Investor Dentists: Have they Changed the Dental Marketplace?

In the year 2007, our firm sold more practices to investor dentists (ID) than in any year previously. These unique buyers have several motives for purchasing a dental practice:

1. They have access to a large pool of associates due to the increasing supply of dentists in the GTA, thus dental manpower is not a serious concern for them.

2. This increasing supply of young, eager dentists is very much to the ID’s advantage because fee-sharing arrangements may be negotiated that are often lower than the traditional compensation agreements of the past.

3. Some owners agree to remain with the office, as the associate of the ID, adding to the security of having a sufficient number of dentists to service patient flow and treatment needs.

4. The ID has a readily available supply of funding which permits purchasing power beyond that of the traditional, younger, solo dentist buyer.

5. The track records of the past few years has bolstered the ID’s confidence — most are reporting increased revenues since the purchase and a resulting increase in net earnings.

6. Some suppliers are offering bulk purchasing rates to their larger customers, which adds to the ID’s net income by reducing supply costs.

7. Patient and staff retention rates have proven to be much higher than first anticipated by most IDs. This has reduced concerns over loss of income due to the changes in both ownership and staffing.

A recent discussion with several IDs revealed an increasing appetite for practice purchases, and most are strongly indicating that they wish to add to their portfolios. As well, there are a number of new candidates who have yet to build a portfolio but who are seriously seeking to buy practices. I predict that this increasing number of IDs is likely to continue for several years, but with some possible restrictions:

1. Lenders could reach a level of ‘comfort’ with some of the less sophisticated and experienced IDs, cautioning them to slow down their planned, rapid growth rate — this may reduce the ID’s buying power.

2. Some dentists may not be willing to sell to an ID, choosing to sell their practices to a hands-on owner, much as they themselves may have done when first starting out. This remains the more traditional and typical sale process of a professional practice.

3. Some IDs may become tired of the challenges of absentee ownership — issues such as associate turnover, staff and practice management come to mind. Another impact of Investor Dentists™ is that they are absorbing a sizeable portion of the available supply of practices. The traditional, younger, solo buyer (one to five years since graduating) who is seeking a practice as a career choice (as well as an investment) often may find him or herself blocked out of the buying process.

The experienced ID can usually analyse and act more rapidly than a first-time buyer. The ID actually creates a larger potential labour pool for his or her business model because there are fewer practices available for purchase. Thus a young dentist may be forced to continue to seek associateships with an ID while continuing to search for a practice to buy. The ID’s buying strategy does have some limits since the business model usually avoids the following:

1. Highly stylized and elaborate offices. The cost to acquire these practices often reduces or eliminates the excess profits the ID is seeking.

2. Practices that are highly influenced by a personal brand (the character and personality of the owner(s) for example). These are more difficult to staff with new dentists and the likelihood of a high patient retention rate is perceived as poor.

3. Dentists who perform a wide spectrum of treatments are not easily replaced. Practice income typically declines if the ID introduces less experienced dentists into these practices.

Would you sell to an Investor Dentist? Would he or she be interested in buying your practice? While every practice is unique, it’s something you may want to investigate before entering the sale process.

Ontario Dentist – April 2008