The rebound of dental practices from the pandemic has been extremely strong, with the most recent American Dental Association (ADA) data showing that patient volume is at 90% of pre-pandemic levels. For most practitioners, economic confidence is very high. Many practice owners who put sale plans on hold during the COVID-19 pandemic are revisiting their plans.
“It’s a seller’s market, with many practice values rebounding from 2020 or exceeding their pre-pandemic levels,” says Dr. Thomas Snyder, senior director of transition services with Henry Schein Dental Practice Transitions. “Bank lending is also very strong, and interest rates remain low.”
Practice valuations vary based on dental location, earnings/cash flow, and other factors, but anecdotally, the majority of sales of practices around the country are between 60-85% of their prior year’s gross revenues.
Conducting practice valuations
A practice valuation is an objective assessment that can help a doctor set a fair sale price on the open market. There are three different methods used to determine the value of a dental practice:
- Market approach simply looks at comparative sales statistics. This method considers what practices sell for in a particular market, as well as the goodwill value and profit margin of those sold practices.
- Income approach determines what the true earnings and cash flow are of the practice. This is the approach most commonly used by certified public accountants (CPAs) to value practices, and is what large groups and dental service organizations evaluate when deciding to invest in a practice.
- Asset approach considers the value of tangible assets, equipment, technology and leaseholds, as well as the goodwill of the practice.
Now is an opportune time for young doctors to purchase a practice, as well as established practitioners to buy another practice, due to attractive lending conditions. Based on data from national dental lenders, currently, most loan rates are between 2 – 4%, with higher risk loans at a higher rate. Terms are generally up to 15 years.
The Small Business Administration found that the failure rate of dental practices is less than 1.5%, which makes them an attractive type of business for banks to fund. Although some dentists have high student loans, recent statistics show that 20% of young dentists have no debt, according to the American Dental Education Association’s annual survey. “Even for doctors who owe $400,000, based on their credit history and the business they’re interested in buying, you may be surprised that banks will fund them,” says Dr. Snyder.
Anecdotally, Henry Schein Dental has found that many lenders are covering up to 90 – 100% of gross receipts.
Securing a loan does take some time. A general rule of thumb is to allow three to six months, or potentially nine months in outlying areas from start to finish, for the sale of a practice.
Building your team
If you’re considering selling your practice, it’s wise to engage with a team experienced in dental practice transitions. This starts with a financial planner. They can provide strong, objective advice, based on the assets and liabilities you have, your lifestyle, and your financial targets after retirement. They will also want to know if selling the business is a financial necessity or simply a quality-of-life decision, as this can impact the timing and other factors of the sale.
Your financial planner will gather a wealth of data about your practice and support you in making decisions about achieving your retirement plans and making decisions around the timing of the sale (e.g. at what age it makes the most sense to retire). They can also help you assess the elements of the potential sale. For example, if you own your building, they can determine whether it makes sense to sell the real estate with the practice or to keep it as a source of rental income.
A broker can then work with you to value your practice. This is based on a three- to four-year look back, although brokers will discount 2020 as a one-time event. They will look more closely at the last 12 months of financial performance.
An experienced broker is particularly helpful if you don’t have the time or resources to interview potential buyers and can facilitate the steps needed to keep the transaction moving forward. They can save time in the process, screening potential buyers to ensure they’ll qualify for a loan and will be a good fit for your practice.
Many doctors choose to hire a broker because they have an inventory of qualified purchasers, but the broker’s job shouldn’t end there. It’s best to work with a broker who will be fully engaged in the transaction and help you get the maximum value and to find a buyer you’ll be proud to take over your patients. Brokers should have deep knowledge of the local market, and also have strong ties to lenders, attorneys, and CPAs who are well versed in dental transactions.
Despite the pandemic, today’s economic conditions are fruitful for those looking to buy or sell a dental practice. If you’re considering selling, start early so you’re not rushed in finding a buyer. The first step is to put an experienced team in place. They can help you navigate the complexities of buying/selling. This will prove helpful for keeping the transaction moving forward smoothly to achieve your financial goals.
Interested in selling your dental practice or investigating your transition options? Henry Schein’s dental practice brokers are ready to help. Schedule a 30-minute complimentary consultation call today.