Originally published on TheDentistsNetwork.Net
By Thomas L. Snyder, DMD, MBA, Senior Director | Henry Schein Professional Practice Transitions
As 2019 draws to a close and you look ahead to 2020, this may be an important year regarding your practice transition plans.
A growing number of doctors are retiring annually, as many dentists who delayed their retirement plans in 2008 through 2010 have now reached a point where it’s time to finish their careers. According to the ADA Health Policy Institute, there are approximately 4,800 dentists retiring annually. They also noted that 1 in 8 dentists, 40 or younger, are moving across state lines. However, the American Dental Education Association reported that the number of dental graduates exceeds 6,300, so there is still an imbalance between potential Purchasers and Sellers, making it a “Sellers’ marketing” for many practitioners. This means that there is an increasing number of young doctors implementing practice transition plans.
So, if you are planning to sell your practice in 2020, can you get maximum value for your practice? Well, the answer is: it depends. The most important factor which will impact your practice’s value is its location. Practice values continue to remain at record levels in many parts of the country. The Henry Schein Professional Practice Transitions Practice Sales Database reveals that in many urban and suburban areas that are considered highly desirable, sales ratios range between 70 to 85% of last year’s gross receipts and in some markets, General Practices are selling at ratios in excess of 90%. How long will this trend last? No one really knows. This is a classic example of supply and demand forces working to affect prices!
For those doctors who are solo practitioners, some trends need comment as it relates to our younger generation of dentists. The ADA’s Health Policy Institute recently reported that only 1 in 5 dentists under the age of 35 want to be a solo practitioner! With about 50% of dentists still being classified as solo practitioners, this trend could have an impact on your transition planning as the supply of doctors who desire to own a solo practice is definitely limited.
Also contributing to the high value of dental practices is the continued growth of Dental Support Organizations (DSO) and large group practice networks. There is a great deal of competition amongst these groups, often driving practice sale prices even higher. It is not just the continued growth of DSO’s impacting the dental profession, multiple office ownership continues to increase as well. Younger private practitioners have the desire to own more than one practice. So, if you are looking for maximum practice value, 2020 may be the year to achieve that goal!
On the dental lending front, interest rates remain low and large increases in rates are not anticipated in 2020. Lender requirements relating to acquisition loan underwriting have become more stringent. For practices with higher gross revenues, some banks may require the Seller to hold a Promissory Note for a portion of the sale price, as they want assurances that the Purchaser can maintain the production levels of the Seller. The Promissory Note can be converted to cash within one to two years after the sale, providing that the Purchaser meets the financial goals set by the banks. This Seller “holdback” usually varies between 10 to 20% of the sale price.
New data from the American Dental Education Association reported that 39% of the Class of 2019 had educational debt in excess of $300,000, yet these new doctors can still qualify for financing of practice acquisition loans. Credit requirements continue to be stringent, so good payment history and satisfactory FICO scores maintained by loan applicants are extremely important.
The trend of increased partnership formation continues to grow as the percentage of solo practitioners continues to decrease. This trend is driven by the preference of recent grads to seek opportunities in multiple doctor scenarios. Recruiting a qualified candidate today and locking them into a future transition has also become more commonplace. Since many dentists need to continue practicing for financial reasons, entering into a partnership for five years and then completing the transition with an eventual sale of the remaining partnership interest, is becoming more common.
In summary, it’s hard to be totally “on target” with any prediction. Remember that sound financial and transition planning coupled with good practice fiscal management are key ingredients to your success whether you have short-term or long-term transition plans.