For those Dentists whom are interested in selling their business at the optimum time, this article might serve as a good reference point.
In order to understand the current dental practice sale market conditions, it’s wise to review the three factors which have the greatest impact on the sale price of the dental practice.
The first factor is the business’s cash flow. EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) is becoming more of a standard when evaluating the profitability of Dental Practices. While EBITDA can be managed there are certain market pressures that have begun to shrink the average profitability of Dental Practices. The two most prominent factors include the higher cost of obtaining and retaining good employees, and the Dental “Insurance” marketplace. The days of “fee for service” dental service is slowly being forced aside by a nationwide belief system of insurance driven medical treatment. This pressure is forcing long established Dental practices to “get on board” or lose a % of their patients. It’s simply a game the veteran dentist entering or in their 60’s generally doesn’t have the energy or time to fight against.
The second factor is “Industry Loan Favor” or better explained as access and cost of financing. Fortunately, the average Dental Practice has historically such a low default rate (less than 2% for acquisitions) that there is a strong market for Dental Practice Acquisition (DPA) lending banks. Each region has at least half a dozen specialized DPA lenders whom understand the business of Dentistry as well, if not better, than most buyers and sellers. While we do not see the lender market changing for better or worse, the cost of financing is bound to increase over the next few years. Interest rates have a direct influence on the price paid for equities. While we are only speculating on this issue, most economists agree we are expected to see higher interest rates over the next few years. The higher interest rates effect the buying power, hence the amount DPA’s are willing to lend on Dental Practices. The other major form of financing in our industry is “Private Equity”. Love them or hate them, the entrance of “Corporate Dentistry/Dental Service Organizations” has driven up the average multiple paid for all dental practices over the past few years. According to Bain & Company, in early 2015, “dry powder” (the term used by private equity firms to define liquid assets ready to be invested on a balance sheet) reached an all-time high of $1.2 Trillion and the major result of this glut has been increased deal-making and rising valuations. Combine today’s record-level dry powder held by PE firms with strategic corporate buyers seeking to meet revenue growth and profit targets by acquisition and you have a recipe for a seller’s market. Over the past few years we have seen Private Equity scooping up all the low hanging fruit, and now the preferred “6 plus treatment room, $800,000 collections or more, 3 years post sale seller working agreement” sales market is shrinking. This will force the growth strategy of many DSO’s to shift to a De Nova platform (Dental Practice Scratch Starts). One must consider how your practice will be effected when these “pop-up” next door to your 30 year old established practice…..
The third factor is supply and demand. Boomers Are Exiting Now. According to the Pew Research Center, beginning on January 1, 2011 and ending in 2030, 10,000 Baby Boomers will celebrate their 65th birthday every day. Many predict a Tsunami-like business exodus by Baby Boomers during this time. Compile that with two negative buyer factors: Approximately 50% of graduating Dentists are female Dentists, whom prefer a more “lifestyle to work balance”. Secondly, the average school debt of graduating dental students has risen over 150% over the past decade to approximately $250,000. Thus forcing more dentists away from practice purchases. The clear increase in seller’s pool from retiring baby boomers together with the shortage of individual buyers will increase the amount of practices for sale while decreasing the pool of individual buyers.
For those Dentists whom have considered selling or retirement over the past year, it is clearly a great time to sell. In addition to the above factors, there appears to be favorable tax changes on the horizon for sellers to keep even more of the profit from their sale. While nobody can tell for sure, all factors point to an eventual shift in balance from the current seller’s market to a buyer’s market. Please take some time to consider your position and set up a meeting with us to discuss your exit strategy.