Looking Ahead to Next Year
By Thomas L. Snyder, DMD, MBA, Senior Director Henry Schein Professional Practice Transitions
2018 is drawing to a close, and for many doctors 2019 will be the year that practice transition plans are implemented. There are a few points to consider about our ever-changing dental marketplace which may influence your decision to move ahead now versus later.
As we have stated in prior year-end columns, for a number of years after the Great Recession many dentists were financially unable to retire, thus creating a huge imbalance between dental graduates and retirees. In recent years this gap has narrowed significantly, with dentists retiring at a greater pace the last seven years. The gaps between recent grads and retirees is still about 1,500 more grads than retirees annually. This means it is still a seller’s market in most areas of the country. How long this will last is anyone’s guess, but at some point there will be a crossover, with more retirees than dental grads. If you are looking near term for maximizing your practice’s value, you are in a good place.
The most important driver for higher practice values is still your location. Practice values continue to remain at record levels in many parts of the country. In many urban and suburban areas which are considered highly desirable for young dentists, practice sales ratios for general practices range between 70-80% of last year’s gross receipts. In several markets, general practices are selling at ratios in excess of 80%! For specialty practices, valuation ratios have a wider variance – anywhere between 60-78%, based on specialty type and practice location.
Conversely, if your practice is in a small town or rural area, this high practice value expectation will most likely not be met. Excellent practices in these areas cannot even recruit doctors to join the practice as an associate, let alone find a buyer.
In addition to the imbalance between retirees and dental graduates, another major contributor to higher practice value is the ever-increasing market penetration of corporate dentistry and large group-practice networks. With seemingly unlimited sources to capital, these entities are able to pay “top dollar” for your practice as long as certain conditions are met.
If you have a practice grossing in excess of $750,000 you may potentially be a candidate for a corporate or large group practice acquisition. As in any practice transition, there are many factors to consider other than a high sale price. Working post sale for several years under a corporate management structure and recognizing that you may have as much control as when you were an owner must be factored into your equation.
Another important point to consider (especially if you are solo practitioner) is that recent data indicates only one in five dentists under the age of 35 want to be a solo practitioner! Since the majority of dentists over the age of 60 are still solo practitioners, this can be a concerning statistic – as the pool of potential buyers for your practice may become more limited. Many solo practitioners may have to consider an alternative transition strategy, such as merging their practice into a large group practice or practice network.
On the dental lending front, interest rates will continue to rise in 2019 as the Federal Reserve is planning on several interest rate increases. Lender requirements relating to acquisition loan underwriting remain more stringent. For practices with higher gross revenues, some banks may require the seller to hold a promissory note for a portion of the sale price, as they want assurances that the purchaser can maintain the production levels of the seller. This note can be converted to cash within one to two years after the sale, providing that the purchaser meets the financial goals set by the banks. This seller “holdback” usually varies between 10-20% of the sale price.
For recent grads with significant dental education debt, some lenders are now requiring the seller to hold a note for a portion of the sale price. For practices with higher gross revenue, the “holdback” period may be several years, with the purchaser required to reach certain financial targets. Credit requirements continue to be stringent, so good payment history and decent FICO scores maintained by the purchaser are extremely important.
The trend of increased partnership formation continues to grow as the percentage of solo practitioners continues to decrease. Recent statistics from the American Dental Association show that as of 2017, 50.9% of all dental practices were considered solo practices. The inference here is that more doctors desire to practice together, so the trend of forming partnerships will continue to grow.
Multiple office ownership continues to increase. It is not just the continued growth of the Dental Support Organizations (DSO) impacting the dental profession, but also a big increase in the number of early and mid-career dentists desiring to own more than one practice. We do not see this trend weakening.
In summary, it’s hard to be totally “on target” with any prediction. Remember that sound financial and transition planning coupled with good practice fiscal management are key ingredients to your success, whether you have short-term or long-term transition plans.
If you would like additional help, email Dr. Snyder at email@example.com
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