Turn on the news and it doesn't take long to hear about interest rates, inflation, housing affordability or uncertainty in the economy. As of late September, the average 30-year fixed residential mortgage rate has again moved above 7%. Understandably, we hear the question from both Sellers and Purchasers: What does all of this mean for the dental practice market?
Perhaps less than you think.
Dentistry remains a somewhat unique business. A well-run dental practice can generate significant cash flow without the inventory, facilities and other capital requirements found in many businesses. More importantly, people continue to need dental care regardless of where we are in an economic cycle.
For a prospective Purchaser, that cash flow is what really matters.
It is also important to understand that dental practice acquisition financing does not behave exactly like residential mortgage financing. While the average 30-year mortgage is currently just over 7%—7.03% according to Freddie Mac’s most recent weekly survey—rates available through our preferred dental acquisition lenders are generally around 5%. Money remains readily available for qualified Purchasers acquiring appropriately priced practices.
Could those rates increase? Of course. But dental acquisition rates do not necessarily move in lockstep with mortgage rates. Specialized dental lenders understand the industry, have significant experience underwriting practice acquisitions and are lending against an operating business with an established earnings stream. Competition among these lenders also continues to benefit qualified dental Purchasers.
We’ve actually been here before.
Interest rates for dental practice acquisitions have been considerably higher at other points during our careers and practices still transitioned, Purchasers still became owners and Sellers still successfully retired. Rather than focusing solely on the interest rate, a Purchaser should be asking a more important question: What does the practice leave me after paying the operating expenses and acquisition debt?
Consider a $750,000 practice acquisition financed over ten years. At 5%, principal and interest is approximately $7,955 per month. Even if that rate increased a full point and a half to 6.5%, the payment would be approximately $8,516—an increase of about $561 per month. Does $561 matter? Certainly. But should it be the reason a qualified Purchaser walks away from the right practice producing sufficient cash flow? Probably not.
There is another important distinction. When you finance a home, the mortgage payment is an expense funded by your income. When you finance a dental practice, you are acquiring the business intended to generate that income. The question, therefore, isn’t simply “What is my interest rate?” but whether the practice generates sufficient cash flow to pay its expenses, service the acquisition debt and provide the owner with an appropriate income and return on their investment.
For Sellers, the message is similarly encouraging. Purchasers are still looking for good practices, financing remains available and healthy practices continue to attract attention. Our own recent transactions continue to demonstrate that well-positioned practices can generate significant Purchaser interest.
Does that mean interest rates and the economy don’t matter? Of course not. Rates affect debt service, inflation affects practice expenses and economic uncertainty can affect everyone’s confidence. But those are pieces of the equation rather than the equation itself.
In all, today’s market requires thoughtful analysis, but that isn’t necessarily a bad thing. Purchasers should focus on sustainable cash flow and Sellers should focus on maintaining healthy, transferable practices.
The headlines will change. The fundamentals of dentistry haven’t changed nearly as much.
For the right Purchaser and the right practice, ownership remains affordable and attainable. For a well-prepared Seller, there remains a marketplace of Purchasers with access to capital.
Reasonable deals still get done in reasonable markets.
