Your business survived COVID, and the reward waiting on the other side was the Great Resignation. You weathered that storm, and now you are greeted with rampant inflation. Now, the benefit of surviving all of this is a looming recession. It has been a hard run, and likely only going to get harder.
Like you, I spend a lot of time reading the financial press. Each paper, website, and author has a unique perspective on the US economy. Although the news is great, I seek out those in the know for their opinions as well. I spent most of the spring meeting with leadership at investment banks and owners of private equity (PE) companies who have investments in DSOs, but the most enlightening conversation I had was with an economist from ITR Economics. ITR is an economic think tank with an impressive record for predicting the future with a 94.7% forecast accuracy (per their website).
- Dental practice valuation 101
- The impact of inflation and higher interest rates on practice values
- Determining the purchase price of your practice; should you also sell the building?
I asked their economist how it is possible that in the face of rising interest rates and profit compression due to rising costs of labor, our clients are enjoying the highest exit values to date (three of our clients sold for more than 10x EBITDA and one closed for 12.8x)? He said he was happy for them, but this is likely going to come to an end as we are not yet in the recession. He shared with me that the US GDP will likely peak in Q4 of this year, and we will enter a recession at least through 2025. He also shared that the dental economy lags behind the broader US economy by one quarter, so we might see spending on dental begin to dip in Q1 2024. Either way, we need to brace ourselves for the inevitable.
As I thought through the situation, any dentist who is looking to sell at the top to an IDSO/DSO will have to work back three to five years. Thus, if someone decides to wait out the recession and sell on the other side, they very well could be working until 2030! That is a long time.
You have a choiceSo, here we sit at the crossroads: sell this year, or hunker down and wait for the recession to pass. For many, it makes sense to stay the
Today, it is common for $1M of EBITDA to sell for 8x, or $8M. Multiples will possibly remain firm, and your business has simply increased operating expenses by $100,000. If that is the case, then you are likely looking at an $800,000 decline in value. But, if you take on those additional expenses and multiples decline from 8x to 7x, then you could be looking at a decline in valuation closer to $1,7000,000.
Another thing to consider is that selling to a DSO can provide shelter from the storm. Although the big check is nice, many DSOs have loads of infrastructure, and robust teams to help you grow your business, or at least maintain it during challenging times. They can typically provide cost savings and higher reimbursement rates with in-network insurance providers. And for those facing turnover, many DSOs are excellent at recruiting and training new team members, including new dentists.
Now that you are armed with this information, how will you benefit from it?
If you’re wondering where your practice’s value stands today in preparation for the upcoming market conditions, don’t hesitate to pick up the phone and call TUSK. Contacting us today helps ensure that you exit at the top and maximize the value of your life’s work.
TUSK is a recent financial supporter of Dental Economics.
This article appeared in the July 2023 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.