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Articles

Volume 86: Dental Market Update - 2019

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When you read this, we will have finished celebrating the holiday season with family and friends. The beginning of a New Year is often a time of reflection. We look back on our accomplishments of the previous year while we look ahead and set goals for what we hope to achieve in the coming year. 

I consider it a privilege to be a veteran in the dental business and am grateful for all the friends, clients, co-workers and colleagues that I have the good fortune to work with in this industry. On a personal note, I would like to take this opportunity to wish all in the dental community a happy, healthy and prosperous 2019.

The start of the New Year is a good time to take stock of what has happened in the practice sales market over the past year. I would suggest that the period of “irrational exuberance” is now well behind us. I say this despite the fact that one of Canada’s biggest dental practice aggregators was acquired in 2018 at historic valuation multiples. The transaction was more a reflection of the appetite of the private equity market for strong sustainable cash flows, than it was a reflection of the value of a single (or a few) dental practice(s). It spurred some individuals and smaller groups to consider their options. Some even tested the market, only to learn that the market differentiates based on the scale of the offering, and that no matter how you package things, it always comes down to numbers, particularly cash flow. Nobody will pay for something that doesn’t give them an adequate return. This is true for 1 practice, 100 practices or for General Motors. While the market is still very strong, buyers, supported by their advisors, are being careful to choose the right practice and pay the right price. 

This measured approach is also being reinforced by the banks active in dentistry. Interest rates have increased. At the beginning of 2018, the prime rate was 3.2% and, as of this writing, it currently stands at 3.95%. On a $1 million practice acquisition loan, that 0.75% rate increase would add $625 monthly to a buyer’s borrowing costs. Stated in another way, the rate increase would mean the buyer could only afford to pay $965,000 for the same $1M practice without negatively impacting the cash flow. We can’t predict with certainty what will happen to interest rates in the future. In October, the government stated that the “interest rate will need to rise to a neutral stance to achieve the inflation target”. While there are many factors that influence the rates, it does not appear that they will be falling anytime soon.

Does this mean that the market has peaked and sellers need to act quickly or they’ll miss out? Or, does it mean buyers should wait until prices start dropping so they don’t overpay? No, absolutely not in either case! It simply means the market, which is very efficient, is now in a period of steady strength. There are still far more buyers than sellers. However, the buyers are well-educated, know what they want and equally important, know what they do not want.

This type of market rewards sellers that take the necessary time to prepare their practices for a smooth sale and an orderly transition of the goodwill. The distinction of time here is important because there are two types of sellers presently. One seller makes (or is forced to make) a quick decision that the time to sell for some reason is now. The practice then goes on the market, with little or no preparation, potentially in a state of flux, and without fine-tuning the operations of the practice. It is also likely that this vendor will either not want to stay after the sale, or will only stay for a very short time. This is the equivalent of buying a boat “as is” in January when you can’t be sure it floats! Obviously, the seller will not receive maximum value for this practice.

The second type of seller has planned for the eventual sale and orderly transition of his/her practice for many years. It runs efficiently with a good, committed and engaged team. This seller will want to stay for at least 6 months or a year after the sale because he/she is passionate about finding the right buyer to carry on the legacy and care for patients. These vendors will receive maximum value for the practice, and will really enjoy “passing the baton” to the new owner, while helping to ensure an orderly transfer of the goodwill.

For buyers, this market offers great opportunities to acquire well-managed practices that may need some tweaking but not fixing. Pick one that “feels right”, where the numbers make sense, and where the value is based on what the vendor has done, not on what you might do in the future.

Here’s to a great 2019 for all!

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. 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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