You’ve been hearing this a lot, but the fact is, there are few certainties right now. That doesn’t mean, however, we can’t do our research, make a solid estimation as to how things may go based on current trends, and prepare the best we can. In that spirit, we here at DDSmatch Mid-Atlantic and our colleagues throughout the nationwide DDSmatch network, have been talking to selling doctors, practice buyers, dental lenders, CPAs, industry lawyers, and key players involved in dental practice transitions in recent weeks. Based on these conversations, we hope to offer you a clearer vision of the horizon we face.
In short, if you are interested in listing your dental practice for sale—either based on current events or because you already reached that point in your career—there is ample evidence that a practice transition is feasible, even in 2020.
While there are no definitive answers to what the dental practice transition landscape will look like on the other side of the pandemic, we’d like to share some insights we’ve gained from our conversations. We discuss these thoroughly in the video above, sponsored by the Maryland State Dental Association Foundation, where we are joined by Matt Howard, a CPA and certified business valuator with Blue & Co., the highly respected independent valuation firm trusted by DDSmatch.
Below, we’ll highlight a few points from the video about how it appears practice valuations are going to be created, some practical tips on how to prepare your practice for valuation, and how transition deal structures might look different moving forward.
Dental Practice Valuation During and Post-COVID
The process of getting a reliable business valuation for your practice has always been an essential part of the process. The valuation tells interested buyers and lenders, in short, the fair market value for your practice. Having a reliable valuation is important, as it helps protect your legacy as the seller, and makes sure the buyer is set for success. Your dental practice is likely the largest asset you have—you want to get paid what it’s actually worth. But, right now, how do you make a reliable determination?
What will stay the same?
The good news is that experts feel it will work largely in the same way it did before. Most dental practice valuations use the income valuation model, which examines the specific economics of your practice (production, collections, overhead, etc.) over the three previous years. Right now a valuation would look at this same information, with a focus on 2019, since that is the most relevant data currently available. Moving into July and beyond, it’s anticipated a valuator will use a post-covid “snapshot” of the practice, annualizing the post-covid results and then comparing it against to pre covid performance. How close are you post-COVID to your pre-COVID numbers? The goal is to be heading towards 80% of your pre-COVID numbers in the first couple of months of returning to practice, which will help indicate that your practice is on a path to recovery. That trend is what the valuator, the lender, and the potential buyer, is going to want to see.
What will change?
While much will stay the same, there is still much work to do. After all, you’ve likely been closed for several weeks or more. And when you reopen, if you haven’t already, there are going to be a number of changes to how your practice operates, including new costs and new limitations on how much you can produce due to social distancing orders. Here, innovation is going to be key.
Your industry is fortunate in one regard— your patients are already accustomed to seeing you in a mask. Still, you will need to alter your procedures in a way that gives your patients peace of mind and protects them, you, and your staff. As you implement these changes, it is imperative that you keep a close eye on your costs. If your costs increase due to new safety and sanitization efforts, and your production and collections are down, due to social distancing, you need to do what you can to keep them proportional to your 2019 numbers.
High awareness is critical in these early weeks, do not make assumptions. Remember to stay on top of what is changing financially to determine your “new normal” and adequately plan and adapt where necessary.
Competitive pressure is mostly static.
If you are considering listing your dental practice for sale, there are two helpful things to keep in mind. First, all dental offices in your area have also been shut down. This isn’t a situation where you’re closed and a competitor opened across the street and stole all of your patients. Your patients haven’t been going anywhere, and are highly likely to return to you when time comes for treatment. Their treatment schedule has been pushed out but, for most, will resume when you are able to provide the treatment they need.
Of course, this doesn’t mean you’ll be right back at 100% in the first week you’re open. People will be wary, some more than others. Many have lost their jobs and insurance. This will cause them to push their treatment further into the future, or forgo certain aspects of treatment. But remember, all of the other dentists in your area are in the same position.
Buyers are considered a good risk.
The second thing to consider is potential buyers’ access to lending. In our recent conversations with lenders, we see a common trend that dental practices are still considered a good risk for lenders, just as they have been historically, with very low default rates across the industry. Everything indicates that lenders will see lending for dental practices the same way they did before. Where there will be some difference is in how they handle the application process. This is more a concern for the buyer than the seller, however, some lenders will prioritize certain buyers (those with more cash in the bank or a stronger track record of production) and some may collect applications and cherry-pick the strongest ones. This could slow the process of your transition and reduce the pool of potential buyers.
As far as the selling doctor is concerned, the lender will likely take the same approach as the business valuation expert: they will look at 30-day snapshots of your post-COVID financials, focusing on production and costs, annualize it, then compare it to your 2019 numbers. If that shows you are on track to getting back to your 2019 levels of production, and your costs remain proportional, lenders will likely view your practice as being worth what it was in 2019.
What Steps You Can Take to Prepare Your Dental Practice for Sale
While it may seem counterintuitive, we are not seeing that potential buyers are being skittish about buying a dental practice. Rather, we’re seeing an uptick in those interested in buying. This is because having our way of life upended has resulted in many dental associates reevaluating their career trajectory. They’re finding that they’d rather be more in control of their work and enjoy the benefits of business ownership than continue as an employee, subject to their employers decisions.
With that in mind, if you think you are ready to transition your practice, here are some things you can do to help get it ready.
- Be flexible. While we are bullish about the dental practice transition market, there are still a lot of uncertainties. It is not yet clear how the practice transition process will change. Many buyers and sellers that had deals lined up pre-COVID have had to hit the pause button and reassess. Some of them are now going forward, some are still paused. As far as timing goes, we’re going to need to be more flexible on how fast or slow the process goes. Also, we’re seeing some restructuring of deals to account for increased risk to the buyer. This is obviously negotiable, but it is a new reality that needs to be considered.
- Put Your Team Together. You need a group of trusted advisors—at a minimum, you should have a dental-specific CPA and tax professional, dental-specific attorney, and a practice transition specialist—to help you plan for and make decisions about your practice transition. Even in the best of times, practice transitions are complex. Having a plan is key, and it’s worth the time and money to have experts you trust in your court to guide you through making a plan that really will deliver the result you desire.
- Get Things Back Towards Normal. It’s unlikely things will be just like they were before. But getting things back as close as we can will be essential. At the top level, this means getting your production back to 2019 levels with proportionate costs, ramping back your practice as close as you can to where it was before. That means staff is back and performing their duties properly, patients feel safe in your office, and your community trusts in the care you provide. These will be discussed more below.
- Keep Your Office Properly Staffed. The pandemic has upended employment for a lot of people, including your staff. Hopefully you will be able to bring them all back and compensate them as you did before. However, if this isn’t the case, you need to think carefully about how your staff impacted your practice, and ensure you have reliable people in place that will not diminish your financials. Your staff is responsible for a lot of things that affect your bottom line: production, collections, proper scheduling, etc. You can’t afford to have less efficiency or performance in these areas when patients are already rattled by change.
- Protect Your Patient Base. Just as your dental practice is your largest asset, your practice’s patient base represents the core value of your business. As stated above, you probably haven’t started losing patients. But this may not remain the case if your adjustment to post-COVID dentistry isn’t clearly communicated or reassuring enough to your patients. Use your online presence (including your website and social media channels), advertising, and marketing efforts to inform and educate your patients about that status of your practice and efforts you are taking to keep them safe. Highlight your sterilization process and your new PPE equipment. Maybe make a short, friendly video showing the changes and your positive approach. Post it online, promote it on social media, embed it in an email to your patients. Have your staff start making calls to explain how appointments will work and get them scheduled.
- Be Creative. For some time, you probably won’t be able to see as many patients in a day as you did before. And many of your patients, due to unemployment, may not be able to afford treatment as they did before. Some ideas we’re hearing doctors considering are things like extending treatment hours into evenings or weekends. This will allow you to see more patients and allow patients who are going to be wary about missing work to still get treated. Also, consider a membership or subscription plan where, for a monthly fee, patients get access to certain levels of treatment. This can ease the financial burden that many are feeling. For example, you may want to consider how you schedule longer procedures to ease up on patient flow and time spent sterilizing. Some doctors are considering hiring a basic wage employee solely for sterilization procedures, freeing up higher-cost employees to focus on production and collection.
Deal Structures Post-COVID
In the past, when a doctor put up a dental practice for sale, there were things the selling doctor could do to help ensure a successful transition (such as writing a letter to patients introducing the new doctor or working in the practice for a period to ease the transition) and all parties could reasonably expect production and collection levels to be fairly steady. Now, that may not quite be enough, and added steps and time may be necessary. It is still too soon to tell. This increased uncertainty creates risk for the buyer, and the reality is that practice transition deals are going to have to reflect that.
A new thing that we are seeing arise in these deals is something called a “holdback.” This is where a percentage of the selling price is placed into escrow for a period of time after the sale. If, during the “holdback” period of the transition, the practice hits specified performance benchmarks, the money is released to the seller. These terms are negotiable. But, as you can see, this added cushion protects the buyer in case the practice doesn’t bounce back as expected. Be prepared to encounter this strategy in the future, and make sure to discuss your options carefully with your attorney and CPA.
Considering a Dental Practice Transition? We’re Here to Help
If you are considering listing your dental practice for sale, we encourage you to talk to a dental practice transition specialist. Even if you think your timeline puts you three, four, or even five years out, it is not too early to start planning. If you are in the Maryland, Washington D.C., or Virginia areas, DDSmatch Mid-Atlantic offers experience, professionalism, transparency, and proven processes to make the transition as simple as it can be.
We understand this has been a stressful transition for everyone, and we are working hard to gather the information you need and be here to answer your questions, always with no obligation. Contact us today—it starts with a simple conversation.