COVID-19 and Practice Transitions
How did the closure of dental practices due to COVID-19 affect practice values?
How did the closure affect practice sales?
Should I sell my practice now and get out? Or should I wait until all this blows over?
Are there any buyers out there still looking to buy?
Is financing still available? How are banks dealing with all of this?
These are big questions. These are important questions. These are questions we are being asked a lot lately, as you can imagine. While there is no definitive answer, we have insights that will be useful to you if you are contemplating a sale of your practice currently, or in the near future. Your practice is one of the most valuable assets you own. The answers to these questions are critical for you. Now is the time to rely on the experience and knowledge of a trusted professional like Practice Impact who specializes in practice transitions to guide you through these unchartered waters. If you are were thinking about selling before all of this happened, or if the shutdown has made you contemplate selling, call us to discuss the impact COVID-19 is having on the market and practice sales. We are offering a no-cost consultation by phone to address your specific questions and concerns as they relate to the affect this pandemic may have on the value and sale of your practice.
In the meantime, here are some thoughts to consider:
The forced closure of dental practices to all but emergency care should have little to no negative impact on practice values, at least not in the short term. That is the prevailing sentiment among practice brokers and appraisers nationwide. Whenever a practice is closed to patient care for any period of time, there is risk of patient attrition. Specifically, there is concern that patients will seek treatment elsewhere rather than waiting for the practice to open again. That risk of attrition results in a loss of practice value. However, in this instance, where are patients going to go? All other practices to which patients could turn as an alternative were also closed, which effectively eliminates the risk of attrition during closure. So, as long as you reopen your practice, patient attrition should not be an issue.
The bigger concern, then, is the pending economic impact created by the widespread closure of businesses during the COVID-19 pandemic. Unfortunately, we simply do not yet know what that impact will be, nor how it will directly affect dental practices, nor do we have a comparable event in history to turn to in order to make an estimated guess. This is simply unprecedented. While economic forecasts vary widely, there is one thing we are certain of: uncertainty. Among the myriad problems with uncertainty are: A) it cannot be quantified, and B) it affects perceptions. This means when it comes to valuing practices specifically, the potential risk associated with the future economic uncertainties cannot be converted into a dollar amount or even a discount percentage.
So, all other quantifiable factors being the same, practice values will be subject to the subjective perceptions of value found in the minds of prospective buyers. Right now, those perceptions are being influenced by the fear and risk of the unknown. This is causing some prospective buyers to abandon the idea of purchasing altogether. Others are taking a step back, adopting a wait-and-see strategy. And yet others see this as an opportunity to pick up bargains. This third group is relying on fear and panic among sellers to result in deeply discounted prices. We are seeing several regional corporate dental buyers taking this approach. Some sellers are falling victim to it, while others are keeping their wits about them and staying the course, realizing their timetable for a sale may need to be adjusted a bit, but confident in the knowledge there are buyers out there who recognize practice ownership is still the best option for most dentists in terms of providing a higher level of job satisfaction and higher income. The buyers who understand this, also understand their success is not reliant on external factors, including the state of the economy.
Most economists agree the economic fallout from the COVID-19 business closures will not reach the severity or extent of the economic recession initiated by the collapse of the sub-prime mortgage lending market in 2008; however, if that recession provides in any way a pattern for the economic impact to be anticipated in dentistry, we have reason to be optimistic. Based on our informal survey of clients during the years following the 2008 recession, the majority of practices were flat in terms of revenues. They did not grow, but they did not shrink. While this was not ideal, it was certainly survivable. Some practices did decline, however, and quite considerably, but we found most of those practices were heavily focused on providing elective, cosmetic and aesthetic dental treatments to a largely fee-for-service patient base.
Additional optimism can be found among banks who specialize in practice acquisition financing. The prevailing attitude among these banks is that things will snap back to relative normal quickly and practices will continue to perform as well or better than they have historically. The banks that we frequently work with on practice acquisitions are still processing applications for financing and approving loans for practice purchases, with the caveat that funding of those loans will be contingent on monitoring practice performance through a pre-determined period of resumed operations after the forced closure is lifted. If the practice performs at or above its pre-closure levels during that monitoring period, as anticipated, then the loan will be funded as planned, allowing a sale of the practice to take place.
As stated, there are many unknowns in the marketplace right now and there are a number of factors to consider. Every market is different, every practice is different and every seller is different. What might be right for you and your practice may not be right for another, so call us to discuss your specific needs and objectives. We can discuss current challenges and opportunities and tailor a transition plan for you, despite the uncertainties of the time.