Timing The Market

Why This Might Be THE Year to Consider Selling Your Practice

As practice transition specialists, we are often asked “Is now a good time to sell my dental practice?”  While many factors are involved in deciding to transition your practice, the short answer is YES.  The current practice transition environment features several attributes that are helping to enhance practice value and make it an ideal time to consider a practice sale:

1. High Demand – The strong profitability of dental practices and the poor economic outlook in medicine have caused a significant increase in dental school applicants over the past 10 years.  With 66 dental schools operating in the United States, the number of graduates topped 6,000 in 2017.  Combined with the rapid emergence of DSO/Private Equity buyers (in some markets), the pool of potential buyers has increased dramatically over the past few years.  This trend is expected to continue shortly.  With a surge in the number of potential buyers comes an increase in the demand for quality practice acquisition opportunities.  

2. Limited Supply of Acquisition Opportunities – Many doctors who are well within retirement age have delayed the sale of their practices due to the recession.  As a result, there have been a relatively fixed number of practice acquisition opportunities available over the past few years.  The increase in demand, coupled with a limited supply of quality opportunities, has resulted in an increase in the value and marketability of dental practices.

3. A Divergence in Practice Values – While the values of large, updated offices with annual revenue over $1 million and substantial cash flow have increased dramatically over the past 3 years (largely due to the emergence of DSO/Private Equity buyers), smaller, antiquated practices with revenue of less than $400,000 and limited cash flow have been declining in value and are becoming increasingly more difficult to sell.   We expect this trend to continue in the future due to the expectations (in regard to the facility, equipment, and technology) and significant living expense needs of most young dentists.

4. Low Interest Rates.  Due to the fact that most buyers rely on third-party financing to fund practice purchases, interest rates and the availability of capital play a major role in practice value and transitions.  Despite recent increases, interest rates are currently near an all-time low and numerous lenders are offering 100% financing plus working capital to qualified buyers.  The current availability and low cost of capital are allowing buyers to comfortably afford to purchase practices and fueling the increased demand for quality practice purchase opportunities.

5. High Cost of Practice Start-Ups – Another contributing factor to the increase in practice values is the rising cost of establishing a new dental practice.  The prices of dental equipment, technology, and leasehold improvements have increased dramatically over the past decade, resulting in an average cost of approximately $500,000 to start a practice from scratch.  Combined with the significant living expense needs of most dental school graduates (due in large part to a high level of student loan debt) and the time and cost required to start a practice and generate a profit, many doctors are focusing on purchasing an established practice rather than pursuing a start-up.  Real estate agents who focus on dental office space have also commented that private practices are struggling to compete with large corporate practices for prime dental locations.   

6. Increasing Burden of Management.  More now than ever, dentists must be proficient in managing the business side of their practices to be successful.  We have seen many established doctors experience an increase in their stress levels over the past few years regarding managing staff issues/turnover, dealing with PPO plans, implementing an effective marketing plan, controlling overhead, etc.  There are currently transition options available to doctors who desire to lighten their management burden, cash out the value of their offices at the peak of the market, and continue working at their offices until retirement.

7. Adverse Changes in Future Market Conditions.  While market conditions are currently very favorable for sellers, we are expecting several changes to occur over the next few years that will likely put downward pressure on practice values, including:

• Increasing Number of Acquisition Opportunities – As the baby boomer generation reaches retirement age and the economy and stock market soar, more and more sellers will enter the marketplace.  Therefore, it is expected that supply and demand will eventually reach equilibrium and it will no longer be a “seller’s market.”

• Increasing Interest Rates – Interest rates for dental loans have increased by more than 1% over the past year and are expected to increase another 1-2% over the next 24 months.  Since most buyers are relying on 100% financing from dental lenders to fund their practice acquisitions, a significant increase in interest rates will harm the buyer’s cash flow and could adversely impact practice values.

• Increasing Number of Female Dentists – The demographics tell us that there has recently been a substantial increase in female dentists entering the marketplace.  While female dentists make excellent practice owners, many of them will likely choose to work part-time and/or refrain from pursuing practice ownership opportunities, which could lead to a decrease in demand.  

• Other Factors – Downward Pressure on Pricing (from PPO plans), Upward Pressure on Overhead (technology, marketing, etc.), Increasing Competition (growth of corporate dentistry), Increasing Management Burden (discussed above), and Rising Student Loan Debt

The factors we have discussed in this article make 2019 an ideal time to consider selling your practice.  If you are considering a practice transition, don’t go at it alone.  A practice broker will help you formulate a transition strategy to meet your individual needs, confidentially market your practice to find a buyer who is the right fit for your office, provide a structured closing process to facilitate a smooth and timely transition, and maximize the value you receive for your practice.