As dental practices shut down for patient treatment across the country, so did any imminent transitions, for retiring dentists to buyers. Doctors who had planned transitions and retirements put plans on hold. Buyers and banks pumped the brakes on deals. After all, why would a buyer pay big bucks for a business that can’t legally be open? Nearly the entire dental transitions industry came to a screeching halt.
A small number of deals are still moving forward. Associates completing a planned partnership buy-in or practices changing hands within a family are the two most common examples of deals still happening. But they’re the exceptions.
Many sellers and buyers are wondering: Where does this leave us when we can practice dentistry again? Are buyers going to be too spooked to buy? Can sellers afford to sell? Have any of the previous rules changed? Some early answers are emerging.
Most are eager to move forward and a few are scared
By and large, those sellers and buyers who have plans (either imminent or in the early mental planning stages) are still planning to move forward with their transitions. Early reports are that recent stock market losses have not spooked the majority of current and soon-to-be sellers. Brokers report they’re busier than ever, holding planning conversations and performing valuations for owners.
Most buyers are less patient to get into ownership than they were before the pandemic. While a few buyers are retreating into the perceived safety of corporate jobs, most want as much control over their careers as they can get. They’ve watched as associate jobs are the first to be cut. Buyers largely see the risks of ownership but are still opting to own. One buyer told me, “I know that as an owner my income can go down, but it won’t go to zero like it did for many of my friends who are associates.”
Traditional buyers believe they’ll have less competition from DSOs
The last few years have seen more demand in practices for sale. While the number of potential practice buyers has increased as dental school enrollment has gone up, corporate DSOs have increased the number of practices they purchase, which grows overall demand for practices that are for sale. This demand has put upward pressure on prices and escalated competition between young dentists and corporate buyers for the “good” practices that are for sale. However, many buyers are seeing a silver lining to the recent shutdown.
As the stock market gyrates and dips, many private equity funds are taking major hits. Brokers are reporting that DSOs are pulling back on aggressive acquisition strategies amid uncertainty. As many corporate groups and DSOs are backed by private equity, many buyers believe they’ll see more practices available due to fewer competitors for deals.
Buyers are asking more questions about lower prices
It remains to be seen exactly how the shutdown will affect the overall collections and bottom lines for current practice owners. Sellers are hopeful that any cancelled appointments will be made up in expanded hours and pent-up demand for dentistry once the doors are back open. Buyers are watching closely to see what happens.
So far buyers are not yet demanding discounts on agreed upon prices for transitions pending. However, many buyers are wondering if the sky-high prices they agreed to before the shutdown still make sense. After all, if collections of a practice dip, there will be a somewhat corresponding dip in that practice’s valuation.
At a minimum, many buyers are demanding performance clauses on the disbursement of the final price. For example, a practice transition may close with 90% of the price changing hands on the closing date, with the final 10% due three or six months after the closing date if certain production and collections metrics are met. Sellers are saying, “Relax, my staff and patient base are stable and loyal.” Buyers are responding with, “Great. If the numbers show you’re right, you’ll get the full asking price for your practice.”
Banks aren’t lending as freely
Most reputable dental lenders have put a penalty-free temporary moratorium on outstanding loan payments. This has been great for buyers who already own practices. But buyers still looking for practices and loans are seeing two negative effects of banks’ willingness to forego payments. The two major changes are that banks are being stricter about who they lend to and about how much they’re willing to lend.
For years, banks funded the entire purchase price of a dental transition, with a natural ceiling on the price around 85% of prior year’s collections. DSOs paid a higher multiple on paper, but with the payout stretched out over several years and performance strings attached, many times the actual multiple paid by corporate buyers was less than 85%. Starting in 2017 and aggressively expanding in 2018 and 2019, many banks increased the amount they would lend to the full price of the practice acquisition up to 100% of prior year’s collections. Several large national lenders have already communicated they will no longer lend buyers more than 85% of prior year’s collections.
Many local and regional dental lenders are also developing stricter criteria regarding lending. Buyers need to have close to the traditional liquidity targets of 10% of the purchase price saved. Underwriters are asking for higher production history marks to be met by buyers.
The net effect could lead to a widening chasm between the valuations of high-collecting, highly profitable practices sought by buyers compared to low-collecting practices with relatively high overhead and low cash flow. Sellers of small practices may have a harder time transitioning out of their practices in the future.
Prices are probably coming down a bit
With banks being tighter on price targets and stricter on who they lend to, and with some DSO buyers pulling back from the marketplace, overall demand for dental practices looks likely to decrease slightly in the near term. Additionally, buyers are watching closely what will happen with annual collections after the shutdown, and how low collections will affect practice valuations.
It’s hard to envision a scenario where prices on dental practices will go anywhere but down in the near term.
The good news
While prices may dip a bit, the good news is that there are still signs of plenty of willing buyers and sellers in the marketplace. Sellers who survive the stress of a forced shutdown and were close to retirement may likely move forward with their plans to sell. Buyers who seek control of their careers are working hard to qualify so they can buy the best practices. The market for dental transitions might change slightly in the near term, but it appears to show no signs of stopping anytime soon.
BRIAN HANKS is the author of How to Buy a Dental Practice, the host of the Practice Purchased podcast, and a representive for buyers in dental transitions nationwide. He can be contacted at brianhanks.com.
