of independently owned brokerage companies that can expose your practice through a nationwide portal and locally through our own website and portal.
Be patient as the best is yet to come this year, even with the uptick in supply.
You have more choices now at the lowest interest rates in the history of the modern economy. Choose wisely, employ good staff and you will eventually pay off your debts, live more comfortably and be able to afford more time away from work, as your staff should be able to help relieve you of the burden of ownership headaches.
About the Author
Dr. Tim Giroux established his own dental practice in Scottsdale, Arizona, upon graduation from Creighton University, School of Dentistry in 1983. Relocating to Northern California upon selling his highly successful practice after 15 years, Dr. Giroux brings a unique perspective and personal experience in dental associateships, practice start-up, sales, and work-back situations to serve and assist you during your exciting transition! He especially enjoys guiding young dentists and helping them fulfill their dreams when they purchase their own dental practice.
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- Market Insider, Feb 9th, 2021. Author Shalini Nagarajan
- Business Insider, Feb 9th, 2021. Press Release
- New York Times, Feb 1st, 2021. Author Jim Tankersley
- Wall Street Journal, Feb 1st. Author Kate Davidson