DAVID’S INTERVIEW WITH ME
Got an email from my friend David Phelps of Freedom Founders fame (www.freedomfounders.com). He wanted to informally visit over the phone and interview me about exit strategies and the general state of the union when it comes to selling your practice. I wanted to list 6 quick questions that I was asked and just a short response from me for each of them.
- What do you view as the current exit-sale models for dentists who to sell his or her solo-owned practice and who is the buyer? A vast majority of doctors are still relying on brokers and sales to individual doctors. Some sales progress from having an associate who eventually buys out the selling doctor’s practice or becomes a fractional owner in a partnership. While DSO transactions are in the news, they still represent a minority of the sales and purchases.
- Over the next five years, do you see the buyer mix changing significantly? I don’t think we will see a change for the average practice. The large solo or group practices that sell will find that only a corporate or DSO group can afford the purchase price. While sales to individuals will be the majority, I do believe that smaller groups as well as large DSOs will continue to increase market share. If this occurs, you will see a gradual decrease in the value of practices because fewer graduates will move from employee to ownership. This will decrease the buying market. I also believe that at some point Insurance companies will increase their ownership of start up practices. It would be foolish to think that insurance covering 75% of the working populations wouldn’t also take advantage of this captured market. This will also be the case for DSOs and larger corporations. Why would a large organization want to pay top dollar for an existing practice when it is so easy to compete with those same practices in a start-up?
- Can you differentiate among the variables of size (revenue/profits/cash flow, location, and dependence on insurance plans) as they relate to buyers and practice values? If we take these one at a time, I hope it is obvious that practices that have 63% or lower overheads, above average production (over $120,000/month), and are in a highly visible consumer location will be more valuable. However, this value will be limited. If we look at solo doctors purchasing an existing practice, value can be a barrier. If the practice is worth over $900,000, there will be few buyers who could qualify to purchase it. If overheads are average at 70% or above, it leaves little or no room at that level to service a debt without increasing production over the existing seller’s current level. If we look at a general dental practice, a Medicaid practice, and a boutique dental practice, and consider their relative value in the market place, most dentists would be surprised. The boutique practice is the least valuable in the market because it is by and large not transferable to another doctor. It generally has few patients, small staff, average overhead and a diminishing market share. The most valuable when compared to collections is a Medicaid practice: It is 100% transferrable, lots of patients, and will sell for almost 100% of the last 12 months collections. The GP practice will fall somewhere in the middle. When we consider practices that have a 70%-80% PPO patient load, I do not see a decrease in value. Across the US, the average city will have a 74% insurance coverage for dentistry. Even in a PPO driven dental practices, you will still find overheads in the best practices below 60%.
- In the next 5-10 years, what primary models of dental practice will exist? Not really knowing what you mean by “models of dental practice”, I certainly could give you a short list of what the successful practice will look like in the future.
- 6-8 ops
- 2 or more dentists
- 2 hygienists per each dentist
- Expanded hours including Saturday
- Wider range of services for a wider range of ages including: Implants, TMJ, Oral Surgery, Ortho, kids.
- Offices will adapt quickly and embrace change.
- They will understand their key practice numbers and use them to manage and act quickly if there is a downturn.
- They will embrace consumerism: They will constantly have their fingers on what the patients want and what they don’t want. They will make sure that their location is number one and aligns with what women want.
- There will be a rise in accountability: Those practices that thrive will accept that they are responsible for their results.
- Notwithstanding a credit contraction (recession), where do you see practice values going the next five years? Currently we have 6,500+ graduates a year. Of the graduates over the last 10 years only 32% of females have become owners and only 67% of the males became owners. When you consider that females make up more than 50% of the dental graduates, we have only about 50% of the group of graduates moving toward ownership. With more dental schools coming on line and less and less demand for our services, the value of dental practices will surely diminish. With fewer buyers, it becomes a buyers-market and sellers will suffer. I would never assume that you will get any more than about 1.5-2 times your net for the last 1-2 years in a sale of your practice. Factor in a 30% tax, 10% to the broker, and limited yields in the stock market, the sale will not affect the average dentist’s retirement.
- The ADA cites the average age of the retiring dentist to have increased from age 62 to 68 and now pushing across age 70. What to you believe is the cause for the later retirement? Since 2009 the average take home for dentists has decreased every year while the production has gone up. Insurance reimbursement has continued downward and competition has soared. When you consider that some dentists have “successfully” ended several marriages as a wealth building strategy, it does not surprise me that retirement age is climbing. If we don’t save about 20% of our income annually, invest it wisely, and maintain a sound business strategy, even 70 will not be the norm. It will go up. Most doctors somehow think that their rich uncle will leave them a limitless trust fund as they and their spouses go on spending 10% more than they make. Debt has become “normal” to these types of doctors and the day is coming when they realize that they will need to work into their 80’s just to pay the bills and eat. For the majority of dentists, it is a sad conclusion to a life of unlimited potential.
Michael Abernathy, DDS