As we made our New Year’s resolutions just a few months ago, looking positively toward 2020 given the vibrant economy, very few could have expected to be where we are today with the devastation caused by COVID-19. As we write this column, much uncertainty still exists as to how this virus will impact our lives and our dental practices in the future. Fortunately, this virus will subside, and we will slowly but surely return to normal or perhaps a “new normal”. There may be some changes in how we practice dentistry, providing new challenges, but dentistry will rebound as the virus has temporarily, but not permanently, affected our practices.
As valuation and transition specialists, we have been approached with questions about the impact on practice values and transitions since the pandemic began. While, certainly, we won’t know for sure until we can look in the rear-view mirror, our experienced team has been through many a crisis (economic, natural, and otherwise) and we can lean on that experience to provide some insight into the future. Here are some thoughts…
A 2020 View – Generally Speaking
While it is true that the last months have created a hardship on every aspect of the national economy—while due to office closures, practices have had led to minimal or no receipts, we do not feel that this is the “new normal”–this is a relatively short-term issue. There is general optimism that many businesses will reopen and therefore, be looking to hire. With the closure of most dental practices throughout the country, except for emergency treatment in some offices, there will be a large backlog of services that patients will want completed. As a result, we feel that there will be a rebound. With reemployment as the economy starts its engines again, finances should stabilize which should help to cover the dental need that persists. We anticipate a very busy time for dental practices once dentists are able to perform routine care and “elective” procedures again.
The stress of closures and stay-at-home orders became an opportunity for us as individuals to spend more time with family. As business owners, many have seized the opportunity to adjust, perhaps consolidating and/or refinancing debt, organizing, or making office improvements. Certainly, there has been a good deal of reflection, and moving forward we will be wiser and stronger as a result.
As noted earlier, the industry has experienced several months of revenue decline due to practice closures. However, that will not necessarily translate into a decline in practice values. We believe that practices will see a steady increase in receipts as practices reopen, particularly if offices are proactive about rescheduling missed appointments due to office closures and confirming upcoming appointments that were made months before. These patients are waiting for treatment. As a result, we believe practices will expand office hours and/or days to address deferred treatment needs early on, which will result in a spike in revenue and collections and should mitigate some of the previous losses. With that, we are expecting a normalized year with some practices possibly even matching or growing past their 2019 numbers. In either case though, we do factor “both sides of the coin”–the clear decline in practice revenues from all of the local, regional, and national economic factors, as well as the mitigating circumstances–but noting that the declines were not attributed to flaws in practice operations. As such, we do not anticipate a significant decline in practice values for most of the country. Value is clearly derived on a local level, and by having our team “on the ground”, we have been and will continue to be able to monitor and adapt accordingly.
While there are some transitions still taking place, not surprisingly, most transactions that were in process “pre-Coronavirus” have been on hold as purchasers look for operations to resume before assuming ownership. With historically low-interest rates, there have been some practitioners who have seized the opportunity (which may still exist in your area) to purchase and make more lengthy modifications and upgrades to be ready to run on “day one”. Moving forward, we anticipate an overall market that looks to be returning to a level that we saw earlier in the year. Demand is still high from purchasers, and most sellers who were approaching retirement in their mind, still are. It is true that some will most certainly delay due to portfolio performance over the first quarter of 2020. Others are still poised for retirement and perhaps already diversified so to decrease their market risk exposure, thus are still positioned to sell their practice. If your market saw higher purchaser demand before, that demand likely did not vanish and so will return shoring up any potential “bottoming out” of the market. Will prices remain at all-time highs? Perhaps not everywhere, but certainly in pockets where demand has always been heightened. Overall, we expect strong sales to remain and that many sellers will proceed with their practice transition plans.
It is important to note that many national and local lenders have either temporarily paused credit reviews and/or lending, or have added conditions to funding deals once practices reopen. We feel that these are temporary actions as institutions continue to work through distributing the government-backed program, such as the Paycheck Protection Program and Economic Injury Disaster Loan, while also supporting the needs of their current customers through refinancing, restructuring, or some loan forgiveness. So, yes, while lending has been constrained, borrowing rates continue to be near or at the lowest we have ever experienced and clearly, we have no reason to believe that this will change in the near term. The ability to secure low-cost money continues to be a huge point of leverage for anyone looking for capital and will continue to support practice sales, strengthening the overall market.
One significant takeaway from the last couple of months should be that of the value of “controlling your own destiny”. If you are an associate, you have likely seen the ramifications of that– perhaps your support staff was laid off, and, in much of the country, your hours (and pay) have declined. While it’s true that practice owners have been forced to weather the storm, dental practices have some of the lowest overhead rates of any business and yield some of the highest net incomes. It is also the huge benefit of ownership, as the net income is completely controlled by you, as the owner. We would also anticipate that you would never fire yourself. The default rate in dentistry (the rate at which practices simply close due to the inability to operate) is very low– as in tenths to hundredths of a percent. This is a business that has constant demand and the way to ensure your personal financial stability is to be the one calling the shots.
It is true that the last weeks and months have been trying, but we see a bright light in the future. If you are a practice owner looking for guidance or assistance, want to know the value of your practice, or seek a transition strategy moving forward, we are available and have a bounty of resources and experts ready to assist you.
Associates and Buyers, now is time to take the steps to secure your future.
Dentistry, business, and our country will persist – keep a clear 2020 set of eyes on the horizon!