Why it’s a Good Idea to List Your Dental Practice for Sale in 2021

Recently, Todd Garfinkel, of DDSmatch Mid-Atlantic, spoke with Matt Howard, a dental CPA, certified business valuator, and Senior Manager at Blue & Co.—one of the nation’s top accounting firms specializing in healthcare—to discuss the current state of dental transitions and whether now is a good time to list a dental practice for sale. Their conversation was based on the dental practice transactions that DDSmatch Mid-Atlantic and Blue & Co. had each been involved in since the spring of 2020, and their interactions with other professionals involved in dental practice transitions. 

As Todd noted, “we’re lucky enough to touch a whole lot of different corners of the dental industry . . . A lot of work with bankers. We’re touching dozens, literally, of bankers, and communicating with them regularly, so we’re understanding what their take is on the market and what their process is for lending. We work a fair amount with lawyers, of course accountants, distributor reps, consultants, insurance representatives, lease negotiators, you name it, we’re touching it. We’re able to keep our finger on the pulse of what’s going on in the industry as a whole, not just in our little corner, so to speak. We get to see a pretty good bandwidth of what’s going on in dental.”

Based on this experience, Todd observed, “I’m happy to hear that the overall energy around practice transitions has been, and continues to be, very high. It’s been extremely active from both the seller and the buyer perspective. And I think, moving forward, we’re going to see it actually increase even more.” Matt Howard agreed, saying, “we did over 300 dental valuations last year” and “I’ve never been more bullish on the dental industry than I am today. I really do believe it is thriving.”

If you are considering listing your dental practice for sale, below we highlight some of the things you should know about dental transitions in 2021.

It’s Currently a Seller’s Market for Dental Practices

While DDSMatch Mid-Atlantic represents only sellers, Blue & Co. provides a number of dental accounting services for both buyers and sellers. Based on his experience in 2020, Matt reports that “there is a lot of buyer activity.”

When practices were forced by local regulations to shut down in early 2020, it drove a larger number of associates to the market. Some simply lost their jobs. Without income to pay employees, and with the restrictions of reopening that limited capacity, some associate dentists found their employers couldn’t afford to bring them back. In other instances, associate dentists saw the precariousness of being employed, as opposed to owning their practice, and decided the time was right to make that step into practice ownership.

Matt reports, “Buyers are interested because they understand that there is opportunity right now to make a change, and to own a practice, and to benefit from the ownership of the practice. I still think in those hot areas, we’re in a seller’s market, as in there’s not a lot of inventory sitting out there waiting to be transacted on.”

He also says that, in his experience, buyers right now “are coming to the table and are asking some good questions . . . They really want to understand the data, and their representatives do, too, to help them get as good of a picture of what they’re buying and how COVID impacted the practice. That is probably the number one thing on the minds of both banks and for buyers.”

Todd says this reflects his experience as well in representing selling doctors. “We continue to see buyers be really strong. There’s . . . a good active pool. They’re looking for that job satisfaction . . . They understand that ultimately they want to be an owner and have their own place. So it’s been really active, and it’s been fantastic.” 

Todd also agrees that these “buyers just want to be reassured that what they’re buying is the value that they’re expecting.” This leads to the next question— how are practices being valued in light of the COVID-related disruptions?

2021 Valuations are Taking the Anomalies of 2020 into Account

If you were thinking about listing your dental practice for sale, you might be concerned about the fact that your practice was closed for a month or more in early 2020, and that when you reopened you had increased PPE costs, reduced capacity in your waiting room, and longer turnaround times between patients. 

These are real concerns. Fortunately, however, dental CPAs and other dental professionals all across the country understand that these circumstances applied to nearly every practice and those anomalies of 2020 can be accounted for. As Matt explains,

“Most parts of the country had some impact in March, April, and May, typically the months that we’re seeing where, obviously, we were either shut down for a period of time, or all of that time . . . And then all of a sudden we reopen and we try to figure out what all the procedures are for COVID and how we’re going to handle it . . . But in the end, what I’ve seen over and over again, and I probably worked on 200 or so valuations since the closure, is we came back very strong in most cases . . . So we had three or four months of just better numbers than most practices have seen in general in their entire existence. And that’s that pent up demand, the industry trying to make up for two lost months, or three lost months, depending on where you’re at in the country.

“So here we have two normal months at the beginning of the year before COVID really hit. We have two or three months that were very impacted by COVID and shutdowns. And then we have three or four or five months of insane activity. And then we have the six month anniversary, from a hygiene recall perspective of COVID, so two more months [where] some practices still were very busy during that time, some were a little bit softer. In the end, we have all [these] ups and downs in the integrity of the data, and it’s just going to make for a lot more looking at that data and making sure that whatever we use in our valuation is really the expectation of what is going to continue on in the practice post-COVID.”

What this means is that any anomalies in your practice revenue last year are likely similar to most of the other practices out there. So, in terms of valuation, these months of ups and downs in 2020 have to be regarded as an exception to how the practice typically performs. The typical baseline can be determined by looking at the individual months and piecing together a 12-month picture by using months outside of the COVID shutdown. As Matt further explains, 

“We are taking each month, and the profit and loss statement is basically the revenues minus the expenses, and that shows the profitability of the practice. We are trying, in any case where we can get this type of data from the practice, we are trying to get each month of data for all of 2020. And that way . . . we can parse out those months that were most impacted by COVID. And what we can do is . . . take out all three months [that] were a wash for your practice, March, April, and May. We’ll take those out, and either tack on some of 2021 that we already have finalized, or going back into 2019 and adding on maybe November and December of that year. That way we can have 12 full months of data without the craziness of those two or three months”

Having done this for literally hundreds of dental practices from all across the country, Matt reports that the consistent trend he has seen is that “most practices were either proportionally down for the 15% of the year or so they were closed. They were either down by that 15%, or they made up for it. I’m seeing over and over and over again, a lot of practices had their best year ever, even without making any adjustments in 2020, or close to 2019 performance.”

The next question is, if you understand this about your own practice, and the dental CPAs understand this, do the dental lenders also understand this impact?

Lenders are Eager to Fund Dental Practice Sales

The short answer is yes. Todd says the banks are “definitely lending money right now.” He continues, “During the heart of this COVID fiasco that we’ve dealt with, there were varying degrees of open lending. Most of them were lending money, but they had tightened up their requirements. But right now, they’re definitely funding dental practice sales, and they’re eager to. I mean they’re actually hunting down and aggressively pursuing transition deals.”

Todd also explains that lenders understand what Matt laid out about how to accurately value a practice in 2021, he explains,

“They’re not taking 2020 as a whole and considering it, because it was so up and down and a roller coaster. Not only did we have a shutdown, but then we had this surge coming back into opening up the offices, and then things kind of dropped, and then leveled out, and up and down. So instead of taking the year as a whole, what most banks are doing is taking monthly P&Ls, so they might request the entirety of 2019 and 2020 in monthly P&Ls. And that allows them to compare month over month your 2020 to your 2019 and see where the practice is in relative terms to pre-COVID.”

What lenders want to determine is whether dental practices for sale in 2021 are “back to a substantial amount of where they were pre-COVID . . . What they’re mostly looking for are practices to be in the 80 to 90 percent, or above, of where they were pre-COVID, and that kind of satisfies them from the practice’s perspective.” Also, before the loan funds, “they’re going to look back at the previous 60 to 90 days just before that point and verify that the practice is still on track and still doing relatively well compared to 2019.”

Matt concurs, saying, “lending for dental is still extremely strong and healthy, and I’d say 100% financing is the rule, not the exception” and that interest “rates are really low, and we think they’re going to stay that way for at least a while longer.” Matt also says, however, that selling doctors should be prepared to provide more financial information than they may have had to in 2019. “The only other thing that the banks are really requesting, and this is a lot from the seller side, is data. They really are looking for more data than they did pre-COVID, so they’re just looking for understanding, reassurance, that the practice is still continuing to at least trend or be at consistent with 2019 numbers than it was in 2020.”

If You are Considering Listing Your Dental Practice for Sale, Talk to Your Advisors

As a dental practice transition specialist, Todd recommends that “if you are considering selling your practice, either currently or in the next few years, it’s a great time to start having a conversation with your trusted advisors . . . Your CPA, your lawyers, your consultants, a good solid dental broker, even if it’s a ways off, it’s important to start to have those conversations. If you have a plan in place, things are going to go a whole lot better than if you’re just kind of working from a more immediate perspective.” He explains, “We’re very, very happy to have conversations years in advance in order to advise and coach. I know the other professionals who we are associated with feel the same way.”

At DDSmatch Mid-Atlantic, Todd explains, “We center our business around a couple of key principles—one of the main ones being transparency. We’re really big on finding the right fit for each of the practices that we’re working with. We’re centered also on helping doctors who are selling their practice, transitioning their practice, to meet their goals financially, as well as helping the one who’s going to take over the legacy that they’ve built, to create what’s going to work for them, their staff, and their patients.”

That last part is essential and key to what sets DDSmatch Mid-Atlantic apart from other dental brokers. “We’re more about making this a win-win transition than we are about making it a transaction,” says Todd. “And the transaction is really important . . . but we lead with the fit, and the transition, and the goodwill, and that’s really what’s being purchased.” 

Finally, DDSmatch Mid-Atlantic makes sure “the clients we work with know that they’re in control of the direction that the process will take. We’ll guide it, we’ll advise along the way, but it’s important for us to fulfill the vision of the sellers that we represent.”

If you are considering listing your dental practice for sale, contact DDSmatch Mid-Atlantic today and find out how we can help you meet your practice transition goals.