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Volume 82: How Can Dental Practice Values be Rising and Declining?

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Over the past several years, overall dental practice values have been rising to significant levels. There are many reasons for this increase in value, but it has primarily been fueled by increased demand from new dentists entering the Canadian marketplace, combined with unprecedented access to capital from many Canadian banking institutions. 

In the past few years, the demand has been strong for all practices, big and small rural and urban, specialty and general. Recently however there has been a noticeable shift in demand and pricing patterns that has resulted in some practices values continuing to rise, but many practices falling out of favor. The practices that are continuing to increase in demand and values are the large practices and surprisingly, the practices in rural markets. The increase in large practice values is not surprising, these practices are usually in highly visible locations, typically have more than 1,500 active patients, and have strong cash flows.

The other area that has seen an improvement in value are practices in non-urban areas. While this is certainly an upwardly positive trend, but it is less significant as their values were previously very depressed. It seems that purchasers have started to look at these non-urban areas, as they have recognized that the urban practices are either too expensive or too competitive. The practices that are stable or declining in demand are either small, in decline or have low visibility.

These trends are not surprising when we consider the demographics of today’s purchasers, the competition in the market, and the access to capital. It is common knowledge that a large majority of new purchasers are foreign trained dentists who are relatively new to Canada. These purchasers are typically older, have good dental experience, and have families. As a result of this fact, these purchasers have certain requirements for their career, and for their families. As a result of the age bracket of these buyers, they have more financial responsibility than a new graduate, and therefore have very different practice objectives. Younger buyers can afford both the time and have the patience to get into a small or new practice and take the time to grow its profitability. These other buyers cannot afford the time it takes to grow cash flow and are therefore are prepared to pay more for the larger practice with greater cash flow and less risk. The other fact impacting the market is marketing or practice growth strategies. Despite being well trained and overall have strong clinical, and communication skills, most buyers are not comfortable with their ability to grow a practice and attract new patients. 

Given the current levels of competition, these buyers are not wrong but are sometimes missing opportunities. The other more important reason for this diminished demand for the smaller practices is unfortunately based on perception. The perception is that if a practice is small, it gets a double negative treatment. Not only does it have limited cash flow, but because it is small it is perceived to have a location that cannot attract or retain patients. The unfortunate part of this trend is that the perception may miss many excellent opportunities.

It is a fact that many small practices have been operated by conservative dentists who are nearing the end of their career. Many of these practices do little or no marketing, didn’t try to get new patients, and were very comfortable operating at their basic levels. We have seen many examples that when sold, the new owners inject life back into these locations, implement new marketing plans, and are able to significantly grow these practices. For sellers of smaller practices, the implications of this trend are meaningful. 

If your practice fits the small practice criteria, it should be your goal to address any negatives as-sociated with your practice. You cannot allow revenues to decline, and should make a reasonable attempt to attract and retain patients to give purchasers the confidence that the location is viable. If it is determined that your practice does not have the required potential to grow, and is completely out of favor with the marketplace, the seller must be prepared to possibly sell patients only, or certainly lower expectations on a sale price. For purchasers, the implications are also just as significant. 

Many purchasers will continue to pursue the larger practices, and continue to pay top dollar for practices that have proven track records. For those purchasers who are willing to look at smaller practices, they must become very strategic in their analysis of the locations, and they need to ensure that they have the basic understanding of marketing and what it takes to attract patients in a particular environment. There is a need to differentiate between a practice that is small by design versus a practice that has tried to grow but failed due to competition, location, or visibility. In summary, we feel that large practices will continue to be in high demand, but for small practices, we urge the sellers to address the perception issues that the practice has no growth potential. For buyers, we urge them to look deeply into the small practices to assess the real reason for the lack of size, and to determine if there are growth opportunities.

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. Understanding Practice Valuations

  2. What To Expect When Selling Your Practice

  3. The Chart Sale

  4. One Year Later

  5. Dealing with Unsolicited Offers

  6. Covid-19 Practice Sales Update

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

  8. Partnership Pitfalls

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

  10. Smaller Practice Realities

  11. Dental Market Update - 2019

  12. Creating Your Own Most Valuable Practice (MVP)

  13. Small Practice Economics

  14. The Market is Very Efficient

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

  16. Hygiene as a Value Driver

  17. The Value of a Good Team

  18. Is it Time to Move?

  19. Staging A Dental Practice

  20. The High Cost of Dying

  21. Deal-Busters

  22. Patients - Attract and Retain

  23. Should I Stay or Should I Go?

  24. Is There a Buyer for Every Practice?

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

  26. Smooth-Sale-ing

  27. Buying Time

  28. Patients, Patience, Patients

  29. A Real Patient

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

  31. Irrational Exuberance or The New Normal?

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

  33. Finding and Being a Mentor

  34. Bigger is Better

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

  36. How Well Do You Know Your Practice?

  37. Dave's Top Ten List for Vendors

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

  39. Your Premises Lease is an Important Asset

  40. What are Associates Thinking?

  41. There is Life Outside the GTA

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

  43. Mergers are a Viable Option

  44. Is Your Associate an Asset or a Liability?

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

  46. The 100 per cent of Gross Myth

  47. The Past, The Present and The Future

  48. Caveat Emptor

  49. Overpaid Long Term Staff

  50. Selling your Practice in Stages

  51. A Potential Pitfall of Selling Shares

  52. Value in Your Practice Through Balance

  53. Only Trusted Staff Can Defraud You

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

  55. Coping With A Large Patient Base

  56. Successful Dental Practice Transitions

  57. Taking Care of Business

  58. The Investing Dentist Phenomenon

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

  60. Organize your Debt in Order to Sell your Practice

  61. Having a Better Team

  62. How Do I Prepare My Practice For Sale

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

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

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

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

  67. Transition - What to Expect

  68. Discussion on Digital X-Rays

  69. Partnerships and Shotguns

  70. Strategic Planning - How to Get Started

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

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

  73. Matrimonial Practice Valuations

  74. Purchaser's Guide to Affording a Practice

  75. Location Improvements Throughout Your Career

  76. Small Practice Valuations

  77. Partnerships – The Best and The Worst

  78. Changing Location When the Opportunity Comes Along

  79. Visual Presentation of Your Practice

  80. Presentation of Charts

  81. Your Premises Lease Can Be Your Worst Enemy

  82. How to Select an Appraiser for Your Practice

  83. How Are Your Billing Ratios?

  84. It Pays to Invest in Your Tangible Assets

  85. The Importance of Separate Financial Statements

  86. Five Time Frame Levels to Sell a Practice

  87. 12 Suggestions to Safeguard Computer Data

  88. How to Buy a Visible Practice

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

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

  91. The Balanced Practice

  92. Will My Practice Be Saleable in The Future?

  93. Buyer Be Aware

  94. Excess Profit - The Second Key

  95. Patients and Profits are the Keys

  96. Plan Ahead

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