Thinking of selling now? We are currently in a Volatile Market when it comes to selling dental practices.
Here’s Why…
Interest Rates
The Bank of Canada finally gave Canadians some breathing room on September 6, 2023, by leaving the key overnight lending rate at 5%. But we’re NOT out of the frying pan just yet. We have more Bank of Canada interest rate decisions coming up on October 25 and December 6. The Bank has indicated that further hikes may be necessary to bring inflation into check. It’s tracking the data, and it doesn’t really have any option BUT to bring inflation into check. So, it might need to increase the rates again this year because now’s the window to do it.
- Canadians are spending less.
- Inflation is still highbut coming into line with the Bank’s 2% target – CPI inflation was 3.3% in July 2023.
- GDP per quarter has dropped to essentially 0% for the second quarter.
- Labour shortages are still plaguing the economy, and employees are demanding higher wages every 6 months instead of every 12 to 16 months.
- Housing prices and activity have both softened.
The Big Squeeze
What about dental practice values? Well, since practice values tend to be based on cash flow metrics, they’ve also come down considerably from a year ago. There’s now a BIG SQUEEZE happening that’s leading to downward pressures on practice values:
- Buyers Borrowing Costs (i.e. interest rates) Are Up
- Depending on the particular purchase and the buyer, banks may ask the buyer to put their own money down.
- Landlords Pushing for Higher Rents
- Higher rent eats into bottom-line cash flow. In general, we’d like to see rent occupy a 5-7% expense of overall net production (being collections minus lab).
- Employees Demanding Higher Wages to Keep Up With Inflation
- This also eats into bottom-line cash flow. Percentage-wise, we’d like to see wages and benefits in the high 20% to low 30% of overall net collections.
- Patients Slowing Down Spending on Dental Care
- When money becomes tight due to inflation or fears of lost jobs/benefits, Canadians tend to view dental care as non-essential and put it off.
- Treatment Fees Have Yet to Increase Significantly
- One way for dental practices to offset these additional costs and downward pressures is to increase their fees. However, dentists may be reluctant to increase their fees (the ODA fee guide will help here) because of resistance from patients and competitive pressures from other practices that choose to adopt a more factory-dental approach (i.e. revenues are sustained by treating more patients for more things but for lower fees).
Practices For Sale
We have seen a lot of practices sitting on the market for a long time (much to the dismay of the dentist seller).
Why is that? It’s because the sellers unfortunately got caught in the ever-changing macroeconomic environment.
These dentists may have excellent practices from a micro-perspective. Lots of patients, lots of production (and good collections), lots of ops, managed expenses, great brand and team, etc. We’ve seen sellers submit very good historical internal data to appraisers with expectations of a particular value. But the data doesn’t reflect a current market value because of interest rates, staff wage raises, higher rents, etc., that have happened since. And the result is a lower appraised value than they expected. Again, the micro-factors are just one part of the overall story. The macro-factors discussed above are shaping the current market and putting significant downward pressure on practice sales and values.
Bottom Line
If you want to sell your dental practice, you need to be aware of what’s happening in the market and manage your expectations. But you don’t need to do it alone. At DMC, we are immersed in these details day in and day out. So we can give you a REALISTIC perspective on what your practice will sell for in the current market. We won’t sugar-coat it. We prefer our clients to be well-informed and know what to expect. But we can also advise you of things you may need to address before you get an appraisal that can help increase the value of your practice.
We are dental lawyers who prepare, market and sell practices. At DMC, we are not going to hype you up on something that isn’t real. We are here to SELL your practice and get you the BEST deal possible, not LIST your practice to make ourselves look good but then never actually sell it. We don’t attempt to sell practices; we focus on actually selling them!
So, if you’re considering selling your dental practice now or in the next 5 years, contact us for a free consultation to discuss your situation. Or contact me directly at michael@dentistlawyers.ca or 647.680.9530.
