Wednesday, March 3rd, 2021 | by Timothy G. Giroux, DDS
The Smart Money is Buying Dental Practices Now!
“Goldman Sachs raised its forecast for 2021 US gross-domestic product growth to 6.8% from 6.6%” 1
“Small Businesses Finally See Positive Outlook for Economic Recovery in 2021” 2 “The Economy Is Improving Faster Than Expected, the U.S. Budget Office Says” 3
U.S. Economy Is Expected to Reach Pre-Pandemic Peak by Mid-2021 4
We had the best economy with the lowest unemployment OF ALL TIME prior to this virus. Most economists are confident that the stimulus package will result in several years of better-than-average growth in the US economy.
I personally have had private conversations with DSO/corporate executives that are
bullish on dental revenues for 2021. Most were able to weather the pandemic storm
through PPP loans and managing their expenses. Sometimes that meant putting their
associate dentists on furlough. When all is said and done, I believe long-standing
practice owners will emerge from this 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. We all hope our favorite restaurants will re-open to full scale, but unfortunately all their lost revenue is truly lost! Not so, for dentists!
CURRENT STATE OF THE UNION FOR PRACTICE TRANSITIONS
The mandatory shutdowns have forced many businesses to rethink their current business models, as they have discovered that 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.
1983 (the year this author graduated from dental school) was the year that the baby boomer generation produced the most dental school graduates of all time. Baby boomers are those that were born between 1946 and 1964. Many of the older boomers delayed their retirement after the 2009 economic downturn. 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.
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. While that 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. Millennials generally are more interested in “quality of life issues,” translated as 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 does not have a problem 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.
TAKEAWAYS FOR SELLERS
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. Your practice sale never should have been the largest part of your retirement plan, but if it was, working an extra year or two results in the same financial gain. The sooner you contact your accountant or tax planning professional, the better.
Every practice, large or small, has value! I am not trying to be negative in this article, I am just trying to be a realist. Large practices are now easier to sell than smaller practices, mostly due to the large school debts of the new graduates. If a dentist is the main breadwinner of their family, they probably need to buy a practice that collects over $700K a year to pay for their family and school expenses. Smaller practices are great for a dentist that is not the primary breadwinner, or a graduate that does not have school debt. 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. There are also some locations that previously sold quickly, but now they do not. Your local broker should be able to tell you what the current demand is in your area. Please note, that even a 5-mile difference in any area might generate a huge difference in demand.
Be Patient! Most buyers now are still expecting some type of “COVID-19 discount.” In fact, there were many practitioners that “threw in the towel” during the shutdown and sold their practices at huge discounts. There is no reason to do that now, but assuming you went back to work months ago, you are now still in a “prove it” mode to show buyers, lenders, and buyer’s accountants that your practice is back to normal. Frustrated, furloughed associates are entering the transition market and patients are returning to dental practices. I believe the economic forecasts cited at the beginning of this article will be true for dentistry by mid-2021, and that dentistry will surpass every other business as it has always done in a recovery. Increased revenues, combined with more demand, should help practice values later this year.
Brokers may be more necessary now than ever: 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. Your practice is still one of your most treasured assets. Transferring this asset is infinitely more difficult than selling your home, and most of you would never try to sell your home without an agent who gives your home exposure in your market. 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.
TAKEAWAYS FOR BUYERS
Associates will take home less than owners for the same amount of production, whether the economy is strong or weak. 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” and would 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, rather than as an associate! Practice debt should not be looked at the same as dental school debt or other debts. It should be looked at as a “return on investment.”
100% financing plus working capital is available at 4% or less. At these rates, 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. Of course, 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. Your “million-dollar question” in your due diligence is “how much do I think I can produce with the patient base in this practice.” Your due diligence should reveal whether you may be able to increase revenues, or perhaps, won’t even be able to meet what the seller produced. We all have different skill sets. No matter what your “team of advisors” might tell you, only you know how you compare to any dentist you are replacing. Your debt service differential is nominal compared to your own skill set with any patient base, meaning the price is nominal compared to what you estimate you could produce in a practice. 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. Guess what, they will both be priced at market metrics 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 and “over-paying” for a practice where you increase revenues could be the real steal, even in a practice where the buyer might have to take the Delta fee reduction.
Scratch starts are crazy. Building out and equipping a new, two-operatory practice now costs around $500K. There are no patients to start with, only bills! For $500K, you can buy a practice that already throws off several hundred thousand or more as a profit, not just gross receipts! Even if you are debt-free, don’t really need the income, and find a “facility only,” normally you will most likely have to spend money on upgrades and marketing to get to the size practice you desire. It still makes more sense to buy many of those smaller practices that an old boomer is ready to let go of, knowing you will have to upgrade much of the office. Most older docs 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.
Sellers: Be patient as the best is yet to come this year, even with the uptick in supply. Buyers: 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.
In most life situations, people use specialists to help them obtain the help they need. People go to their dentists to obtain dental care. They go to a medical doctor to obtain medical care. They seek the services of insurance agents to help design an insurance program to meet their needs. They seek the help […]
“I’m sorry, but we are not comfortable making the loan due to poor credit history!” Unfortunately, this is a comment I hear all too often from lending institutions when attempting to secure a loan for a practice transition. For the past 30 years, I have been preparing financing packages for dentists wanting to purchase a […]