When my father started his very first job in the dental supply industry in 1948, the dental practice sales marketplace did not exist. When a practitioner decided to retire or relocate, the norm was simply to discontinue operations and close the door.
The usual result was that a few of the busy neighbouring colleagues would take some of your patients into their already overbooked practices, with the equipment and furniture often ending up in storage or in the garbage.
The Evolution of Dental Practice Brokers
During the 1950s, only a few dental practice sales transpired, usually involving a couple of thousand dollars for the equipment and the customary one dollar for the goodwill. It was at this time that graduating dentists began to recognize the value of a “turnkey” dental business system, versus setting up from scratch. However, the abundance of patients meant that the value put upon such a business system was merely a token payment, mostly out of respect.
Throughout the next three decades a series of major changes took place in the key dental practice marketplace indices, and as such, practice values have steadily increased. The most significant change was to the dental manpower ratio when expressed as the number of dentists to patients. My research, which incorporates Stats Canada data and RCDSO listings of licensed dentists, indicates the ratio has decreased such that it now favours the owner dentist, with an active patient base – and not the associate dentist, who has a limited number of patients to rely upon.
Essentially, the shortage of available patients increases the business value of the operating dental business system that treats those active patients. In my view, purchasing the many components that make up the asset known as goodwill, along with records of these loyal patients, has proven to be one of the most economically sound decisions a young dentist can make.
The cost of building and equipping a new dental office has increased from about $25,000 in the 1950s, to approximately $250,000 today. The price paid for goodwill has increased from the token amount of one dollar, to values that exceed half a million dollars in some recent sales. In fact, the majority of the price paid in some of those sales was for the goodwill. Equipment values also continue to rise, as the technology employed in a typical dental office is more costly than what was used 50 years ago, which, in turn, raises the average selling price even higher.
If we perform some basic calculations, it is easy to demonstrate the rapid growth of this relatively young market. As well, we can prove that the investment made by dentists to buy or set up a practice anytime throughout the ’60s or ’70s is probably one of the greatest they ever made. Compare the amount spent to set up versus today’s selling prices, and we see double-digit rates of return over 20 or 30-year periods. This is unheard of with most other investment vehicles.
The necessity for regulation and licensure of dental practice brokers became evident in the 1970s, when some dubious transactions garnered the attention of provincial Registrars. Accordingly, each provincial regulatory body has since developed a set of ethics and standards that regulate the individuals who have obtained a license. This arrangement is similar to the various provincial dental regulatory bodies. A dental practice is now defined as a business, carried out for profit, under the Real Estate and Business Broker’s Act. A dental practice, under the various definitions, may include leaseholds, business fixtures, dental equipment, stock, goods or chattels and most importantly, goodwill.
Most provincial Acts contain some variation on the following: “no person shall trade, which includes disposition or acquisition or transactions in real estate by sale, purchase agreement, lease or attempt to list such, or to act, advertise, conduct or negotiate directly or indirectly, unless they are a Licensed Broker or a Licensed Salesperson employed by the Broker.”
These types of regulations stipulate that accountants, lawyers, dental dealers and others who are not licensed brokers are restricted from arranging dental practice transaction for a commission ÷ a common occurrence many years ago in the unregulated era. This regulation has also assisted in the rapid growth of the specialized business brokerage service.
“the decision to use a business broker for the sale of your practice should not be based upon the profit motive alone.”
Alternatively, it is legal for an individual to sell his or her own business. Some practitioners I know have the energy, skill and time to represent themselves successfully. Some do not.
An informal survey of my clients indicates that the decision to use a broker was typically not influenced by skill and time alone, but also by the cost. How best to utilize personal time is a decision that many of us struggle with whenever we make changes to our professional lives that involve the need for expertise. When we are young, we often have the time to learn many new tasks, such as buying our own stocks and cars. As we age, we often retain a broker for the more complex task of disposing of major assets, such as a home or practice. Results can vary significantly when we measure those achieved by an inexperienced individual versus those of a professional.
My market data indicates that a dental practice transaction, arranged through a broker, will usually produce a higher sale price. This is not necessarily favourable to the buyer, but in todayâs sellers’ market it is the reality of the supply and demand cycle that they must often accept.
However, I believe that the decision to use a business broker for the sale of your practice should not be based upon the profit motive alone. It is also important to consider your unique skills, energy and available time when deciding whether one is required or desired.
Dental practice brokers have been in existence for over 25 years in Canada. They are required to be licensed, participate in mandatory continuing education, and be accountable to a Registrar ÷ all of which serve to encourage a higher overall quality of service to the dental profession.
I foresee that the dental profession will continue to consume this very unique service for many more years, regardless of the market changes that are without a doubt on the horizon.