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!Read More
Performing due diligence on patient charts can be a big undertaking, but it should not be overlooked. By examining the charts, you can tell what type of dentistry the seller performs, how the practice cares for and follows up with patients, how patients are scheduled, and how the practice makes financial arrangements.[Check out our overview of the process of buying a dental practice.]
Chart Review: Review a few dozen of the active patient charts.
Paper Chart Count: If there are paper charts, manually count the charts and compare to the computer numbers. Be sure to only count the current charts.
Random Chart Review Notes and Log: Select a few dozen patients randomly and keep a list or log with the following information:
- Last full series of x-rays,
- last bitewing x-rays,
- last prophy,
- last perio charting,
- written treatment plan,
- written financial arrangements,
- type of dentistry (see below)
This gives you a feel for the thoroughness of the charting. Most offices have over $1,000,000 of diagnosed undone treatment. Run a report of this, but of course know that the stats just mentioned are typical and should not be cause for alarm.
Types of Dentistry: In most cases, the dentistry performed by the selling doctor should match the type of dentistry you do or intend to do. Treatment plans should appear solid and predictable, with treatment completed in a reasonable amount of time.
From my experience, getting compliant on x-rays and perio charting can be a gold mine for a new owner (or any dentist at any time). The same goes for dentists who do patchwork repairs. I would consider a “patchwork” practice that doesn’t have up to date x-rays or perio charting as a practice with tremendous opportunity for growth. Ideally, there should be plenty of dentistry left for me to do on the patients of record.
Insurance Billings Validation: Ensure that the X-rays and treatment notes seem to validate treatment billed to insurance.
Distance Patients Live from the Practice: Check the active charts as well as review a computer zip code report. Practices that have been in one location with one doctor for a long time often have many patients that have moved out of the area and still commute to the office. Be aware that some might find a new dentist closer to home rather than make the 2-hour drive (or flight) to the seller’s office.
Is your style of dentistry similar to the sellers? The selling Doctor’s treatment planning patterns should match your experience and overall dental philosophy.
Clinical questions to ask the seller:
- What is your favorite type of dentistry?
- What types of procedures do you refer out?
- What special clinical training or courses have you taken, and would you recommend I take any of these to better serve the patients?
- How often do you do periodic exams?
- How often do you take x-rays?
- How often do you perio probe and when do you refer patients to the periodontist?
- Who do you like to refer to for endo, perio, OS, Ortho, etc.?
- How are your relationships with the specialists you refer to?
- What kind of mouth splints do you use?
- What kind of whitening systems do you use?
- Do you place amalgam?
Once you have a signed Letter of Intent, it’s time to take a closer look at your potential new practice. Due diligence is one of the most important aspects of preparing for a successful dental practice acquisition.
There are several important indicators that offer insight into practice performance. In this blog post, we will look at how to assess a practice’s schedule. As part of reviewing the schedule, you should take a look at both the appointment book and the recall system.
Look at how the day is scheduled.
Picture yourself in the doctor’s shoes. Would you be comfortable doing that dentistry? If they place a crown every 15 minutes, do think you could keep up? Can you envision yourself working their schedule? While schedules are flexible, this you may want to think twice if the selling doctor is significantly more efficient than you feel comfortable with.
Reviewing the Schedule: What Many Doctor’s Miss
It might be tempting to just glance forward in the schedule and check to see that appointments are scheduled out and the days look relatively full. If you only look forward, however, you’re doing yourself a serious disservice!
If you want to find the truth, look to the past. If you only look forward, you may see an ideal schedule. It’s likely that the schedule will be full. But looking backward gives you the real picture. Does the practice have a problem with cancellation? Would you be happy performing the dentistry that the doctor actually performed, and not just the dentistry that is on the schedule going forward?
Looking at what has actually happened is as important as looking forward to ensure that appointments are being scheduled and re-care is on track.
Assessing Hygiene Appointments
There is a fairly simple formula for analyzing a hygiene schedule.
First, count how many hygiene days there were in the last 30 days. Next, count how many hygiene openings there were in that same time period. (If there are 2 days of hygiene or less per week, you may want to increase the sample size.) Then you simply divide the number of openings by the number of days.
For example, if I count back and find 40 hygiene days and, in that same time period, count 40 hygiene openings, then that practice has one opening per day. In looking at practices, I’ve found that there are usually about 0.8 hygiene openings per day (32 openings over 40 hygiene days).
If you look back and there is more than one opening per day, this indicates one of two things: either there are too many hygiene days scheduled or, more likely, the office does not keep with up with their recall system (or has a poor system to begin with). It could also mean that they don’t have a system in place to handle cancellations or they have a weak perio program.
All of these problems indicate opportunity – and having 1 opening per day is usually ok. Even the best run practices have about .5 openings per hygiene day. We’ve seen some practices with as many as 3 openings per day! Remember, if you look forward you probably won’t see any openings – so be sure to count backward.
Using these tricks can help you feel confident about your practice acquisition. If you’re considering purchasing a practice in the next 5 years, please fill out our Inside Buyer Survey and be the first to hear about new listings that meet your specific criteria.Read More
Once you have a signed Letter of Intent, it’s time to take a closer look at your potential new practice. Due diligence is one of the most important aspects of preparing for a successful dental practice acquisition.
There are several important indicators that offer insight into practice performance. In this blog post, we will look at the financial side of due diligence.
Your banker is an important member of your transition team and will help with the financial side of due diligence. Because they are looking to avoid risk, they are naturally in your corner. Your success is their primary goal – when you succeed, you make your loan payments.
The first step in evaluating a practice that you think you want to purchase is to look at the finances. You should already have determined that – based on the practice prospectus – this practice could support you and your family after you pay all of the practice expenses and the bank loan. Now it’s time to double check all the figures.
Cash Flow Sufficiency: Monthly practice cash flow must be sufficient to cover practice overhead, practice loan/lease payments, and all of your living expenses. Sometimes with a smaller practice, it is advised to keep working at an associate position until practice cash flow increases. The benefit of buying a larger practice is that it should be able to meet all of your financial obligations.
So, what is sufficient? California Dentists make $164,000 per year according to the Bureau of Labor Statistics (bls.gov). That may sound good to you, or you may be looking for significantly more. The good news with purchasing a practice is that you’ll immediately start to take home a significant income (depending, of course, on the size and profitability of the practice).
Consider asking your Dental CPA to perform a “Review of Books and Records”: While the bank does a good job reviewing the practice books and records (to protect themselves), some buyers prefer to have their own CPA review the tax records, financial statements, and bank statements.
Financial Arrangements and Accounts Receivable (A/R): Review computer or manual reports that document patient payments as well as the accounts receivable percentages. A healthy A/R might be ½ of a typical month’s collections. A high A/R (over one month’s collections) might indicate poor financial arrangements. Even if you are not purchasing the A/R, doing an A/R review gives you insights into the practice.
Purchasing Accounts Receivable: Often the A/R will be included in the sale. Typically, the price for the A/R will be calculated using one or more of several popular formulas such as;
- 100% of current A/R and 50% of everything over 30 days, or
- 90% of current A/R, 80% 31-60 days, 70% of 61-90 days, 50% of over 91 days, or
- 75% of all A/R less than 90 days
Another option is to purchase the “first $____” of the A/R. This number might be 70% of the total A/R, in other words, if the A/R total is $100,000, then the A/R would be sold at “$70,000 for the first $70,000 collected”. In this example, the last $30,000 would be collected for the seller and given to the seller, once collected, for a typical 5% fee that the buyer would charge.
Property Taxes: Review the property tax bills for tangible personal property and also real property, if applicable. Personal property is anything that can be subject to ownership except land. Real property is immovable property, such as land or anything attached to the land. Bottom line: ask your tax advisor about this.
Payment Arrangement Balances: Examine any written patient financial agreements for balances due. Office policies vary drastically in this area, from verbal “agreements” (not recommended) to solid written payment plans that include interest.
Fee Schedule Review: Review the office fee schedule and compare it to typical fees in the area. IPS can help by providing typical area fees. How often does the office increase fees, and when did the last fee increase take place?
You generally don’t want to raise fees as soon as you purchase a practice – it is much better for the seller to have raised fees in the last year. However, as with so many items, this is unique for each practice. Ask your agent and other advisors about the pros and cons of raising the fees and be sure you understand how fees affect profit. I’m not kidding. Realizing that, with a 70% overhead and increasing the fees 10%, you will increase your profit by 33% … or you will make the same if you treated 33% fewer patients. (Google the Kodak Study that was done in the 80’s for more info on this).
These are some of the most important aspects of conducting due diligence on the financial side of a dental practice. If you are currently looking for a practice to purchase, please take 5 minutes to join our Inside Buyer list and be the first to hear about upcoming practices.Read More
So you’ve just successfully closed on your new practice and you’re excited…but you’re also nervous about how the new patients will react to you. In this blog post, I’d like to share one of the most important…and most overlooked…aspects of patient retention after a sale.
Meeting the Team
Winning over your new dental team is perhaps the most important way to preserve the goodwill of your new practice and a crucial aspect to any successful transition.
The basic fact is this: most patients will be happy to work with you if the team believes in you.
Your new team will set the tone for your patients as they introduce you as a new doctor. If they express confidence and talk about how great a dentist you are, it will go a long way in building a lasting relationship with the patient. Conversely, an eye roll or critical word can damage that relationship in a way that is difficult to overcome.
For these reasons, it’s more important to win over the team than the patients. The patients almost always follow the team. I discovered this when I sold my wonderful practice and knew my wonderful patients would be weeping at my doorstep begging me to come back to the office … and they didn’t! My ego was bruised, but I saw how much the patients loved my team.
When you first meet the staff, it is crucial that you listen. Ask them what they think about the practice and how it could be improved. Ask them what they are looking for in you and how you can contribute to the continued smooth operation of the practice. Ask them about the patients. They’ve all been at this office for longer than you – don’t forget to listen!
Re-Hiring Your New Team
On the day you purchase your new practice the seller is required to terminate all of the employees so that you can hire them. This is normal and typical, but it needs to be presented to the team very carefully for obvious reasons! The team needs to be reassured that their jobs are secure (assuming this is true) and that this is a required formality. The seller must pay each employee, in their final check, for all of their unused vacation and sick days, personal time off days, bonuses, etc., according to their employment manual, as well as ensuring that any retirement plans are funded with the required amount up to the date of the sale. You will be rehiring the employees immediately after they are terminated (again, assuming this is your plan and you don’t have an employee that will be retiring, moving, or a problem employee that really shouldn’t be there).
I suggest you give your new employees the same hourly pay rate and benefits as the seller gave them, with the possible exception of retirement benefits that might be re-implemented once the practice is solidly established with the new owner. By now you should know from your due diligence what percent of collections are going towards the team, which will help determine how generous your employment offer can be, but again, it’s best to at least keep the same hourly rate.
Important Note: Some long-established practices have their employees on salary rather than hourly pay. In California, it’s very difficult to use salary pay for dental employees. Be sure to consult with an employment attorney and/or use the free resources provided to CDA members to create your Employment Manual (CDA has one that members can download) and a hiring letter that is compliant with California Law.
Winning over the team puts you on the path to a successful future with your new practice!Read More
When you’re thinking about buying a dental practice, there are two primary paths to ownership: solo practice or partnership. Will you buy 100% of the practice or less than 100%?
We are all familiar with these ownership models, especially as group practices gain popularity. 30 years ago, nearly all practices were operated by a solo dentist. Today, as practices grow, the owner dentist may decide to bring on additional dentists to continue growing the practice.
As such, you’re likely to have the opportunity to purchase part of a practice. This blog post compares the two most basic forms of dental practice ownership.
The Downsides of Associates and Associating
Associates can work well in clinics designed for associates. They can also work well in private practice if the associate never intends to buy a practice at all.
The problem comes with short term associates who say they want to buy your practice. Too often, an associate buy-in position doesn’t work out, and both doctors have to make costly changes. I believe the failure rate is close to 90%, but the ADA suggests the failure rate is *only* 70% … bad odds either way!
If you want to practice as an associate with the option to buy down the line, I highly recommend that you work out all the details prior to joining the practice as an associate. Don’t work in the practice for a few years, and only then begin to consider a purchase. If discuss the terms of a future sale up front, you’ll be much more likely to succeed.
And if you’re looking to buy into a practice, starting as an associate is probably not the best way to go. If you do want to “test drive a practice,” I suggest you have clear conversations with the seller prior to associating!
From a lot of experience, I firmly believe you do not need to practice together for a few years before buying into a practice. In fact, the longer you work together without a financial buy-in, the more likely the potential purchase will not happen.
Benefits of Solo Practice
The benefits of solo practice include more autonomy, the ability to make all the business and clinical decisions yourself, hiring and firing, marketing, scheduling, etc. Some doctors worry about vacation coverage or having someone around to discuss clinical cases with, but solo practices can work fine for vacations. I used to take 6 or 7 separate weeks off per year and very few of the patients even knew we were gone because they were not scheduled that week and we didn’t have many emergencies.
My dental friends were happy to cover any emergencies … and they were happy to discuss cases with me over lunch or at our local study clubs. I believe it’s easier to be a solo doctor (probably because that’s what I did successfully and feel comfortable with), but it’s not for everyone.
The Benefits of Partnerships
The number of group practices is increasing in California. While 61% of dental offices nationally are non-DSO (Dental Service Organization) solo practices (and about 66% in California), just about 35% of the dentists in California work in solo practice. We believe that both solo and group practices offer great ownership opportunities for dentists, as long as the group practice is formed as a well-structured partnership.
The benefits of partnerships include having someone to cover for you when you take a vacation, someone to discuss clinical cases with, and someone to share management decisions with. I’ve been in good and bad partnerships. While the good ones can be great, the bad ones can be extremely difficult. Just like getting married, when you’re joining or creating a partnership, it needs to be done cautiously, carefully, and with plenty of good advisors around you.
Either of these models can work well. It really depends on what you prefer!Read More
We all have different clinical styles and beliefs. Finding a practice that is close to your style can make the transition much smoother.
That being said, in my experience, almost any dentist can work in almost any practice … and transform almost any practice to their style over a few years.[See our guide to buying a dental practice.]
Building Clinical Confidence and Speed
Do you feel confident in your clinical ability to treat your prospective new patients? This is obviously an important factor to consider before deciding whether purchasing a specific practice is the right move for you. Especially if you go into solo practice, clinical confidence is key.
Clinical confidence comes with time, but you can always take additional training such as AGD courses, Spear Courses, residencies such as those found at Esthetic Professionals in Tarzana, or at our local dental schools. Join a study club and follow your interests. You can increase confidence in your clinical skills and speed in less time than you might think!
The number of chairs you’re used to working out of can also make a difference. Some doctors use one chair and one assistant, while other practices are designed for one doctor to work out of three chairs with three assistants at the same time. If you are experienced working with RDAEFs, this can also dramatically increase your efficiency. Typically, practice finance lenders will want to lower their risk by ensuring that you can fill the shoes of the doctor selling his or her practice. By building clinical speed and efficiency now, you’ll be better prepared to take on a bigger practice in the future.
If you have strong clinical beliefs, it can be important to decide on the non-negotiables up front.
For example, there are doctors who believe that amalgam is the best restorative material out there. Other doctors strongly disagree. One practice I work with has a sign in their bathroom above the toilet that states, “Hazmat can fine us thousands of dollars for flushing amalgam down the toilet, but we’re allowed to place them in your mouths.”
One of the benefits of being a practice owner is that you have the opportunity to can control your clinical decisions. You can always do what you believe is best for your patients.
Specialties and Special Training
Specialties or special training can also be important as you consider whether or not you want to purchase a dental practice. There are laser doctors, holistic doctors, gnathologists, cosmetic dentists who place Botox, sleep apnea experts, etc. If you have special training, it can be an ideal fit if you can find a practice with one of these specialties. On the other hand, introducing a specialty can offer a great opportunity to offer something new and grow your patient base.[Click here to join our Inside Buyers list and be the first to hear about practices that meet your unique criteria.]
General dentists might refer out all of their specialty work or keep most of it in-house. If you do have special training or want to focus on a particular style of dentistry, owning your own practice gives you the option to make this determination for yourself.
Questions to ask yourself:
- Are you confident in your clinical skills?
- What are your most important clinical beliefs?
- Do you have any special training you would like to incorporate into your clinical approach?
While closely related to personal goals, financial goals deserve a blog post of their own. When you are thinking about buying a dental practice, it is important to understand how your personal finances can affect your ability to get a loan and live the lifestyle you want.
Dental practices pay for themselves. This makes the conversation very different from the decision to rent or buy a home. “I can’t afford it,” does not come into play when the bank finances 100% of the sale and the income from the practice pays for the loan and your living expenses. This is why getting a handle on your living expenses is the first step.
Do you have a budget? Whether or not you’re planning to buy a dental practice, it’s always a good idea to know where your money is going and exactly how much you need to meet your goals.
These days, dental lenders are generally offering 100% financing for dental practices. This means that you don’t need large cash reserves to purchase a dental practice, so long as the cash flow is sufficient to meet your budget (and then some).
Generally, banks are looking for the monthly income from the practice to cover at least 120% – 130% of your monthly budget. This means that if you need $8,000 to cover your living expenses, saving goals, and lease and loan payments, then the monthly cash flow for the practice must be at least $10,000 for the bank to consider offering you a loan.
Remember: buying a dental practice means purchasing a business, and businesses are designed to make money. They “cash flow”. You’re borrowing money to purchase a long-term source of income. As I write on our blog about valuing dental practices, what really makes a practice valuable is the amount of money you as a buyer can expect to earn. The more expensive the practice, the more money you should expect to earn.
For this reason, there shouldn’t be any problem finding a practice that can support your lifestyle and then some.
- Cash Flow is the money that is moving (flowing) in and out of your business. Cash is flowing in from patients immediately, patients belatedly (in the form of accounts receivable), and insurance. Cash is flowing out as you pay for staff, rent, supplies, and so on. In a profitable business, more money flows in than flows out. A business is generally as valuable as the strength and size of its cash flow.
If you’re like most young dentists and you have student loans, then it is a good idea to lower your monthly loan payment if possible. In my experience, practice finance lenders are more concerned that you will be able to cover your expenses than they are that you have considerable student debt. Refinancing can offer attractive options for lowering your monthly payments.
Another obstacle that many young dentists face is building good credit. A credit score can range from 300 – 850. Generally speaking, a higher score indicates a lower risk. You are entitled to one free personal credit report each year from the three major credit reporting companies: Equifax, Experian, and TransUnion. Visit https://www.consumer.ftc.gov/articles/0155-free-credit-reports to find out more.
Increasing your credit score is possible, but it can take some time. Payment history is important – pay your bills on time! If possible, put your student loans on automatic payment, so you’re never late. If you don’t have a credit card, get one and pay it off every single month no matter what. A quick Google search for ‘how do I improve my credit score’ will offer many more suggestions. Quickly increasing your credit score is possible, but it takes discipline.
It is also important to maintain an emergency fund or liquid cash reserves of at least $5,000-10,000. In addition to protecting your budget against unforeseen expenses, banks want to see this money even when they finance 100% of the practice.
Questions to ask yourself:
- What income do I need to meet my current budget?
- What income would I like to meet my ideal budget?
- What is my credit score?
- What concrete steps can I take now to increase my credit score?
Are you ready to buy a dental practice? There are many factors that play a role in this important decision: personal, financial, and clinical. This post will focus on the personal aspects of deciding whether to purchase a dental practice.
Buying a dental practice is similar to buying a house.
In many cases, it makes sense to start out by renting. Maybe you’re not sure that this is the right location for you and your family. Or maybe you want the option to factor a partner, spouse, or child into the equation down the line. You might not be sure how much space you need or how much yard you need.
In the same way, starting out as an associate can help you advance your career without committing to any single location or practice style. You can develop your clinical speed, explore different practice environments, and pick up some business and management skills.
However, just as with buying a house, there are some long-term advantages to dental practice ownership.
Schedule Flexibility: The ability to control your own schedule. As a practice owner, you can dictate the pace of the schedule in the office, the days and times you work, and the vacation you can take.
Treatment Plan Autonomy: The ability to control your own treatment plans, and actually complete the dentistry you diagnose. Many associates are given the smaller or less interesting cases by the senior doctor or clinic owner.
Work with People You Like: The ability to choose your own team. Some associates have to work with the less skilled assistants in the office, and once in a while team members can have bad attitudes towards you while at the same time being the owner’s close friend or relative.
Job Security: When you’re the boss, the practice success is up to you, and no one can fire you.
Tax Advantages: Practice ownership offers the ability to tax advantage income and write off expenses. There are many tax benefits to owning your own practice, but there are responsibilities that go along with that, like payroll taxes, etc.
Long-Term Relationships with Patients: The ability to build long-term relationships with the people in your community. When I was practicing, many of my patients became personal friends.
Earning Potential: Practice ownership offers considerably more income potential for the same work.
Long-Term Investments: The ability to build equity in a practice that you can sell in the future. Even with modest growth over your entire career, you could end up using your practice sale to fund a portion of your retirement.
If you’re not ready for a long-term commitment, working as an associate may be the right thing to do, just like renting is sometimes the best option. In fact, buying a practice is often a longer-term commitment than buying a house.
Consider these advantages and weigh them against the flexibility and learning environment of working as an associate. If you have a spouse or partner, discuss it with them. Think about the direction you want your life to head and the kind of impact you would like your life to make.
There isn’t a right or wrong answer here – it depends on you and your personal goals.
Questions to ask yourself:
Are you ready to commit to one location for the long term?
Are you tired of having someone else control your schedule?
Are you ready to take full control of your treatment plans?Read More
You may have seen it in the news: interest rates are about to go up. And if you’re thinking about buying or selling a dental practice in the next few years, it’s time to pay attention.
This is the first in a series of blog posts exploring the market forces that drive dental practice values. Of course, the best way to increase your practice’s value is to improve its profitability. The more money you make in your practice, the more your practice is worth. But some of the variables that determine price are beyond your control.
One of these variables is interest rate. The basic reason is simple. When borrowing money is cheap because of low interest rates, buyers can afford to buy a bigger practice. Money has been cheap for almost ten years now, but it’s about to get more expensive. It’s therefore likely that practice values will be decreasing.
But things aren’t looking rosy on the buyer’s side either. While it might make sense at first to wait for practice values to decrease, this is probably not the best strategy. When interest rates go up and borrowing money becomes more expensive, the actual cost to buyers also increases.
Let’s explore this in more detail.
As you know, interest rates tell you how expensive it is to borrow money, or, in other words, how much you will have to pay to the person or institution with the interest in the loan.
The rates that regular folks receive when they go to borrow money depend on the rate at which banks can borrow money, and those rates are set by the Federal Reserve, an independent institution created by Congress in 1913 to address bank panics. These days, the Fed works to promote a healthy economy and banking system.
One of the roles of the Fed is to address inflation and stagnation by adjusting the rate banks can charge each other for overnight loans. These rates filter down, both directly and indirectly, to affect the interest rates attached to loans for dental practices.
While monetary policy is complicated and goes beyond the scope of this blog post, what you need to know is this: since 2009, interest rates have been set at historic lows. Now the market is bracing for them to go up.
What does this mean for practice values?
The interest rates attached to loans affect how much practice a buyer can afford. Higher interest-rates lead to higher monthly loan payments for buyers, thereby reducing the potential cash flow to a buyer of a given practice. This reduces buyer-purchasing power, disqualifying some, and reducing the overall number of available buyers in the marketplace.
Imagine that you’re looking to purchase a practice for $600,000. A 10 year note for $600,000 at 4% interest will cost you $728,964 over the life of the loan. The same loan at 8% interest will cost you $873,558.
That’s a difference of $144,594! The difference in monthly payments is $1,205. This means that the doctor who borrowed at 8% has to earn an extra $1205 each month to take home the same amount of money as the doctor who borrowed at 4%. These market forces clearly affect what buyers can or will pay.
When interest rates go up, monthly debt service increases. If debt service goes up by $1,000, the buyer’s net income decreases by $1,000. Lenders are acutely aware of the additional drag on cash flow due to higher interest rates and they loan correspondingly lower amounts, which also drives down practice values.
Here’s the bottom line. If you’re thinking about buying or selling a dental practice, consider selling it now, before the market starts reacting to the changes on the horizon. And if you’re ready to buy or sell now – or just have questions about your options – Integrity Practice Sales is here to help.Read More