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Articles

Volume 63: Bigger is Better

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Dental practices in general are growing. Dentists are taking more space and building bigger practices, buying neighbouring practices and merging them together, moving out of the “invisible” location and becoming more visible and accessible, extending hours and staying open on weekends. Why is this happening and what does it mean for dental practice values?

I believe this is happening for a few reasons.

  1. Equipping and operating a dental practice is expensive. With average overhead expenses approaching 60 per cent, it is challenging in smaller practices to cover the overhead and earn a good income along with a return on capital investment. Bigger practices can afford to have all the latest technology such as digital x-rays, paperless charting, lasers, and CAD/CAM systems. All of these technology enhancements also produce efficiency gains, further reducing the overhead percentage. Smaller practices cannot afford these expensive improvements and are stuck being less efficient as a result.
  2. Patients are demanding modern and more accessible dental practices. The older style practice that patients must walk up a set of stairs to get to, and is only open four days per week from 9:00 to 4:00 may still be viable for the current patient base that trusts and respects their dentist. However, I suggest the new patient flow would be waning in that type of practice as the new patients are attracted by the more modern and accessible practice. With new patient flow slowing the practice will eventually decline and become even less efficient.
  3. The broader business world is noticing dentistry and is intrigued by the returns offered. There are several new entrants in corporate dentistry in Canada. These businesses are not interested in small practices but do have an appetite for large practices as long as the owners will stay for an extended period. What do they know? They know that there are economies of scale enjoyed in larger practices that are not available in smaller practices. The risk associated with goodwill transfer is less in a larger practice because they are generally destination offices rather than driven by one individual dentist. Further, the cash flow in smaller practices is not worth the time it takes to analyze and acquire them. Corporate dentistry is not for everyone but it is here to stay and offers an alternative for some dental practice vendors.
  4. The demographics of dentists have changed. The graduating classes of dentists in the seventies and eighties were primarily male. Most of these dentists set up from scratch, made a very good living and were happy and fulfilled with a one dentist, one hygienist practice in a traditional office setting. Now more than half of the graduating classes are female. Many want to own their own practice but want more flexibility in their schedule in order to accommodate the various demands on their time. A traditional practice model cannot accommodate that kind of flexibility.

I am often asked by owners of these larger practices “Is there really someone out there that will be able to pay for my large practice?” And further “will they be able to get the financing they need to close the deal?” The answers are quite simply – yes and yes. Some are surprised by that, but what they find even more surprising is the fact that their large practice will actually bring a premium in terms of its value.  The efficiencies that are gained in larger practices make them more profitable and therefore more valuable and there is a demand in the market for larger practices. We have large lists of prospective purchasers who have target prices over $1 million. We do have buyers for smaller practices but the demand is far less. Greater demand means greater value that the purchasers will place on the larger practices which is why the practice will sell for a premium. The reverse however is also true. The traditional small walk up practice will have less demand and will therefore be valued lower.

The real opportunity here lies for the practices that are in the middle of the pack. There are many practices that were built 20 or 30 years ago with an extra operatory or two to accommodate future growth; growth that never came. There may be room to expand hours too. A practice like this could be significantly enhanced by purchasing a smaller local practice and merging them together. You will not have to pay a premium for the smaller practice which is a benefit. The real benefit however comes from the economies of scale that the new combined practice will enjoy. This will produce a higher value for the combined practice than the individual practices were worth pre-merger. Philosophers may describe it as a whole that is greater than the sum of its parts. Financial types call this accretive to value and earnings. I call it a classic win-win!

 

David Lind is a Principal and Broker of Record 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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