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Dental Practice Sales & Transitions: An Update on Current Market Conditions

Articles, Business Life

As a nationwide leader in dental practice sales, our team at McLerran & Associates is responsible for staying on top of industry trends as they relate to practice valuations and transitions. In this article, we discuss current market conditions for both doctor-to-doctor practice transitions and DSO transactions and explain how changing economic factors are expected to impact the dental practice sales ecosystem.

 

Looking Back

A confluence of unique factors resulted in a record level of M&A activity in the dental industry over the past 24 months. From a supply perspective, more practices were offered for sale as a result of the baby boomer generation reaching retirement age, younger dentists choosing to exit practice ownership earlier in their career to obtain better work/life balance and alleviate the burden of management (which has increased dramatically in recent years in large part due to the challenging labor market), and large practice owners choosing to liquidate the equity in their businesses at premium valuations driven by private equity’s continued consolidation of the dental market. Along with an increase in the availability of acquisition opportunities came a surge in demand from buyers, driven by steady demand from private buyers looking to pursue practice ownership combined with a massive increase in demand from DSO/Private Equity buyers after dentistry proved (once again) to be a remarkably resilient industry following its quick recovery from the pandemic. Many DSOs were also looking to deploy as much capital as possible in a low interest rate environment and/or re-capitalize prior to entering a more challenging economic climate. All these factors led to a substantial increase in practice  valuations, especially for larger practices (revenue of $1.5 million+) that are acquisition targets for DSO/Private Equity buyers.

 

Doctor-To-Doctor Practice Transitions

The current market for doctor-to-doctor transactions remains stable and is still a seller’s market to some degree, as there continues to be a surplus in demand from buyers compared to the supply of quality private practice acquisitions opportunities available in major metro areas. As a result, strong practices (revenue of $750,000+) located within 30- 60 miles of a desirable metro area typically sell very quickly and are trading for premium valuations. Conversely, we have seen demand for smaller practices (revenue of less than $500,000) and/or offices located in rural markets decline over the past 24 months, resulting in a longer sales cycle and lower valuations.

We are happy to report that several experienced nationwide dental lenders and multiple regional banks continue to provide buyers with conventional loans featuring 100% financing plus working capital, 10-15-year loan terms, and attractive interest rates, making private practice ownership possible for most dentists with 2+ years of experience, good credit, and a modest level of liquidity. We expect the rising interest rate environment and the threat of an upcoming recession to have a limited impact on doctor-to-doctor practice sales. While rising interest rates will have an adverse effect on cash flow and some less confident and/or qualified buyers may put their plans to pursue practice ownership on hold until the economy stabilizes, there are ample confident and qualified buyers ready and able to pursue their dream of practice ownership.

Therefore, we expect demand and valuations for solid private practice acquisition opportunities to remain steady for the foreseeable future.

 

DSO & Private Equity Transactions

As previously noted, practice valuations from a DSO/Private Equity perspective have ratcheted up substantially in the past 24 months and are currently hovering at all-time highs, leading many successful practice owners to consider affiliating with a DSO. While we expect demand from DSO buyers to remain steady in 2023, DSOs will likely be more selective regarding the practices they choose to acquire moving forward.

As a result, quality assets (established practices located in attractive geographic markets with a history of strong financial performance) will continue to garner the attention of multiple bidders and trade for premium valuations while practices with more transitional risk (less attractive geography, single doctor offices, high production/ patient, etc.) will likely see less interest from DSO buyers and possibly trade for lower multiples. As we transition into a more challenging economic environment, some DSOs (at the request of their banking partners) will be forced to enter a holding pattern where they focus less on growth via acquisition and more on efficiently operating the practices within their network (same-store sales growth).

That said, we are less concerned about rising interest rates than the availability of capital. Given these factors, it is more important than ever for sellers to create a highly competitive environment for their practices and vet the buyers at the table to ensure they have the operational and financial fortitude to close on the purchase and successfully reach a future re-capitalization event.

In Conclusion, The Greek philosopher Heraclitus is credited with saying “The Only Constant in Life is Change.” This holds true in all aspects of life and is certainly applicable to how rapidly the dental industry (and the broader economy) has evolved over the past few years. The good news is that with change comes opportunity. While 2023 will likely present some challenges, we have no doubt that the dental industry is well-positioned to weather the storm and the practice transition marketplace will remain viable for many years to come. 

 

Brannon Moncrief
McLerran & Associates
Principal – Chief Executive Officer

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