Prospective practice owners and sellers alike are wondering how COVID-19 will impact professional practice values. And, while nobody knows what the future holds, we certainly can make reasonable predictions based on historical facts to help prospective buyers and sellers prepare for the upcoming practice transition market.
First, let’s explore the Dental Valuation marketplace pre COVID-19
Many significant factors came together to influence the practice transition market in recent years, and consequently, the values of dental and related specialty practices. “Corporate dentistry,” student debt, reduced fee insurance, historically low interest rates and changing generational priorities, plus many other factors, influenced a practice’s marketability and sales price.
Medium to large practices with consistent, dependable revenues generating strong net incomes were selling at higher multiples of revenue and net income than we had ever seen. Why? Young doctors, primarily concerned with servicing their often-oppressive student debt, were focused on finding associate positions that would support their personal income needs while satisfying their student debt obligations. These associate positions did not require a binding commitment and provided the young dentist a (perceived) low-risk stable income stream.
To provide a dentist with this financially comfortable position, a practice ownership opportunity would need to provide income equal to or greater than what they were currently earning after servicing the debt of the acquisition. In addition, the opportunity must provide the confidence that practice revenues will continue as they have in the past with the potential for growth. The results are stable, consistent and dependable revenues with income greater than comparable associate positions commanded premium values.
Compounding the practice value premiums situation was the influx of private equity money focused on the same practices that were so attractive to individual buyers. And, because these practices were providing consistent, dependable income streams for the investors, values climbed higher and higher. For practices with inconsistent or declining revenues, they were considered higher risk and were often sold at discounts to practice norms. Thanks to the recession and increased student debt, a risk aversion in the buying population drove up values for low-risk practices and discounted practices with high-risk attributes.
After COVID-19 Considerations
The methods for valuing a practice post COVID-19 will not change. The most common question I am asked is, if practices in a specific market sell for 80% of collections and the practice is shut down for 60 days, will the value decline in line with the two months of absent production? There are two issues with this line of thinking. First and foremost, while many dentists prefer to value a practice based on a percentage of collections, this methodology has been repeatedly proven to be an inaccurate valuation process.
Secondly, investments in professional practices are based upon a future income stream. Traditionally, in dental practice valuations, as well as most mature industries, future income streams are based upon historical performance accounting for extraordinary events. Therefore, in valuation calculations, the evaluator will be looking at the return to normal month over month production and collection numbers. Should a practice bounce back to pre COVID-19 levels, practices should maintain their values.
I am confident the buying population will continue its trend toward risk aversion and be willing to pay premiums for practices that have shown the ability to return to consistent predictable production levels. So, practices that are taking steps to return strong will be rewarded with higher values. It should be noted that one aspect of risk aversion that may change in the young buying population is the realization that job security doesn’t exist as an associate. Many associate dentists have been laid off and it is not clear if they will have a position to return to, plus the glut of practice startups overbuilt and leveraged to high growth projections may fold. For a dentist, true job security exists in owning a practice with quality systems in place and a solid patient base with consistent and stable revenues.
In this time of uncertainty, there are several steps you can take to protect the value and marketability of your practice. While offices may be closed, now is the time to roll up your sleeves and make your practice attractive. The first step is to stop the financial bleed. The financial options available to a dentist to support the continued employment of staff and overhead costs have been well-publicized and documented. The SBA’s Economic Injury Disaster Loan program and PPP forgivable loans under the CARES act will help small business owners get through the stay-at-home period.
ADS Precise Ensures A Smooth Transition
As a practice owner, specifically one looking to transition out of ownership in the near future, a dentist needs to be thinking beyond this period and how to emerge with a better, stronger and more attractive practice.
- Stay close to your staff and check in with them regularly to ensure they continue to feel like part of the team.
- Make sure everyone is working on projects to prepare the practice to bounce back better than ever.
- Update your infection control procedures, your financial and operational systems.
- Maintain communication with your patients, emailing them updates about the steps you are taking to provide them with a safe and comfortable practice.
- Schedule patient exams and procedures for the anticipated reopening of the office. (If you are forced to reschedule again later, patients will understand; communication is key.)
- Consider adding additional hours and days to clear up the backlog.
Once we all emerge from the stay-at-home period, patients’ schedules will have changed and commitments to returning to work will be their first priority. This will require flexibility with your current office hours, as patients may not be as willing to miss work to keep their
appointments. Offering additional evening and weekend hours will go a long way in showing your commitment to your patients’ needs during this period of recovery.
While no one can know what the COVID-19 recovery will look like, I am confident there are steps you can take now that will help ensure your practice will be positioned to sell at a premium.
This is written by Peter J. Ackerman, CPA, CVA, CEPA is a principal of ADS Midwest