It was inevitable, the extended time of ‘free’ borrowing has come to an end.  With the pandemic, and post-pandemic, stresses on the economy, demand continues to exacerbate supply chains throughout the world and in working to ease inflation, the Federal Reserve has taken the steps it can, increasing core interest rates quite rapidly. 

What does this mean for your dental practice?

Selling a dental practice

If you are looking to transition your practice, valuations may be affected by the cost of inflation and the cost of funds.  Your practice expenses are likely rising (especially noticed if you have had to hire clinical staff in the last 12 – 18 months) which is probably affecting your net income. Simply put, in most cases, lower net income equates to lower value. Potentially buoying pricing, for much of the country though, is that same supply and demand strain that is pricing up groceries, fuel, travel, home improvements, and more.  We are still seeing more purchasers looking to buy than there are Sellers ready to sell.

Buying a dental practice

On the Purchaser side, the review seems mostly mechanical.  It is important to understand that the price of a practice has little significance on the actual cash flow for the right practice opportunity.  By quick example, for a five percent note, over the ‘industry standard’ 10-year period of lending, $100,000 financed is roughly $1,061 per month.  Equating to the real world, the difference in price between $650,000 and $750,000 is roughly 1 additional crown[1] or 3 core build-ups[2] about every 6 weeks. So, more important is your “match” to the practice and then sufficiency of net income, after paying debt service, to accommodate your lifestyle and expenses. 

Beyond the purchase price, though, there is a clear concern of rising interest rates affecting affordability.  First, practice acquisition lenders are forward-looking, working diligently to secure funds at the lowest possible rates to remain competitive.  Second, rates are not always specifically tied to the Fed Funds (lender dependent) rate.  Third, in the environment we are in, the interest rate will probably not make or break the deal.  Interest rates for practice acquisitions were, at one time, 15% to even 20%.  Even in the last 20 years, they were as high as 8-10%.  Now, we are talking about the difference between roughly 3% in 2021, and perhaps 5% to 5.5% today.  But what does that mean?  Let’s look at the repayment of a $750K loan (practice acquisition and working capital) paid over the 10-year repayment period.

As illustrated, the 1% rate increase equates to 1 core build-up per month[3].  The full 3% increase from 3% to 6% is more than covered by 1 additional crown[4] about every 6 weeks.

So, in the end, it’s reasonable to ask whether price and rates matter?  Of course, yes, its just to what extent which also may be further driven by supply, demand, and opportunity/desirability.  While it’s possible that variations in rate or price could affect affordability (or the ability to obtain financing), it’s likely that other factors are much more important. 

Whether you are a current practice owner or anticipate being one soon, as expenses are rising, both by interest rates and inflation, it’s important to keep your practice current.  As always, we advocate annual (if not more frequent) UCR fee adjustments and in-network PPO fee schedule negotiations.  Costs change annual and the expense of not updating your fees can be felt significantly longer than the single year over year – it’s incredibly difficult to make up for lost fee increases so a regular review of your practice expenses and fees can prove valuable in the short (cash flow), middle (retirement funding) and long terms (sale price). If you need help approaching either or would like a further review of your practice procedures and fees, please reach out to your local Henry Schein Dental Practice Transitions representative and we will be happy to get you the right resources. 

We’ve been here before and found that the sky is not actually falling.  Most dentists do not spend the time and money to acquire professional degrees just to go to work for someone else. Acquisition and ownership are still very affordable, attractive, and obtainable options but understanding the landscape is vital.

[1] D2740 / D2750 from the NDAS 2022 Survey of National Values, P80.

[2] D2950 from the NDAS 2022 Survey of National Values, P80.

[3] D2950 from the NDAS 2022 Survey of National Values, P80.

[4] D2740 / D2750 from the NDAS 2022 Survey of National Values, P80.