Guarding Against the Decline of Dental Practice Value

Dental practices may be worth less in the future. Why? Demographics.

Our aging population has been studied and documented, revealing that baby boomers are working toward freedom 55. This is not just a company slogan – it’s a mindset. Many dentists are going to retire at the age of 55. They do not intend to practice for as long a time as the previous generation and they have planned and budgeted more effectively than their predecessors.

In the year 2002, many baby boom dentists will start turning 55. This will mark an unprecedented departure from dentistry. Another group of dentists who will be retiring and selling their practices at the same time are those who are now over 60. Many in this older generation must continue to work. Most had planned to retire by now but can’t afford to because they did not budget for unforeseen economic changes such as a threatened Government Pension Plan, low interest rates and the taxes payable due to the December 31 year-end which created a deferral of income tax payable.

Call any practice broker today and ask, “How many of your listings are retiring dentists that are selling?” and the answer is sure to be, “Very few.” Why is this? Have they all retired? No one can predict if the retirement situation for a mature dentist will improve but that is not the issue. Many dentists think it will not and the result is a reduced number of retiring dentists. This has created an over-supply of buyers who are eager to purchase a viable practice. Therefore, it is now a seller’s market and practice values are probably at their peak.

Any practitioner who works beyond the year 2002 will witness a slow deterioration in the value of his/her practice as the volume of practices for sale increases. Then the demand by the number of available purchasers will slowly diminish as they find practices to buy. When you have fewer buyers, it becomes a buyer’s market again. This is the law of supply and demand, a fundamental economic principal that determines the worth of an asset.

Do not ignore this highly predictable and inevitable event. Plan ahead and be prepared to manage your finances with this in mind. What should you do? I have several recommendations:

  • Plan for the sale of your practice two to five years in advance.
  • Find out what your practice is worth now and budget for the proceeds of sale in your financial plan. There are a few reputable and experienced appraisers to choose from.
  • Consider any reasonable overhead reductions and keep pace with new technology to increase value and make your practice more attractive to the potential future buyer.
  • Watch out for associate buy-in agreements because they may lead to complicated formulas (splitting patients) and, eventually, disappointment. I have witnessed many failed attempts when an associate is buying in. There are many reasons why these agreements don’t work.
  • Many practice sales include part-time associate agreements for the previous owner. This provides for a gradually reduced income and assures a better transition of the patients to the new owner.
  • Selling your practice piece by piece can be very complicated and will lead to disputes over patients, busyness, and price in almost every instance.
  • As long as there are able and willing arms-length buyers who will pay 100 per cent of the price up-front and in cash, avoid sophisticated deals where price is paid over a period of time. This will still be achievable for many years, at least until the quantity of bank-approved buyers starts to decline.
  • Keep your gross income stable or, even better, increasing. Practices in any state of decline worry buyers and usually attract a lower sale price.
  • The value of your practice is important but many dentists can earn just as much money by working another two to three years. Selling is a matter of choice. Don’t rush to sell just because of the proceeds of a sale when you will be giving up regular income.
  • Do not tell your staff and patients you are thinking of selling. This only leads to concern, or gossip, about your health, finances and other issues and can damage goodwill. If patients know you are selling, they may seek another dentist and gross could be affected.
  • Cost-sharing with another dentist is an option but be careful that you join with the right individual. Most dentists are unique in their clinical and management philosophies, and no matter how simple the concept of cost-sharing may seem, it is a relationship between two parties. I’m certain you know how different people can get themselves into trouble once they start sharing space, equipment and, possibly, staff members.
  • If you have an associate, or want to hire one, have your agreement in writing. Most brokers have excellent sample documents and you can always go to a lawyer.

Whether you are thinking of selling now or anytime in the next five years, start planning and asking questions now. There are many sources of information including appraisers, brokers, consultants, and your peers. I highly recommend you speak with someone who has recently sold and listen to their story. You will learn much from those who have just experienced what you are thinking of doing.

Ontario Dentist – March 1998