Does a Dental Practice Transition Still Make Sense?

Does a Dental Practice Transition Still Make Sense?

The emergence of the COVID-19 pandemic has taken its toll, and unfortunately, it seems we’re still a little way off from a light at the end of the tunnel. With significant reductions to the labor force and a double-digit unemployment rate, the economy quickly became hampered in a way not experienced since the Great Depression. Despite a gradual, recent rebound, we continue to move forward through this financial turmoil and period of uncertainty. Some industries have collapsed while others labor through the long tumultuous road to recovery. Given all this, it’s fair to ask, “do I still want to buy or sell my dental practice?”

If you’re a buyer, you are understandably tentative in deciding whether it fiscally makes sense to take the plunge into ownership given such a sharp drop in the economy. Not all practices have fully reopened, some are not operating at full steam and others are seeing some of their best months ever. This creates tremendous uncertainty regarding the short-term viability of your prospective practice, as it’s tough to discern how long it will take to fully service the existing patient base or how long the “production boom” will last.  Many also wonder, of those patients who are back, how many will stay patients during a transition in an unstable time?

Perhaps you were looking to expand by taking on a new partner or cash out the equity you have built and ride off into retirement. The fear of an unforeseen sudden drop in value could likely case you to rethink your plans. After all, why would you sell something you’ve worked so hard, for so long to build at a pandemic-induced discount?

Obviously, navigating this conundrum can be confusing. But before pulling the rip cord on your longtime ambition of transitioning into or out of your dental practice, consider the following.

 

The Numbers May Look Grim Now, but that Does not Mean the Practice is Doomed

During our valuation process, we review three-fours year of financial history to get an indicator of what of what the business is likely to do in the future. If, for example today we were to examine a practice pre-COVID, we’d considered the financial period covering the first half of 2020, in addition 2019, 2018, 2017 and possibly even 2016. However, COVID has changed perspective, as 2020 isn’t a honest indicator of the future and therefore we focus our attention on 2019 financials. Furthermore, we can support the 2019 reporting to prove the value would be the same in 2020, by look at the 2020 recovery and financials that were generated after the practice has reopened. 

With perceived losses in value, some buyers may be tempted to offer less, even if there existed a prior pending agreement. However, a current snapshot of a prospective practice’s most recent financial status will often set a falsely low bar. What has the historical performance of the business produced? What has the production been upon reopening? Is it trending back up to pre Covid levels? These questions are every bit as important to answer as the current financial performance question itself.   

Just as easily as the current practice value may have dropped, a solid recovery or consolidation of a market could prompt an increase in price. After all, if the agreed upon price can drop during COVID, a seller could easily argue a higher price upon a later improved valuation. If the valuation checked out as a winning proposition before the shutdown, it’s important to understand and reframe your analysis when determining if it’s still a good decision as the practice returns to normal operations. 

 

Owning is Still Financially More Lucrative

Despite the nationwide slow down, many dental practices have demonstrated resilience, with business recovering throughout the summer. Part of this recent uptick in dental activity can be credited to a buildup in demand, as businesses closed their doors for roughly two months and may be attributed to some older owners and practices closing their doors (time will continue to show us these trends). Regardless of the reason for the uptick and rebound, it’s business 101 that owners earn more than their employees. As practices begins to ramp back up, your gains can (and often will) outpace any short-term losses you may have incurred especially if you planned well and had a good cash reserve. As an employee, you lack control over when you can and cannot return to work. As an owner you gain more autonomy over your ability to operate and your ability to return in unforeseen circumstances.

Additionally, ownership carries extra benefits at everyone’s favorite time of year, tax time. As a business owner, numerous expenses can be written off. Office space, materials, transportation expenses, and other business-related costs all remain eligible as tax write-offs and this flexibility is of course another benefit to ownership.

 

Some Changes have Brought About new Opportunities

COVID has changed the way virtually all businesses operate, with rules and regulations necessitating distancing procedures, occupancy limits, and correspondence between companies and their clients. While temporarily affecting financial performance, practices are now presented with new ways of interacting with their patients and are finding creative ways to improve the overall customer experience.

The advent of newer methods has also presented many current practice owners with improved work-life balance. Less days at the office (for better or worse) may allow current owners to entertain a transition, or at least operate at a lower total capacity with a new focus as they move forward.

 

Dentistry is not Going Away

Unless a miracle cure for toothaches and dental health is discovered, or a method of teeth cleaning that occurs while we sleep is invented, dentistry will remain one of the most evergreen professions in the world. Unlike so many positions in the workforce, smart practice owners understand the cycles of short-term economic troughs and are confident in their position from the ever-approaching threat of a robot economy. If a practice has maintained sound financial performance, a smart forward-thinking business plan and a sterling reputation of high-quality patient centric service and professionalism, it will almost assuredly thrive once again.

The reality is that global pandemics are not the only potential crisis that business owners might face. Health issues, family emergencies, and natural disasters can all adversely impact practice owners for periods of time. The owners that recognize these conditions, prepare solutions in anticipation of these events, and adapt when they occur, emerge most successfully from what would be doom and gloom. Business may have taken in recent months, but the opportunities remain constant.  

To learn more about transitioning in or out of a dental practice amid the current market conditions, listen to our thoughts on our podcast, Transition Talk , where we talk in-depth about the messy path to practice ownership now in “the new normal” and beyond.