Is 2020 a Good Year to Buy a Dental Practice?
What smart dentists understand about potential recessions, election-year jitters, and the practice sales market in 2020.
There seems to be a pervasive feeling that the economic outlook is too uncertain to make the jump into dental practice ownership. I have spoken to more than a few dentists recently who are concerned about the future and who suspect that it would be better to wait before they start reaping the rewards of practice ownership.
It can be difficult to feel positive about the future. Our fast-paced, 24-hour news cycle consistently confronts us with reasons to worry. The pundit class seemed all but convinced over the summer of 2019 that the economy was due for a recession (far fewer of them are talking about it now). The current impeachment drama and the impending presidential election have dominated the news for months. Escalating conflicts around the world give us new reasons to worry.
I don’t want to downplay the importance of being informed about the world around us. But pending catastrophes get clicks, and clicks generate income. Most of the news media is incentivized to keep us on the edge of our seats, anxiously refreshing our browsers to consume the latest headlines (and see their ads).
Unfortunately, all this can contribute to the feeling shared by some dentists that the economy is shaky and 2020 is not a good time to act. On the contrary, I believe that the smart move is to invest now and move your career forward.
My argument is simple and can be broken into two parts.
- The economic outlook for practice ownership is good.
- Practice ownership remains the best option for most dentists from both a financial and quality of life perspective.
Now, I know I run a dental brokerage and it’s in my best interest to say this. But hear me out. There are many good reasons to be positive about the business of dentistry and the many opportunities for both first-time buyers and seasoned multi-practice owners. In this article, I’d like to share a number of reasons to feel optimistic about these opportunities, especially as we head into 2020.
US News and World Report just released its lineup of the Best Jobs of 2020. In 2nd place, coming in after software engineer (but with almost 50K more per year in median salary) is General Dentist. Orthodontist ranks #4 and Oral Surgeon comes in at #9.
Does it surprise you that 3 of the top 10 jobs in the US this year are dental related?
It shouldn’t. The population is growing and the demand for dentistry remains consistent. Dentistry is a great profession.
The Economic Outlook for Practice Ownership is Good
Markets expand and contract and business cycles will continue to roll. While the panic that a recession was imminent has died down, we know that the future holds both good times and bad. In spite of this, I think dentists should feel confident about the future. Here are three reasons why.
Reason #1: Dentistry is recession resistant.
Will bad times crush your practice?
The Great Recession (officially December 2007 to June 2009) is considered the most significant economic downturn since the Great Depression. It caused personal and financial strain for a great number of people, including some dentists.
In their April 2019 JADA article titled, The effect of the Great Recession on the demand for general oral health care and orthodontic care, authors Albert Guay, DMD and Andrew Blatz, MS conclude the following: “The downturn in the status of the general economy during the period of the Great Recession resulted in a decrease in the demand for general oral health care and orthodontic care in the United States.”
This sounds bad, but it misses an important caveat. Compared to the rest of the economy, dentistry fared remarkably well. And the ‘downturn’ they speak of was not very pronounced at all. Here’s a chart from that same article:
The top line tracks the percentage of the total US population with GP Dentist visits. In 2003, the figure was 41.2% (representing 119,616,627 visits), while in 2015 the figure was 39.2% (representing 125,959,071 visits). In those same years, average annual per patient spend (for GPs) increased only slightly, from $589 in 2003 to $601 in 2015.
But because the population grew, the actual number of visits grew by almost 6.5 million. And total dental expenditures increased by just under 4 billion dollars.
There are many factors at play here, but the primary takeaway is that – even as demand for dentistry may have decreased somewhat during the recession – the clinical need for dentistry did not go away. This constant need for dentistry is one of the reasons that the profession featured so highly in the US News jobs ranking.
This need persists through good times and bad, which is what prompted Gordon J. Christensen, DDS, MSD, PhD in his article titled Positive changes in dentistry related to the “Great Recession” to remark:
However, as the economy recovers and patients have more income, they must return to their dentists after prolonged periods without routine oral care because of potentially extensive oral therapy needs. As they do so, many will find that postponing their oral care has caused significant and extensive need for treatment of various oral problems.
I have seen hundreds of dentists in private practice succeed through economic upturns and downturns. Buying a dental practice is an investment, and there are many ways to maximize that investment. Hiring a quality dental management consultant can make a real difference by providing good advice, training for your team, and (most importantly) helping you grow into a better leader and savvier businessperson. I’ve seen doctors whose practices grew like crazy over the recession by sticking to fundamentals.
Reason #2: Consumer confidence isn’t as bad as you might think.
Despite strong job numbers, record highs in the stock market, and historically low interest rates, confidence in the future of the economy seems to have been down in the minds of some. However, most consumers are confident. A recent CNN poll found the following:
Looking ahead, nearly 7 in 10 expect the economy to be in good shape a year from now (68%), the best outlook in CNN polling since December 2003. The new finding includes 63% who say things are good now and will continue to be good next year, while just 9% say the economy is currently good but will turn south in 2020.
Consumer opinion fuels economic growth, and confident consumers are a good sign.
Reason #3: Lenders remain confident.
The best part of all this – you don’t have to take my word for it! The banks and their teams of economic prognosticators have not put the brakes on lending to dentists. To the contrary, they are lending more than ever before.
According to Burnett Facer, VP at Zions Bank,
Applications are up and loan volume for 2019 was up 60% over the previous year. Rates are at historic lows and well qualified borrowers have multiple offers to choose from. We are seeing well run practices continue to thrive and expand both internally and externally.
The reason why is simple: the percentage of dentists who default is lower than other small business owners. Buying and operating a dental practice is a solid and generally very safe investment.
Matthew Christie, Regional Director at Lendeavor and Jason Schneller, Director of Business Development at Lendeavor highlight why dentists stand out:
From a lender’s perspective, dentists are highly educated borrowers and amongst our economy’s hardest working entrepreneurs. They understand the implications of maintaining good credit and preparing themselves for practice ownership. While nothing in life is guaranteed, if you’re a dentist with around a year of experience, a good credit score, and a demonstrated ability to produce dentistry, the chances of you getting a loan are very good, even if you have a good amount of student debt. Investing in private dental practices has remained relatively low risk over many years.
Lenders (and their risk-averse underwriters) are continuing to lend 100% of the purchase price (often with working capital), and they’re offering historically low interest rates. These terms would be unthinkable for other business owners, especially if they had the type of debt carried by many young dentists. But the facts speak for themselves: the lenders are confident in you and your profession.
Why does practice ownership remain the best option for dentists?
The economy will have its ups and downs and consumer confidence will wax and wane. When looking at the financial benefits of practice ownership, a piece of classic investing advice is in order: time in the market beats timing the market.
In other words, as long as you’re planning to be in private practice for over 5 years, the time to start reaping the rewards is now. While the parallels aren’t perfect, consider Bob, the world’s worst market timer. Bob only purchased stock at the worst moments in the last 30 years – just before every downturn, yet – through time in the market – he still came out very much on top. (The whole detailed story is fun and worth reading.)
Buying a dental practice is an investment, and it pays off MASSIVELY over time.
Here’s a little rundown on the 7-million-dollar difference between being an associate for 30 years and being an owner (producing the same amount of dentistry) over the same period. And that’s assuming that you park that money in a savings account! Investing even 1 million dollars of that 7 million over 10 years (assuming 6% returns) would turn that initial million into almost 1.8 million.
Here’s how I came up with a 7-million-dollar difference:
Let’s say that you’re an associate producing $800,000 at 25% compensation. Your take-home income is $200,000 (not bad at all…Mom is proud and you’re beating the average associate compensation, but those years in dental school could be worth a lot more).
With more dentists entering the market, your job isn’t entirely secure, but let’s say that you keep working at the same place (a very rare feat for an associate) for 30 years.
Now, as an owner producing $800,000, your overhead is likely around 60%, meaning that your take-home income is $320,000. Let’s say that you’re still receiving 25% for the work you do, but you’re also receiving the 15% profit generated by the business. That’s a $120,000 bonus every year!
But wait…there’s more!
If a conservative 25% of the practice production comes from your hygiene department. If you continue to produce $800,000, then hygiene is producing $266,000, for a grand total of $1,066,000. Now your overhead is still 60% and you’re still producing the same amount of dentistry, but your ‘bonus’ (profit from the business) has just gone up. Your total take-home income is now $426,400.
Now let’s say you buy this practice today for $850,000 (a reasonable price for a practice doing these numbers in many California markets).
Your annual payment for the loan you take out (10 years at 5%) is $108,192.
Your take-home after debt service is $318,208.
Your tax savings on just the practice purchase over 10 years amounts to around $340,000.
Assuming you haven’t grown your new practice at all, the difference after 10 years:
Associate: 2,000,000
Owner: 3,182,080 + $340,000. + practice equity of $850,000 = over $4,000,000
Difference after 20 years (10 years of no loan payments):
Associate: 4,000,000
Owner: 7,446,080 + Tax Savings + Equity
Difference after 30 years:
Associate: 6,000,000
Owner: 11,710,080 + Tax Savings + Equity
That’s 7 million dollars with no practice growth and no investing. Grow the practice by improving systems, producing more, working more days, increasing fees, or any other means, and that number goes up even further.
Buying a dental practice is an investment. It provides you with more than a job that you control; it also offers profit above and beyond your compensation for the dentistry you perform, tax-advantages, a working environment you control, and equity in an income-producing asset (your practice).
2020 is a great year to purchase a dental practice!
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Do I need the selling doctor to stay on in the practice?
In some cases, doctors who sell their practices are contractually obligated to stay and work in the practice for several weeks or months after the sale to provide treatment and “introduce the patients to the new doctor”.
The benefits of such an arrangement may seem clear, even obvious. It makes sense to keep the selling doctor around for a while to talk to the patients and introduce them to the buyer, right?
In my opinion, short-term work-backs just for the sake of “introducing the new doctor” typically do more harm than good. In fact, they can be a real disaster for the buyer if the patients see Dr. Seller in the office treating some patients since they’ll wait for him or her rather than seeing Dr. Buyer.
This can complicate the transition, causing problems with team members and confusing patients. If the Seller becomes an associate and helps produce dentistry for the new doctor, then it can be an ideal situation. Here, context matters most.
Team Loyalty: It is difficult for the team to transfer their loyalty to the buying doctor when the selling doctor is still around. Even though the team knows that the practice has sold, the de facto leadership will always remain with the seller. The staff will ‘double-check’ on instructions with Dr. Seller, and it only takes a slight eye roll, or a muttered “Well that’s not what I would have done…” to lower your credibility in the eyes of your new team.
For the new doctor to assume the leadership role in the practice, it is easiest for the selling doctor to make him or herself scarce, even right after the sale. It is important for the selling doctor to be available by phone and during the non-patient time to answer questions, but if they are around the practice too often, especially when patients are there, it can cause problems.
Patient Loyalty: With patients, the selling doctor’s presence can cause even more problems. Even if the buying doctor can see a patient tomorrow, they’ll wait for months to see Dr. Seller, the one with whom they’re comfortable and often “the best dentist in the world”. Furthermore, when patients schedule an appointment to see the new doctor and, while in the office, see Dr. Seller walking down the hall, they may feel cheated. They thought Dr. Seller retired and they didn’t understand that they had an option to see her.
The outright sale is almost always the best option for a clean transition. There are a number of important strategies for transferring goodwill, like a well-crafted letter to patients and thoughtful reactivation telephone scripts, that do a much better job than a work-back arrangement.
What if the selling doctor wants to keep working? What I’m talking about here is not the same as the transition scenario where the seller stays on as an associate for several years or where the buyer and seller form a partnership (partial sale) for the foreseeable future. Such arrangements – when carefully planned out ahead of time – can be mutually beneficial.
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What Is My Dental Practice Worth?
This is one of the most common questions we receive at Integrity Practice Sales. And it makes sense – you’ve devoted a huge part of your life to your practice! If you’re thinking about selling your dental practice, understanding practice value is key.
The first thing to note regarding practice value is that, just like the value of anything else, the basic rule of supply and demand applies. A glass of water isn’t worth much. I can get a cold water bottle for 25 cents at Costco – and I can turn on the tap in the office and get one for very close to free. So water isn’t worth much…until you’re lost in the desert. With the sun beating down on your parched skin, a single drop of water may be worth a fortune.
Our goal as practice brokers is to find that one buyer to whom your practice is worth the most. We do this by keeping a large and up-to-date record of buyers looking for practices. We pay attention to their specific criteria and overall circumstances, and we also widely advertising the practice to other prospective buyers for whom we may not have detailed information.
When we go to set a listing price for a dental practice, we are aiming to determine what a willing buyer would offer our seller. From there, we discuss strategies for pricing that depend on the seller’s requirements (financial, timeline, etc.) as well as the local market conditions.
There’s both an art and a science to arrive at the opinion of value for a dental practice. On the science side, there are several guidelines that can be fairly easily applied. You can plug the numbers in and…voila! The application of some industry-standard multiples to your top line collection figure or your bottom line profit figure give us a foundation from which we can begin valuing your dental practice.
Determining the profit figure can be a challenge for anyone looking to value a dental practice. Small business owners (dentists included) are economically incentivized to reduce their tax burden. The job of the CPA is, in part, to help the small business owner limit their tax liability through a set of perfectly normal and legal strategies. These strategies are designed to reduce the ‘profit’ that the business shows on paper without reducing the actual discretionary income available to the seller. When we look at the financial records of any selling doctor, we always consider these strategies and work to “re-cast” the financials as if none of these tax strategies were employed. There are many cases where the profit on a tax return may only be $20,000, but the total cash flow actually available to the seller is more like $250,000 or more.
The application of basic multiples, however, is not all there is to it. The art side of the equation is where things get tricky. Below, I’ll give examples of the formulas, and then show how these formulas can get more complicated.
What do you mean by ‘multiples’? Multiples are ratios that are calculated by dividing the value of an asset by some dental-practice specific financial variable. For example, if we know that practices collecting $1,000,000 per year are selling for an average of $850,000, then the multiple we can use is 0.85. We can then take this multiple and apply it to other practices.
Where do you get these multiples? Since there is no reliable and statistically significant data publicly available for recent transactions of dental practices, these multiples are derived from industry standards and our own private data sources. Additionally, they are regularly confirmed by dental practice finance lenders, who maintain some of the best privately-held data available.
How do you choose the right multiple? Initially, we apply a multiple that is based on location and practice size. However, the final multiple will be a function of location, goodwill, profitability, tenant improvements, equipment and technology, insurance accepted, and other factors.
The basis of this multiples approach is the economic principle of substitution, which says that one would not purchase a business asset for more than one could acquire an equivalent substitute asset. Basically, a buyer would probably not purchase a practice – even if the investment risk was relatively low and the projected reward was high – if that buyer could acquire a similar practice for less.
Valuing Dental Practices:
Simple Example: One of the simplest ways to come up with a value is to apply a multiple to your last year’s collections. For this example, I’ll use 80% – but, as I said above, this number depends on a number of market conditions. So if you collected $1,200,000 last year, this quick rule of thumb would value your practice at $960,000. How easy!
Why this doesn’t work: Not so fast. Imagine that there are two practices, Practice A and Practice B. In both practices, the total collection from last year was $800,000. So they’re both worth $640,000, right?
Let’s take a closer look. In Practice A, the overhead is at 50% of collections, which means that Doctor A takes home a profit of $400,000. Dr. B’s overhead, on the other hand, runs high at about 80%. Dr. B takes home a profit of $150,000. A practice where a doctor makes $400,000 every year is more valuable than a practice where the doctor makes $150,000. The percentage of collections method is helpful, but it does not always give you the whole picture.
Multiple Multiples: We always apply these multiples to both top-line (collections) and bottom line (profit or doctor income). Both of these aspects must be balanced to provide the most accurate value, but at the end of the day, the doctor’s take-home income is what provides a very substantial part of the value for a potential buyer. At the same time, you cannot rely on any single multiple alone. Remember Drs. A and B from the example above? Is Practice A really worth $800,000 and Practice B only worth $300,000? That’s a serious discrepancy in value when compared to the percentage of collection method.
Additional Considerations: In our experience, practice value is influenced by many different, dental-specific factors. These include curb appeal, location (city, neighborhood, professional complex vs shopping center, etc.), the age of the practice and resultant value of the goodwill, the age and condition of equipment, the level of technology in the practice, and the recent income trends of the practice (up or down). This is why it is so important to work with an experienced dental practice broker.
What does it really boil down to?
At the end of the day, cash flow is king. It only makes sense to buy a dental practice if you can make enough money in the practice to pay the overhead, pay the bank, and still generate a reasonable income for yourself and your family. If a practice is valued correctly, it will support the buyer.
Balancing these different valuation methods takes an experienced hand. At Integrity Practice Sales, we look at everything to make sure your practice or any practice you are looking to purchase is correctly valued. Click on the link below to get a free preliminary opinion of value for your practice to assist with your financial planning today.
Discover the Value of Your Practice
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Perfecting the Practice Transition Letter
When most doctors purchase a dental practice, one of the big worries is always patient retention. Most of the value of a dental practice is in the goodwill with the existing patient base, and if those patients choose not to come back, you’re in trouble.
Fortunately, this ALMOST NEVER happens. At Integrity Practice Sales, we work hard to make sure that both buying and selling doctor work together to manage a successful transition.
Many doctors decide to write a letter explaining the transition to patients. This can be a powerful tool for controlling the narrative around the transition and can help patients feel at ease with the new doctor.
[Why winning over your new staff is the key to winning over your new patients.]As with all powerful tools, however, the transition letter can be misused and serve to confuse or worry patients. Remember that patients don’t really care who “owns” a dental practice. In fact, practice ownership rarely crosses their minds.
Instead, they want to know why their doctor is leaving (or becoming less available) and who the new doctor is. In fact, patients can be offended if they read that Dr Seller “sold” her practice to Dr. Buyer.
The transition letter should be used to thank your patients for their loyalty and friendship over the years, explain why you are transitioning (basics only), and then promote the new doctor. Preemptively thank the patients for continuing as patients at the practice and for supporting the new doctor.
Tips for a great transition letter from the seller:
- Have a professional photo taken of Dr. Seller and Dr. Buyer together to use in the letter.
- Write an introductory paragraph explaining the need for the transition and thank them for the years of commitment to the practice.
- Introduce the replacing dentist and include experience and qualifications.
- Dr Seller should become Dr Buyer’s patient and let the patients know this.
- Explain the reason you have chosen this doctor to take over your practice.
- Give a personal view of the new dentist, including hobbies and family.
- Keep this letter enthusiastic and share your optimism regarding the transition.
- Repeat your appreciation and confidence in the new doctor.
Send this letter out AFTER the close of escrow. This cannot be over emphasized. The deal isn’t done until it’s done. Once you close escrow and send out the letter, you’ll also want to call the patients that have scheduled appointments over the next few days since they will be at the office prior to receiving the letter.
A few months into the new practice, the buyer should send out a second letter.
From the new doctor (1 to 2 months after the transition):
- Greet and welcome the patient.
- Talk about your background and experience.
- Discuss common commitment and philosophies with the previous dentist and thank him or her for their support and for creating such a nice practice.
- Thank the patients for such a warm welcome and thank the team for being so supportive and encouraging.
- Encourage the patient to come by to meet you or call with any concerns.
- Express your desire to get to know the patients and promise to listen to their goals.
At Integrity Practice Sales, we provide samples and help the doctors draft ideal transition letters. But no matter who you list with or buy from, following these guidelines will help you retain the value of your new practice and build great relationships that will last for years to come!
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