Is 2020 a Good Year to Buy a Dental Practice?

January 24, 2020 | Trevor Kimball, PhD | ,

Your dream doctor. Cheerful dentist looking at camera with smile while sitting in dentist’s office

Update: Some months later, this article might seem somewhat outdated. But I think the fundamentals remain as true as ever. With the post-COVID recovery already well underway and dental practices producing near pre-COVID levels across America (something many other businesses cannot say), the outlook for practice ownership is as good as ever.

 

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.

  1. The economic outlook for practice ownership is good.
  2. 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 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 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!

Assume that a conservative 25% of the practice production comes from your hygiene department. If you continue to produce $800,000, then your hygiene department 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

 

The difference after 20 years (10 years of no loan payments):

Associate: $4,000,000

Owner: $7,446,080 + Tax Savings + Equity

 

The 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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Trevor Kimball, PhD