If you’ve been considering buying a dental practice, a part of you may be inclined to wait until things stabilize to make a move. However, the shifting landscape is actually opening a unique window of opportunity for buyers. The wide-reaching economic pause, combined with more time for introspection, has led to more buyers and sellers to reassess their plans and timelines. For many, this experience has emphasized the importance of creating a self-sufficient, stable future for themselves, making now a natural transition time for many.
As we’ve discussed the current market with an increased number of buyers and sellers, as well as our wide network of dental industry professionals—lenders, CPAs, business valuators, lawyers, other DDSmatch transition specialists—we’re finding a consistent theme: dental practice transitions are still not only possible, but quite active.
In particular, many buyers we’ve been in contact with recently were thinking only casually of making the transition from dental associate to owner before COVID-19. Naturally, many of these dentists are using this experience now to take stock, wondering whether they want to continue to be subject to an employer’s financial limitations or decision-making in the future. On the other hand, some selling doctors are motivated by the result of COVID-19, as they come to realize they prefer early retirement over a recovery effort.
Regardless of the reason, transition is in the wind for many. If you are thinking about a transition, you may find within your current options a reason to move rather than to wait. Now is the perfect time to gather the information you need to take the wisest course of action toward your long-term plans.
Below we’ll discuss some factors to be aware of as you make your decision.
Will a Dental Practice Valuation Be Reliable?
As we’ve had conversations with dental industry professionals, the consensus continues to reflect that business valuations will work similarly to the way they did before. In the past, the most common method was income valuation, where you look at the specific economics of a practice (production, collections, overhead, etc.) over the three previous years. Basically, the idea is that the valuator would focus on 2019— the period with the most relevant data currently available—to establish a baseline for the historic performance of the practice. Next, the valuator would look at how the practice is performing post-COVID by examining 30-day “snapshots,” and annualizing those results and comparing them to the pre-COVID numbers. If the practice is heading towards 80% of its pre-COVID numbers in the first few months of reopening, that is a strong indicator to lenders that it’s on a path to recovery.
What About Loss of the Patient Base?
In nearly every area, if one dental practice was closed due to the pandemic, they all were closed. The competition was also shut down, so no new practices were opening and syphoning off patients. Patients are highly likely to return to their previous dentist. While their treatment schedules have been pushed out, most will go back to their regular office as soon as it is able to provide the treatment they need.
There will likely be a backlog of patient needs post-closure, which early on may help fill the books. However, this isn’t to say all your patients will pick right back up where they left off, as some have lost jobs and insurance. This may cause them to push treatment out further, or put off certain aspects of their treatment.
But again, all of the dental practices in your area are going to be having the same experience. A proactive, patient-focused reopening will help you retain your base. As a potential buyer, this will be something important to look at when considering buying a dental practice. Our buyers are asking, “How has the practice responded to this? Are they simply doing business as usual, or are they creative in their effort to retain patient loyalty and appointments?”
In addition to competitive and retention factors, the tactical responses required by COVID-19 will impact the practice of dentistry for at least the near future. Practices may incur new costs as they adjust their procedures, pricing, marketing, and other aspects of the business. When considering a practice, you will now need to look closely at the COVID-19 related costs and limitations to be certain they remain proportional to earnings.
Will I Be Able to Get a Loan?
Dental practices have always been considered a good risk for lenders as, historically, this industry boasts some of the lowest default rates. Currently, lenders are indicating there is no change to this assessment. The present crisis is being viewed as an interruption of business for dental practices, not a change to it. Nothing about it has fundamentally altered the nature of dentists or the dental practice business.
The lender will likely take a similar approach as the business valuator. They will look at 30 to 60-day snapshots of the post-COVID financials, focusing on production and costs, annualize it, then compare it to the 2019 numbers. If that shows the practice is on track to getting back to 2019 levels of production and costs remain proportional, lenders will likely view the practice as being worth what it was in 2019.
That said, you may find that the application process will change. This aspect is where we see the most variation among lenders with whom we’ve spoken. Ultimately, there are a variety of approaches and most are assessing deals on a case by case basis. Some lenders will prioritize certain buyers (those with more cash in the bank or a stronger track record of production), and some may collect applications and cherry-pick the strongest ones. And some may want to hold off on lending at all until further in the future.
This may require a little more effort on your part as you do your due diligence in selecting a lender. You may find you are being looked at more closely than you would have been before, and the process may take longer. But if you are a strong candidate for a loan, you shouldn’t have trouble finding a lender who will want to work with you. In addition, as there is currently a lot of political drive behind financially supporting small businesses in this crisis, further recovery stimuli and loan packages may further brighten lending prospects.
What Should I Do to Prepare to Buy a Dental Practice?
If you think you are ready to take this step, here are some things you can do to get ready:
- Be flexible. This has always been advisable for practice transitions, but now it is more important than ever. It is not yet clear how the practice transition process will evolve, and those transitioning now will be paving the way for that evolution. Success is well within reach if you are committed to remaining flexible, open, and patient.
- Assemble your team of advisors. You will need a group of trusted professionals — at a minimum, you should have a dental-specific CPA and tax professional, dental-specific attorney, and a lender with dental practice experience — to help you plan for and make decisions about buying a dental practice. Even in the best of times, practice transitions are complex transactions. You’ll need people around you to help you understand what the numbers say, see where the pitfalls are, what your obligations are, and how to best plan for success.
- Be prepared to do your due diligence. Now more than ever, it will be essential that you properly undertake a thorough review of every aspect of the dental practice you are considering. You need to understand what you are taking on, being certain that you are comfortable with it and ready to meet the challenge, and able to envision what you can bring to the practice. As practices will be adapting post-COVID, you need to look carefully at the logistics of those changes to be certain they are both adequate and sustainable.
- Understand what the practice means to the seller. For the seller, this is not just a financial transaction, liquidating an asset. A dental practice transition can be a highly emotional event. For the selling doctor, the practice represents a life’s work, often involving close personal relationships. It can be the dream they realized, or a place of complicated life memories. Even doctors who are ready to step away will have deep and mixed feelings about letting it go. Be mindful of this as you engage in negotiations and make arrangements for transfer of ownership and control to ensure an outcome where everyone feels good.
- Understand what you are buying. Likewise, when buying a dental practice, you are buying a career. This is what you will be putting your time and energy into for decades — it will become your life’s work. This means that, beyond the financial aspect of the practice, you need to be certain that it’s the kind of practice in which you want to be engaged, and a community in which you want to live. You are buying someone else’s legacy and using it as the foundation for building your own legacy.
- Consider “the right fit.” Bringing the last two points together, the selling doctor and the buying doctor need to be well matched for a successful dental practice transition. You need to consider the type of dentistry and location, but you also need to remember that a successful practice was made that way because of the doctor who ran it. That doctor’s personality, philosophy, and relationships with their staff, patients, and community are essential factors in the success of the business. While you don’t need to do everything the way the seller did, you do need to be compatible with those aspects of the practice that have kept patients coming in for treatment and kept employees happy and productive.
How Can I Protect Myself With All of this Uncertainty?
There are definitely a lot of uncertainties right now. As mentioned, it is not yet clear how the practice transition process will change. Many buyers and sellers that had deals lined up pre-COVID have had to pause and reassess. As the summer begins, some of them are now moving forward as planned, while others are still on hold. We are also seeing some restructuring of deals to account for increased risk to the buyer in this uncertain time.
In the past, there were obligations on the selling doctor to help protect against patient attrition (a letter to patients, working in the practice with the new doctor during transition) to ensure a successful transition. While these things remain important, it’s less certain that they will be as effective on their own as they have been historically. It is simply too soon to tell how it will all play out across the board, so transitions happening right now will require practice-specific attention and up to date expertise to ensure your success.
One new thing we are seeing arise in deals is something called a “holdback.” This is where a percentage of the selling price is placed into escrow for a period of time after the sale. If, during the “holdback” period of the transition, the practice hits specified performance benchmarks, the money is released to the seller. The inclusion of a “holdback” (as well as its terms) is obviously negotiable, but it is a new reality that may need to be considered in the future, as it was already becoming a standard practice in other industries prior to COVID-19.
As you can see, new risk-mitigation measures such as this are an added cushion that can protect you as a buyer in less predictable times in case the practice doesn’t bounce back as quickly as expected. As you look at buying a dental practice, discuss this option with your attorney and CPA to determine whether this or another strategy would be most appropriate.
DDSmatch Mid-Atlantic Has Available Dental Practices for Sale
Here at DDSmatch Mid-Atlantic, we represent selling doctors. However, we strongly believe it is essential to have a good relationship with the buyer. This means we advocate for transparency, clear communication, and flexibility among the parties, and are always looking for quality buyers to create the perfect match. For us, success is determined by whether everyone walks away from the table happy with the deal.
To that end, we keep information flowing through open lines of communication and work to smooth out any bumps along the road, working towards mutually agreeable solutions where everyone wins. If you are considering buying a dental practice in the Maryland, Virginia, or Washington D.C. areas, you can view our available practices here. If you’d like further information about our available practices, or wish to discuss any dental practice transition you are considering, please contact us today.