Timing the Market
Why 2017 Might Be THE Year to Consider Selling Your Practice
As practice transition specialists, we are often asked “Is now a good time to sell my dental practice?” While there are many factors involved in making the decision to transition your practice, the short answer is YES. The current practice transition environment features several attributes that are helping to enhance practice value and make it an ideal time to consider a practice sale:
- High Demand – The substantial increase in the profitability of dental practices and the poor economic outlook in medicine have caused a significant increase in dental school applicants over the past 10 years. With 61 dental schools currently operating in the United States and Puerto Rico and several more in the works, the number of dental school graduates will likely top 5,000 in the coming years. As a result, the pool of potential buyers has increased dramatically over the past few years and this trend is expected to continue in the near future. With a surge in the number of potential buyers comes an increase in the demand for quality practice acquisition opportunities.
- Limited Supply of Acquisition Opportunities – Many doctors who are well within retirement age have delayed the sale of their practices due to the recession. As a result, there have been a relatively fixed number of practice acquisition opportunities available over the past few years. The increase in demand coupled with a limited supply of quality opportunities has resulted in an increase in the value and marketability of dental practices.
- Low Interest Rates. Due to the fact that most buyers rely on third party financing to fund practice purchases, interest rates and the availability of capital play a major role in practice value and transitions. Interest rates are currently at an all-time low and numerous lenders are offering 100% financing plus working capital to qualified buyers. The current availability and low cost of capital is allowing buyers to comfortably afford to purchase practices and fueling the increased demand for quality practice purchase opportunities.
- High Cost of Practice Start-Ups – Another contributing factor to the increase in practice values is the rising cost of establishing a new dental practice. The prices of dental equipment, technology, and leasehold improvements have increased dramatically over the past decade, resulting in an average cost of approximately $500,000 to start a practice from scratch. Combined with the significant living expense needs of most dental school graduates (due in large part to a high level of student loan debt) and the time and cost required to start a practice and generate a profit, many doctors are focusing on purchasing an established practice rather than pursuing a start-up. Real estate agents who focus on dental office space have also commented that private practices are struggling to compete with large corporate practices for prime dental locations.
- Increasing Burden of Management. More now than ever, dentists must be proficient in managing the business side of their practices in order to be successful. We have seen many established doctors experience an increase in their stress level over the past few years in regards to managing staff issues/turnover, dealing with PPO plans, implementing an effective marketing plan, controlling overhead, etc. There are currently transition options available to doctors who desire to lighten their management burden, cash out the value of their offices at the peak of the market, and continue working at their office until retirement.
- Adverse Changes in Future Market Conditions. While market conditions are currently very favorable for sellers, we are expecting several changes to occur over the next few years that will likely put downward pressure on practice values, including:
- Increasing Number of Acquisition Opportunities – As the baby boomer generation reaches retirement age and the economy and stock market continue their recovery, more and more sellers will enter the marketplace. Therefore, it is expected that supply and demand will eventually reach equilibrium and it will no longer be a “seller’s market.”
- Increasing Interest Rates – Interest rates for dental loans are expected to increase by .5 – 1% in 2017. Since most buyers are relying on 100% financing from dental lenders to fund their practice acquisitions, a significant increase in interest rates will harm the buyer’s cash flow and could adversely impact practice values.
- Increasing Number of Female Dentists – The demographics tell us that there will be a substantial increase in female dentists entering the marketplace over the next few years. While female dentists make excellent practice owners, many of these dentists will likely choose to work part-time and/or refrain from pursuing practice ownership opportunities, which could lease to a decrease in demand.
- Other Factors – Downward Pressure on Pricing (from PPO plans), Upward Pressure on Overhead (technology, marketing, etc.), Increasing Competition (growth of corporate dentistry), Increasing Management Burden (discussed above), and Rising Student Loan Debt
The factors we have discussed in this article make 2017 an ideal time to consider selling your practice. If you are considering a practice transition, don’t go at it alone. A practice broker will help you formulate a transition strategy to meet your individual needs, confidentially market your practice to find a buyer who is the right fit for your office, provide a structured closing process to facilitate a smooth and timely transition, and maximize the value you receive for your practice.