Investor Dentists: Will they Drive Valuations even Higher?

Investor dentists are entering the marketplace in increasing numbers. These individuals typically seek to buy established practices and then employ the previous owner and/or new dentists as associates. Most do not actively work in the practices they buy. What effect is this emerging trend having on dental practice sale prices and valuations?

We receive inquires from a select group of dentists who for years have been seeking dental practices purely for investment purposes. Ever since the early 1980s, when retail dentistry became popular, the trend towards absentee-owner dental practices has been growing slowly. Today’s sophisticated investor dentists study the expanding dental economy and report the following factors as motivators for their business plans:

1.     Low interest rates that are stimulating borrowing and boosting purchasing power.
2.     A steady growth in dental spending at the consumer level, contributing to increased dental practice earnings nationwide.
3.     A more entrepreneurial style of recently graduated dentist.
4.     Third-party financiers who are seeking secure investments, thus increasing interest in dental practice ownership.

These factors combined with the widely held knowledge that dental practices are profitable are influencing values. This strong demand for desirable practices is likely to increase sale prices. One dentist recently mentioned that he predicts the regulations could change, permitting anyone to buy a dental practice, a custom that is legal for medical practices. The regulations in Ontario permit only a dentist to split fees with another dentist, although management services can be provided to dentists, at a fee. Thus, we see more management companies seeking to purchase dental practices, if only to own the equipment and facilities, while allowing the dentists to earn the fees. Their aim is to profit from the management services offered while still complying with the current regulations – a practice that appears to be more feasible.

Over the past year, there has been a significant increase in the number of inquiries from these management companies. They usually examine a dental practice solely as an investment opportunity and budget that well managed dental practices will yield a gross profit margin, after all the dentists and other expenses are paid, of five to 15 percent of annual gross income. For example, a practice grossing $500,000 per year could yield a return on investment of $25,000 to $75,000 per year. Absentee owners and investor dentists typically use a multiple of annual earnings to indicate value, much like the stock market. Recent open market transactions indicate that investor dentists are prepared to pay between 10 to 20 times the annual return on investment figures.

I predict that the trend towards more absentee owner practices will continue and that management companies as buyers will increase sale prices. In the event that the dental regulations were indeed to change (although I suspect it’s a highly unlikely event) such that anyone could own a dental practice, valuations would increase significantly.

What would your practice be worth to an investor dentist?

Ontario Dentist – July 2005