Many doctors have inquired about the feasibility of selling a practice in today’s economic climate. The correct answer to this question is simply… it depends. After available net income, perhaps the most important factor that will impact your practice’s value is your location. Practice values continue to remain at record levels with many urban areas that are considered “highly desirable” supporting sales ratios ranging between 70% to 80% of last year’s gross receipts.
We do not have indication of this trend slowing, but why?
We do know that the retirement age for general practitioners and specialists has increased to 68.7 years. Recent surveys show, though, that the number of retiring dentists is increasing to over 3K per year. Since the number of dental school graduates per year exceeds 5K, it is quite apparent there is a severe imbalance between potential purchasers and sellers putting weight on the “normal” market.
Add to this the continued desire of many recent graduates to practice in urban and suburban areas. This is a classic example of supply and demand working to affect pricing. The more available purchasers for a single product there are, the higher the value and price.
Also contributing to the high practice value is the growth of corporate and large group practices. There is a great deal of competition for good practices amongst these organizations, reducing available opportunities and therefore often driving practice sale prices higher.
All above considered, if you are looking for maximum practice value for your urban/suburban practice, 2017 may be your year.
Conversely, if your practice is located in a small town or rural area, this increasing/high practice value phenomenon will most likely not be your reality. While net income in rural practices is generally equal to or higher than an urban/suburban practice of similar make-up, finding a willing purchaser can be significantly harder.
On the dental lending front, interest rates will probably rise in 2017. While money itself is still widely available (and currently incredibly inexpensive to obtain), lender requirements relating to acquisition loan underwriting have become more stringent.
In some cases, 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 production levels. In other instances, some lenders require this holdback specifically on acquisitions by recent grads with significant dental education debt. This note can be converted to cash within one to two years after the sale providing the purchaser meets the financial goals set by the banks. This seller “holdback” usually varies between 10% to 20% of the sale price. It should go without saying, but good payment history and satisfactory FICO scores maintained by the purchaser are extremely important.
Although only a small portion of all practices can handle this type of transition, we continue to see a trend of increased partnership formation as well as deferred practice sales. This involves recruiting a qualified candidate today and locking them into a future transition. Since many dentists need to continue practicing for financial reasons, offering a partnership for five years with an eventual sale of the remaining partnership interest is becoming more common.
“Locking in” a qualified buyer with short-term employment and then a complete sale appears to be on the increase as well. These deferred sale transitions should require a down payment of at least 10% of the sale price.
Multiple office ownership is also becoming more commonplace. In addition to the Dental Support Organizations (DSO) impacting the dental profession, there is a growing trend of younger, private practitioners desiring ownership of more than one practice. This requires planning, strategy, and excellent business sense. In these cases, maximizing a single practice before adding additional practices becomes vital to a long-term strategy of growth.
For some doctors, your exit strategy may end up being the sale of your “Patient List.” If your practice has been in decline or you’ve been deliberately reducing your schedule, the part-time practice may not be as desirable to or simply cannot be afforded by many. This type of transaction may also be ideal for those multiple practice owners who want to quickly grow a new location, though.
In summary, it’s hard to be totally “on target” with any prediction, however, given our current economic climate, sound financial planning and fiscal management are becoming even more critical, regardless of your short or long-term transition plans.