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Articles

Volume 66: Irrational Exuberance or The New Normal?

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The dental practice sales market, particularly in the large urban centres has experienced a prolonged period of growth in practice values. When compared with even a few years ago, practices now sell for between 20 and 40 per cent more on a relative basis. It is common to receive multiple offers for good practices, which leaves both vendors and purchasers struggling with how to deal with it. We are constantly queried by both sides of this unbalanced market with, “when is it going to change”?

When we hear that from Vendors, they are probably really asking, “should I sell my practice now because the market has peaked?” My standard answer is quite bluntly, no! The decision to sell a dental practice should be driven by the dentist’s personal circumstance not because they may or may not catch the top of a market. It is not like a stock where you can get in and out multiple times and generate profit if you get the timing right. Frankly, from a financial point of view, the best strategy is to work until the day you stop working. You will make far more working a few more years than you will selling. Dentists sell for various reasons; freedom, health, time, stress, and other interests. When the time comes, you will know and it won’t be based on money.

When the question comes from purchasers, they are probably really asking, “If I wait a while longer will practices become more affordable” or “when will the bidding wars subside.” To answer this I will turn to a quote from Warren Buffet, “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. In other words if you find a practice that is suitable for you and it is run like “a wonderful company” than you should buy it and never look back. This is a life decision that will have impact on your life for 20 years or more. Therefore, getting the timing exactly right is somewhat irrelevant. Find the right one and go for it!

So will the market change? Of course that is asking me to predict the future which I do not have the clairvoyance to doHowever there are some compelling reasons to believe the market is going to stabilize.

• The aging population of dentists has been written about over and over again. According to the CDA, the average age of a dentist in Canada increased from 46.8 to 47.9 over the five year period from 2007 to 2012. This modest aging is not going to have a dramatic effect on the number of dentists who want to sell. As Imentioned earlier, it is not age that motivates a dentist to sell, it is other things. So while I expect the choices buyers have will grow over the next few years, I do not expect a glut of practices to come onto the market that would increase supply enough to cause prices to drop.

  • The oversupply of dentists in Canada has been the single biggest factor that has contributed to the heated market. CDA stats show that from 1997 to 2013 the population to dentist ratio shrunk from approximately 1,900:1 to 1,700:1. Fewer dentists are retiring, more dentists are graduating from Canadian dental schools and more foreign trained dentists are choosing to immigrate to Canada. All of these factors contribute to this statistic continuing to shrink.

  • The purchaser population continues to be strong. Recently, several purchasers have given up finding a practice to set up instead. If a fantastic location can be found with a reasonable lease negotiated, this can be a successful path over the long term. Otherwise it can be very challenging to find enough patients to cover the overhead, let alone provide a reasonable income for the dentist.

  • There are several Canadian banks that are very active and very talented at lending into the market. They are pleased with their portfolios of loans to dentists. These banks are historically well capitalized and are earning record profits quarter after quarter. There is no reason to think their appetite for these loans will wane.

  • Corporate dentistry continues to put high values on the cash flow dentistry provides. This has also had a stabilizing impact on the market.

    Overall, I believe there has been a slow steady paradigm shift in how both vendors and purchasers assess the market. We as dental practice brokers are living and breathing that shift every day and I believe what we have now is The New Normaland not Irrational Exuberance.

    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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