Covid-19 & Dental Practice Sales
𝐴 𝑀𝑈𝑆𝑇 𝑟𝑒𝑎𝑑 𝑓𝑜𝑟 𝑒𝑣𝑒𝑟𝑦𝑜𝑛𝑒 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑖𝑛𝑔 𝑏𝑢𝑦𝑖𝑛𝑔 𝑜𝑟 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑎 𝑝𝑟𝑎𝑐𝑡𝑖𝑐𝑒
The impact that Covid-19 will have on the dental practice sale market is uncertain. However, we are beginning to see activity in the market that provides us with greater clarity on how things may play out.
Firstly, the government has provided small businesses including dental practices significant support including paying for a large proportion of auxiliary staff wages for 6months, some rent relief, ability to defer loan repayments and cash boosts. There are also other initiatives all directed at keeping small businesses afloat. Further, there has recently been a reduction in the treatment restrictions imposed on dental practices. All this means that the majority of practices will get through this.
However, those that cannot survive, even with this support, probably were not good businesses to start with. They either operated in a highly competitive and saturated area and/or had a very high fixed expense base such as exorbitant rent. High staff wages are also an area that can impact profitability in these practices. It is likely we’ll see several of these practices put up for sale soon. These will be ‘junk’ practices that will attempt to be sold as a whole to avoid having to be shut down and have their leases paid out or bankruptcy declared by the owners. Perhaps a positive of this period is that these practices will be easier to identify whereas in the past their junk status may have gone unidentified by buyers. Avoid these practices!
On the other hand, there may be practice owners out there who have just been through perhaps the most stressful time in their business life. These owners may have very good practices or practices with significant opportunities for growth, but they just don’t want the headaches of ownership anymore. They may not be absolutely desperate for a sale but will be willing to sell at the right price. Many of these owners are likely going to want to continue working in their practices. There are problems that are associated with these practices as well as significant opportunities.
Further, there may also be sellers that are highly leveraged and need to offload a good performing practice quickly. In this case, there are no underlying issues with the practice, but the owners have significant accumulated personal and business debt that they need to reduce. Often these sellers may own multiple underperforming practices and their debt load has just gotten too high. Covid19 could have been the straw that finally broke the camel’s back. For a potential purchaser these practices may present short-term challenges but can be great long term buys.
There may also be practice owners out there who always intended to sell their practices who now hold-off and attempt to claw-back any lost earnings from declining super balances etc. Typically, these are dentists that are approaching retirement age. This will somewhat temper the supply side of the practice sale market. However, overall it is our belief that there will be an increase of practices come to market.
In terms of the demand side. The belief from people outside our industry may be that the demand will completely drop off for dental practices. However, this is not what we’re seeing on the coalface and we did propose at the beginning of this pandemic that there will still be a demand for practices. The main reason for this, we postulated is that there will be cashed-up associates looking to buy themselves a secure job. They may have reduced billings at their current clinic from the owner increasing hours and/or monopolizing the more profitable procedures.
In the last week, our business, has seen huge enquiry from associates looking to purchase a practice or looking for guidance in the next steps. Some of these enquiries, do not have a practice in mind but have lost secure jobs or have had to take on reduced hours with corporates or with privately owned practices where the owners have increased their own clinical presence. We know of a practice for sale in Brisbane which has attracted 40 enquiries in the last week and which has received two solid offers above the asking price.
There will also be a difference in the demand for small to medium practices compared to large practices. Generally, the larger practices with their large sale price only attracted corporates and priced out most associates. There are indications that corporates as well as private equity groups will not acquire practices in the short to medium term and the demand for these practices will be low. Conversely, the demand for small to medium practices will likely increase.
Overall, we predict more activity from both the supply side as well as the demand side for small to medium sized dental practices. There will be highly motivated sellers in the market as well as highly motivated buyers. We do predict that values for these good solid long-term small to medium dental practices will hold up and alternative, albeit low chance scenario is that we may actually see a rise in value of practices. The mechanism for this will be constrained supply of practices coming on the market with vendors assuming their practice value has fallen, combined with many experienced and cashed up associates out of work.
The biggest issue in the time ahead is the uncertainty of the economy. We understand that poses a challenge in the short to medium term but for many people, finding a good practice that meets their needs might present an amazing long term opportunity that will set them up in their career.
Our advice is certainly to be open to opportunities but also examine these throughly to ensure that you are mitigating the risks ahead. Associates need to consider that the biggest asset they have is their earning potential for the dentistry they do with their own hands. One of the advantages of practice ownership is it secures you the ability to practice in an uncertain job market.
The one big caveat facing the practice sale market is financing. There is evidence that many lenders are tightening up and waiting for the uncertainty to pass. This will throw a spanner in the works for sellers and buyers alike.