2020 will be a big year for many reasons and it may be an especially important one for you regarding your practice transition plans. It is no secret that many dentists have extended their careers due to the Great Recession which occurred over a decade ago. The average retirement age is now 68.9 years which is the highest it has ever been. We are still in a situation where the annual number of retirees is substantially less than the annual number of dental graduates, thus contributing to what has been a ‘seller’s market’ for most of the country.
What does this mean for you if you are planning to sell your practice in 2020? Can you get maximum value for your practice? Well, the answer is: it depends. The most important factor affecting your practice’s value is its location. In many urban and suburban areas that are considered highly desirable, practice sales ratios for general practices vary between 70 to 85% of last year’s gross receipts. In some markets, general practices are selling at ratios in excess of 90%. How long this trend lasts, no one really knows. Regarding most specialty practices, sale ratios vary between 55% to 75%, again based on specialty as well as location. For those of you who took an economics course in college, this is a classic example of supply and demand forces working to affect prices! Conversely, if your practice is located in a small town or a rural area, this high practice value expectation will most likely not be met. Excellent practices in these areas cannot even recruit doctors to join their practices as an associate let alone find a Buyer!
If you are a solo practitioner you need to take note of a trend that may affect your plans for a practice sale. It has been reported that only one in five dentists under the age of 35 want to be a solo practitioner. This obviously lowers the potential purchaser pool when it’s time to sell.
Also contributing to the record values for dental practices is the growth of corporate dentistry as well as large group practice networks. There is a great deal of competition for good practices amongst these groups, thus driving sale prices even higher. So, if you are looking to get for maximum value for your practice, 2020 may be the year to implement your plan! On the dental lending front, interest rates still remain relatively low and now is a great time for purchasers to obtain financing for a practice acquisition loan. For practices with higher gross receipts, some lenders may require the Seller to hold a promissory note for a portion of the sale price particularly if the Purchaser does not have extensive clinical and business experience. This ‘seller note’ usually is paid off by the bank within one to two years after the sale assuming the Purchaser meets the financial goals set by the banks. These Seller ‘holdbacks’ usually vary between 10 to 20% of the sale price.
For those recent grads with significant dental education debt (in excess of $300,000), some lenders may require the Seller to hold a note for a portion of the sale price. As in the case of those practices with higher gross receipts, the ‘holdback’ period may be for several years, with the Purchaser again required to reach certain financial targets. Credit requirements continue to be stringent, so good payment history and satisfactory FICO scores maintained by the Purchaser are extremely important.
The trend of forming partnerships continues to grow as the percentage of solo practitioners keeps decreasing. This trend is also driven by the preference of recent grads to seek opportunities in group practice situations. For older dentists, recruiting a qualified candidate today, offering a partnership interest for a 5 to 7 year period, then followed by a complete sale at the end has become more commonplace.
Multiple office ownership continues to increase. It is not just the continued growth of the Dental Support Organizations (DSO) impacting the dental profession, but also a growing number of younger private practitioners desiring to own more than one practice.
In summary, remember that sound financial and transition planning coupled with good practice fiscal management are key ingredients to your success whether you have short term or long term transition plans.
Dr. Tom Snyder is a Senior Director with Henry Schein Professional Practice Transitions. A former Department Chair at the University of Maryland School of Dentistry, Dr. Snyder is currently a member of the faculty of the University of Pennsylvania School of Dental Medicine. He also serves on the editorial boards of several national publications. He is a nationally recognized speaker, author and consultant who has been advising dentists for over 35 years in dental practice strategic planning, practice valuations and dental partnership formation. Dr. Snyder received his D.M.D. from the University of Pennsylvania’s School of Dental Medicine and his M.B.A. from The Wharton School, Graduate Division, at the University of Pennsylvania.