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Articles

Volume 72: Good, Better, Best – The Market has Spoken

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Approximately three years ago, we wrote an article in Volume 59 of The Professional Advisory entitled What Will Happen to Dental Practice Values in the Next 10 Years?
   
In that article we cited key market factors that affect the market, and tried to predict how these factors will affect practice values. The key factors mentioned included; the economy, aging population of dentists, and the significant influx of new dentists. The premise of the article was that because of the aging dentist population there would be an increased supply of practices for sale in the market. In addition, because of continued new dentist graduation and immigration, and a strong economy, there would also be continued demand for those practices.

The normal conclusion based on supply and demand economics should have been that if the above were to occur, total practice prices would fall. However in our article, it was our conclusion that the increase in supply of practices would not result in an overall collapse of prices, but instead the market would segment itself resulting in a greater differentiation of market prices between different practices. In our article we said that strong “high demand” practices would continue to increase in value, and the weaker or “average demand” practices would decline.

Based on our recent experience it seems that this forecast is being realized. The market continues to stay very strong for the high demand practices. However we see that there has been a decline in the demand for average or below average practices.

This segmentation of practice values has very significant implications to many dentists, and it is important that dentists realize how their practices measure up.
 
In our experience the high demand practices generally have similar characteristics. These characteristics include:

  1. Location: Main floor location with good access and visibility. The practice will have a long term lease with some protection versus competition, and ideally, be located in a growing community. The good news is that rural and small town practices, are gaining popularity as they generally have less competition and more patients.
  2. Patient count and demographics: Usually high demand practices have more than 1,200 active patients, good new patient flow, no specific ethnicity, and production that is reproducible. (A conservative Preventive and Restorative orientation versus lots of Specialty procedures)
  3. Practice Operations: Efficiently run practice with good staff, strong hygiene orientation, collection of co-payments, and updated facilities (not new, but clean, current, and with some newer technology)  

On the other side the practices that will experience weaker demand are as follows;

  1. Location: Not on the main floor, low visibility, leases with demolition clauses, no exclusivity in the building or plaza, or a highly competitive area.
  2. Patient count and demographics: Usually low demand practices have less than 800 active patients, low new patient flow, large proportion of ethnicity, and or perform lots of Specialty procedures.
  3. Practice Operations: Average practice performance, problems with copayment collections, and older or run down facilities. 

Those practices that fall into the former category will be in good shape when it comes time to sell. Those in the latter category will benefit from some enhancements in how the practice is run in order to reposition the practice to obtain good value.

  1. Location: While we cannot change the location of a practice, the current market is asking for good exposure. If a practice is not in a high demand location, or has lease issues, this may result in the need to merge the patients into another nearby practice.
  2. Patient count and demographics: smaller practices are less attractive as they don’t have strong cash flows and do not provide full time dentistry. If a practice has significant ethnicity, there is a concern that there needs to be a specific dentist to take over that practice. In these cases, a growth strategy should be implemented to include all potential patients.
  3. Practice operations: This is an area that can be managed. The practice can be improved operationally. Co-payments should be collected, and practice performance should focus on preventive treatments and patient education. In addition, although it isn’t a good idea to completely renovate, the practice facilities should be updated, clean looking, and the adoption of base technologies can be implemented.

In the cases where a practice is in the average or low demand category the seller must be realistic about what they have. If the practice cannot be improved prior to selling, they must be willing to accept that the market conditions may limit their ability to sell their practice at a price that meets expectations.

Naturally the best practices attract multiple offers and therefore the best prices. Those that are not in that category would be wise to seek assistance in preparing their practice for sale years ahead of their closing date. It is certainly not impossible to move from good to better and maybe even to best, but it does take insight, planning and time.

Colin Ross is a Partner 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: colin.ross@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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