There is no doubt that recent events have left us all unsure what the future will bring. In a matter of days, normal life was turned upside down and most of our plans were put on hold, if not cancelled altogether. While we are still unable to say when life will return to normal, or even what the new normal will entail, we can begin to prepare for the future in the best way possible. Knowing this, our DDSmatch Southwest team, along with our colleagues in the nationwide DDSmatch network, have been hard at work talking to industry experts including doctors, CPAs, industry lawyers, and other key players in the dental practice transition industry. We hope that the work we have put in will give you a clearer picture of what dental practice transitions will look like in a post-COVID world.
If you are considering listing your dental practice for sale in 2020, signs point to this being an attainable goal.
We understand that most of our clients are curious how dental practice transitions will work in a post-COVID world. While we cannot give definitive answers as to how the industry will look after the pandemic, we do have insights into the new process of practice valuation, tips for doctors looking to sell in the near future, and information about post-COVID transition deal structures. Below we will lay out these insights to help you prepare your practice for sale.
Dental Practice Valuation During and Post-COVID
An accurate and reliable valuation is essential to the process of transitioning a dental practice. At its essence, a valuation tells buyers and lenders what the fair market price for your practice is. After pouring years of work into your practice you deserve to get what it is actually worth when you decide to list your dental practice for sale. Typically, valuation is heavily influenced by the income your practice has brought in over the past three years, leading to the question, how do you value a dental practice in the current climate?
How Valuations Will Likely Be Done in 2020
According to industry experts, the income valuation model, which is widely used in dental practice transitions, will still be used for the foreseeable future although with a few tweaks. This model closely examines your practice’s production, overhead, collections, and more for the previous three years. Right now your practice’s valuation will look at this information, with a special focus on 2019 as that data is most relevant. As we move forward into July 2020 and beyond, experts expect valuators will utilize a post-COVID “snapshot.” What does this mean? Valuators will take your pre-COVID numbers and compare them to your post-COVID numbers, with the goal of reaching 80% of your pre-COVID numbers within a few months of reopening. This goal is indicative of your practice heading toward recovery, which is what potential buyers and lenders want to see.
What Will Change When You Put Your Dental Practice For Sale in 2020
While it is comforting to know some key aspects of selling your dental practice will stay the same, there are still some things that will change. Most, if not all, dental practices around the country were closed for several weeks. Reopening has come with some important restrictions that require creativity and trust.
Fortunately, your patients and staff are all used to seeing you in a mask and trusting that your instruments are properly sterilized. Still, there are several new cleaning and sterilization procedures you will need to implement in order to keep patients and staff safe. In addition, you will likely see production and collections slow as a result of social distancing. Increased costs related to cleaning procedures combined with the anticipated decrease in collections will result in a very different financial picture if you are not carefully monitoring it.
Remember that the goal of the next few months is not necessarily to return to the way things were in 2019, but to keep your numbers proportional. It is now more critical than ever to be aware of your financials, particularly how all your costs are shifting. If you are planning on putting your dental practice for sale in the near future you need to be highly aware of the way your practice is changing financially. Moving forward, remember to adapt where necessary and do not make assumptions.
Static Competitive Pressure
One helpful thing to keep in mind as you prepare to make changes to your dental practice is that competitive pressure is mostly static. Around the country dental offices have been shut down for weeks or months, and reopening will require the same type of restrictions across the board. Other dental offices are not stealing your patients while you are closed because they are also closed. In addition, your patients are highly likely to return for their regular treatments as soon as you reopen. Treatment schedules may have been paused momentarily, but not stopped altogether.
Of course, you should not expect to be back to 100% production within the first few weeks of reopening. Some patients will be wary to return, particularly if they have certain health related risk factors. Many patients have lost their jobs and insurance coverage which may cause them to put their treatments on hold. However, as we stated above, every dentist in your area are in the same position.
Lenders See Dental Practices as a Good Risk
Historically, lenders have seen dental practices as a good risk due to extremely low default rates. According to the lenders we have spoken to, there is no reason to believe this trend would change. Buyers should have the same access to lending as they did pre-COVID. However, the application process will probably be slightly different than it was before. Some lenders will prioritize certain buyers, such as those with a strong record of production or those with a large amount of cash. Lenders may also take more time and pick only the strongest applications resulting in a longer wait time for application processing and a reduced pool of buyers.
On the valuation side, lenders are expected to use the same approach as the business valuation experts outlined above. In order to properly estimate the value of a dental practice for sale, lenders will take a “snapshot” of your post-COVID numbers and compare them to your 2019 pre-COVID numbers. Lenders will primarily examine your production and costs, making sure that your practice is on track and proportional to your 2019 financials. As long as your costs remain proportional and your practice is on track to its 2019 levels of production lenders will likely deem it worth the same now as it was worth in 2019.
Steps You Can Take Now to Prepare Your Practice
While it may sound counterintuitive, we have seen an increase in potential buyers recently. Rather than shying away from purchasing a dental practice in 2020 many dental associates have decided now is the time to take control of their careers. After the upheaval of the past few months, these associates are realizing the benefits of owning their own business rather than simply being an employee.
Taking the current landscape into consideration, if you are ready to put your dental practice for sale, here are some steps you can take to prepare.
- Maintain Flexibility. Keep in mind there are still a lot of uncertainties when it comes to post-COVID dental transitions. Experts can make their best guesses, taking into consideration current and historical data, but the truth is we don’t know exactly how the process will change. We have certainly seen buyers and sellers put their transitions on hold as the pandemic ramped up and now must reassess their deals. The process may take longer than it did in the past, so try not to set expectations in this regard. Deals may need to be restructured to account for increased risk and uncertainty the buyer is taking on. The best thing you can do for your peace of mind is to remain open to every possible scenario.
- Gather a Trusted Team. Even pre-COVID, dental transitions were complex, however now more than ever, it is crucial to have a team of dental-specific experts on your side. Before you list your dental practice for sale you must gather a group of trusted advisors. At minimum your team should consist of a dental-specific attorney, CPA and tax professional, and a practice transition specialist. Your team will help you make the most of your time and money, and create a plan that will guide you through the process.
- Move Toward Normal. Things may never return to exactly the way they were pre-COVID, but we should still strive to be as close to “normal” as possible. As we have stated repeatedly, getting your production back to 2019 levels with proportional costs is one of the most important things you can do to prepare your practice for sale. Make sure your staff is back, patients know they will be safe in your office, and your community still trusts the care you provide.
- Maintain Office Staff. The news is full of reports about unemployment, with nearly every sector affected in some way. Hopefully your office and staff are still operating as usual, but we realize that may not be the case. If you are forced to reduce your staff or their compensation while trying to prepare your dental practice for sale you must consider how this will impact your practice as a whole. Your staff plays a major role in your bottom line and you must have reliable people in place to ensure your office runs smoothly.
- Protect Your Patient Base. As important as reliable staff is, your dental practice could not run without a solid patient base. In fact, your patient base is the core asset of your practice. As stated above, your patients are highly likely to return to their regular treatments as soon as you reopen. However, patient loyalty is not a guarantee and requires a bit of work on your part. As you make changes to your processes, such as extra cleaning and social distancing measures, make sure you communicate them clearly with your patients. Utilize your online presence to announce important changes around the office. Through your website, social media, and additional marketing efforts, educate your patients on the efforts you are making to keep them safe. Consider making a short, friendly video highlighting your new safety protocols, sterilization procedures, and PPE equipment. Share the video to social media, through an email newsletter, and on your website. In addition, your staff should begin calling patients to inform them the office has reopened, what the new safety processes are, and answer any questions your patients may have.
- Tap Into Your Creativity. Preparing your dental practice for sale in the post-COVID world will take creativity. Right now most dental practices are seeing limitations on the number of patients they can see a day. In order to accommodate these new rules, and help patients who are worried about missing too much work, we have seen some doctors extend weekday treatment hours or open their offices on the weekend. In addition, doctors are getting creative to help patients who have lost jobs and insurance coverage recently. One option to consider is an in-office dental membership or subscription plan. For a monthly fee patients gain access to certain treatments, such as exams and x-rays. Finally, some doctors are considering how they can make their offices run more efficiently. These doctors are hiring basic wage employees to handle sterilization protocols so higher-cost employees can attend to collections and production.
How Post-COVID Deal Structures Will Work
Doctors who put their dental practice for sale in a pre-COVID world could reasonably expect a successful transition, as long as they put a little bit of work into it. Whether they wrote a letter to patients explaining the transition, or continued working alongside the new owner for a period of time, there were steps the doctor could take to keep production levels steady. At this point in time it is too early to tell what steps a doctor can take to ease practice transitions, and this uncertainty adds risk to the buyer. Deal structures will have to change to reflect this added risk.
One new deal structure we are already seeing is what is called a “holdback.” A holdback adds extra cushion that protects the buyer in case the practice does not climb back up to its expected production. According to the typical terms of a holdback deal a percentage of the selling price is held back in escrow until the practice reaches certain performance levels. After reaching these benchmarks the money is released to the seller. If you are putting your dental practice for sale in 2020 or beyond be prepared to encounter this type of deal structure and discuss it carefully with your team of advisors.
We’re Here to Help Your Dental Practice Transition
It is never too early to start planning your practice transition. In fact, the earlier you start, the better off your practice will be when it comes time to move on. If you are considering transitioning your dental practice, even if you are four or five years away, talk to one of our dental practice transition specialists. The experts at DDSmatch Southwest offer unmatched experience and professionalism in the industry, meaning your dental practice transition will be as simple as possible.
The past few months have proven to be difficult and stressful for everyone. We understand that you likely have questions and we are working hard to gather all the information you need to feel comfortable with your dental practice transition. Remember that we are here to answer your questions any time, with no obligation. Contact us today to learn more.