by Sarah Lynch
For more on this topic, go to www.dentaleconomics.com and search using the following key words: recession-proof, practice consultants, Sarah Lynch, ADS Transitions.
If you are a new dental practice owner, you have probably been bombarded by the dismal economic news. You may be incredibly concerned about how your practice will fare in the next couple of years. If you're an associate dentist, you may be feeling a pinch in your paycheck and wondering if you can buy a practice. If you're planning to sell your practice, you may be questioning the timing of the transition. What does the future hold?
As long-time practice transition experts, we have seen these cycles before. Many dentists who have been practicing a while have as well. The good news is that dentistry is recession-proof. That's not to say that dental practices in certain areas will not contract. Quite the contrary. Recent findings from economists at a large national practice acquisition financial company report that so far for 2008 they are seeing some practice gross revenues drop 9%-14% from last year on the practices they have funded nationwide.
How does a practice owner adapt his or her practice to contractions in the economy? To expand your practice you can either amp up existing marketing or acquire another practice. Depending on the size and scope of your operation, you may be able to simply acquire charts and records of another nearby practice, or you may buy another satellite office if you have the manpower to do it.
If you're experiencing significant patient cancellations or postponement of nonessential treatment, an alternative is to temporarily reduce workweek hours until demand for services picks back up. It may be a good time to examine existing practice management systems and engage experienced consultants to optimize your time in dentistry.
If you're looking to buy a practice, there is no better time than right now! Interest rates are low but are predicted to rise by the end of the year.
Unlike the national housing market, practice values remain strong, especially in the demand-pull areas, those metropolitan areas with immediate access to amenities including airports, public transportation, hospitals, education, and economic and cultural opportunities. Demand-pull markets have lots of buyers and limited sellers, thus keeping practice values at the high end of the spectrum, and providing further proof that we might have a geographic misdistribution of dentists. It's unrealistic for us to think we can bargain hunt in a demand-pull marketplace. The likelihood of finding a steal is an illusion and a waste of valuable career time.
Now if you want to quickly get ahead economically, think like a contrarian. To optimize your career time, investigate areas outside the box. Second tier cities (ones without dental schools) or smaller communities with good economies bode well. Many of the practice owners in these areas work a very balanced work week — four days, no nights or weekends — take ample time off to enjoy six to 10 weeks per year, and still take home significant six figure incomes. Practice prices are moderate, thus allowing a new owner to take home a nice income and save for retirement. I call these practices sleepers.
Many of these practices will net more than $200,000 per year to a new owner, even after loan payments! We have seen many satisfied buyers through the years take over practices in these geographic areas. These practices are their economic launch pad to expedite student loan payoffs, lifestyle enhancements, and retirement plan payments. The lesson is to optimize valuable career time now to allow more personal freedom in the future. Do you love what you do? If so, you can practice anywhere. The day your desire to practice wanes is the day you need to transition.
Nationwide bankers are still willing to fund practice acquisitions, even if the pricing is high (more than 75% of gross revenues). But depending on credit policy, a buyer's capacity to produce, and practice characteristics, we occasionally see requests from lenders to have the seller carry back a percentage of the selling price for two years. The good news is, dentists in general are good credit risks and bankers like the cash flow lending. Credit policy and underwriting standards may tighten up due to available money supply, and interest rates may go up, but money is still available to acquire a dental practice.
There is no time like the present to investigate your options and cultivate an awareness of the marketplace for your benefit.
Sarah Lynch is a practice transition specialist and partner at Jim Kasper Associates, LLC. She serves as president of ADS, Inc. She can be reached at [email protected] or (603) 355-2260.
