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Articles

Volume 56: There is Life Outside the GTA

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The dental practice sales market has been extremely robust for the last several years. There is more demand than supply which has put upward pressure on prices. It is not unusual in this market to receive multiple offers on practices and in some cases achieve a sale for far more than the appraised value. This is true for good practices, with good balanced metrics, and, most importantly, in a good location in or near the GTA (Greater Toronto Area). For illustrative purposes, I suggest “near” means within one to 1 t0 1.5 hours. For readers outside Ontario, the same can be said for most large urban centres, particularly in Alberta and British Columbia.

The reasons for this have been covered in other issues of the Professional Advisory but to summarize, in large urban centres:

·         There are too many dentists
·         Dentists are working longer by choice
·         Dental school admittance is based on academic achievement
·         Mature foreign-trained dentists, after obtaining their Canadian license, wish to buy a practice immediately
·         Investing dentists are buying multiple practices

If this is the case, would it not follow that practices a little further from the GTA, for instance, 2 - 4 hours away, would also enjoy the same kind of market but with slightly lower values? Unfortunately the answer is no, particularly in smaller, more remote centres that are not near the 401 corridor. The reasons can be summarized as follows:

·         Lack of geographic appeal. (already a shortage of dentists in many areas)
·         Dentists work longer because they have to, or their patients will not be treated
·         Dental school admittance requirements do not take into consideration the need for dentists
        in remote communities (as they once did many years ago)
·         Foreign trained dentists in general wish to locate in large urban centres
·         Investing dentists avoid remote communities due to the difficulty in getting associates

We have recently been involved in a sale in Northern Ontario that I will use for illustrative purposes with a comparable to a very similar practice we sold just west of the GTA.

 

Northern Ontario

West of GTA

Gross

$2,060,000

$2,078,000

Sale Price

$1,300,000

$2,030,000

Sale Price as a % of Gross

63

98

Active Patients

4,300

4,200

Asset Value

$298,000

$368,000

Adjusted after tax net Income

$577,000

$454,000

Coverage Ratio

2.36

4.77

 

 

 

 

In the example above you will notice that these two practices are very similar. The production on a per-patient basis of approximately $500 per year is very similar indicating that treatment acceptance is reasonable and the results should be reproducible by most dentists. The adjusted after-tax net income is the income available to the owner after paying all overhead expenses, paying the dentist producers (including the owner) 40 per cent of their gross collections, and after paying the corporate tax that is due on Dentistry Professional Corporation income at the rate of 15.5 per cent. In essence, this is profit from ownership and is the amount that the owner will use to pay for the practice. The $123,000 difference in net income is typical of the difference in profit between remote practices and urban practices. This is due to much higher overhead for things like rent, common area expenses, and staff in urban practices. We are left with the coverage ratio which shows us how long in years it will take the buyer to pay for the practice if he or she were to use all the net income and not have to pay any interest. This is obviously not practical but it does show that you could pay off a practice in a remote community twice as fast as you could near a major urban centre. Stated another way, if you took 10 year loans for the purchase of both practices you would have approximately twice as much net income left over (after paying yourself as a dentist) in the remote practice.

This is a compelling financial argument for considering a practice in a remote community. There are many other benefits in a remote community to be considered as well:

·         Patients have very high regard for dentists
·         Patients are extremely loyal
·         Hours of operation are more reasonable--typically 9 - 5, four days per week.
·         Your cost of living will be less
·         Far less crime
·         Commute to the office is usually measured in minutes not hours
·         More favourable work/life balance

I am aware that there is some awareness of this situation with organized dentistry. I believe the CDA has begun analyzing this as there will definitely be an increase in the shortage of dentists in remote communities in the future. I would urge dentists who are frustrated with the bidding wars that go on in the GTA, or dentists that just want to get out of the “rat-race” and live a more balanced life, to consider the remote communities across Canada as a very viable option.

David Lind is a Principal in Professional Practice Sales Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices.  He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at:david.lind@ppsales.com

The Professional Advisory

  1. One Year Later

  2. Dealing with Unsolicited Offers

  3. Covid-19 Practice Sales Update

  4. When is the Right Time to Sell Your Practice and Why?

  5. Partnership Pitfalls

  6. The Real Cost of a Dental Practice Set-up

  7. Smaller Practice Realities

  8. Dental Market Update - 2019

  9. Creating Your Own Most Valuable Practice (MVP)

  10. Small Practice Economics

  11. The Market is Very Efficient

  12. How Can Dental Practice Values be Rising and Declining?

  13. Hygiene as a Value Driver

  14. The Value of a Good Team

  15. Is it Time to Move?

  16. Staging A Dental Practice

  17. The High Cost of Dying

  18. Deal-Busters

  19. Patients - Attract and Retain

  20. Should I Stay or Should I Go?

  21. Is There a Buyer for Every Practice?

  22. Good, Better, Best - The Market has Spoken

  23. Smooth-Sale-ing

  24. Buying Time

  25. Patients, Patience, Patients

  26. A Real Patient

  27. Why Do a Practice Valuation? I'm not Selling

  28. Irrational Exuberance or The New Normal?

  29. Do dental equipment and dental technology affect a practice value?

  30. Finding and Being a Mentor

  31. Bigger is Better

  32. Dave's Top Ten List for Buyers (Vendors should read this too!)

  33. How Well Do You Know Your Practice?

  34. Dave's Top Ten List for Vendors

  35. What will happen to dental practice Values in the next 10 years?

  36. Your Premises Lease is an Important Asset

  37. What are Associates Thinking?

  38. There is Life Outside the GTA

  39. When Is the Right Time to Sell My Dental Practice?

  40. Mergers are a Viable Option

  41. Is Your Associate an Asset or a Liability?

  42. Has your Practice Facility Kept Up With Your Billings?

  43. The 100 per cent of Gross Myth

  44. The Past, The Present and The Future

  45. Caveat Emptor

  46. Overpaid Long Term Staff

  47. Selling your Practice in Stages

  48. A Potential Pitfall of Selling Shares

  49. Value in Your Practice Through Balance

  50. Only Trusted Staff Can Defraud You

  51. To Own or Not to Own Practice Real Estate? That is the Question.

  52. Coping With A Large Patient Base

  53. Successful Dental Practice Transitions

  54. Taking Care of Business

  55. The Investing Dentist Phenomenon

  56. Two areas to focus upon that could negatively impact the value of your practice

  57. Organize your Debt in Order to Sell your Practice

  58. Having a Better Team

  59. How Do I Prepare My Practice For Sale

  60. How Do I Prepare My Practice For Sale? Part 3

  61. How Do I Prepare My Practice For Sale? Part 2

  62. How Do I Prepare My Practice For Sale? Part 1

  63. Advice to My Son or Daughter Graduating from Dental School

  64. Transition - What to Expect

  65. Discussion on Digital X-Rays

  66. Partnerships and Shotguns

  67. Strategic Planning - How to Get Started

  68. Calling All Vendors - Practices have Gone Up in Value

  69. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

  70. Matrimonial Practice Valuations

  71. Purchaser's Guide to Affording a Practice

  72. Location Improvements Throughout Your Career

  73. Small Practice Valuations

  74. Partnerships – The Best and The Worst

  75. Changing Location When the Opportunity Comes Along

  76. Visual Presentation of Your Practice

  77. Presentation of Charts

  78. Your Premises Lease Can Be Your Worst Enemy

  79. How to Select an Appraiser for Your Practice

  80. How Are Your Billing Ratios?

  81. It Pays to Invest in Your Tangible Assets

  82. The Importance of Separate Financial Statements

  83. Five Time Frame Levels to Sell a Practice

  84. 12 Suggestions to Safeguard Computer Data

  85. How to Buy a Visible Practice

  86. Why is there a shortage of good practices today?

  87. The Importance of Equipment in the Purchase of a Practice

  88. The Balanced Practice

  89. Will My Practice Be Saleable in The Future?

  90. Buyer Be Aware

  91. Excess Profit - The Second Key

  92. Patients and Profits are the Keys

  93. Plan Ahead

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