Let’s Talk About a Recession

I started my legal career in 2008 out of my parents’ basement.  What a great time to start, right?  Lawyers weren’t getting hired back at the big firms.  Small law firms were hiring a new lawyer for ~$30k / year.  I had offers from new grad law students who needed to article and were prepared to ‘volunteer’ for David and I.  And, to top it off, young minds stopped considering becoming a lawyer because the idea of making lots of $$$ and having lots of prestige suddenly disappeared.  That’s how I started. That’s the world I entered into.  Awesome.

So I finished articling (Ontario Power Generation and McMillan – a big Bay Street firm) and told my principal lawyers that I was going to leave and go do ‘my own thing’ and that that they probably didn’t want me back anyways because I wouldn’t be what they wanted.  I needed to be my own boss.  And what a year to be your own boss!  In debt + no prospects + no experience + working out of your parents’ basement, etc.  I tell you what, though, it sure pure puts hair on you n**s.

What I learned in 2008 is that you gotta be lean and mean to survive.  I kept telling myself: don’t worry, things will get better, business will pick up and then I’ll be ready to take advantage of all the growth.  Just stay lean and mean and eventually it’ll work out.  Looking back at those 12 years, I can say that it was tough but worth it.

Not to gloat, but my law firm is now the largest dental-only law firm in Canada.  I’ve also seen more of Ontario and the Caribbean (through our dental mission trips and some CE courses) and met hundreds of dentists with this “job”.  We’ve helped countless dentists sell or buy practices, get through tough legal times, and get educated while saving big $$$.  I’ve also had fun too – traveling, partying, dancing and eating / drinking with many dentists who I now consider good friends.  It’s been a wild ride.  And certainly, it’s far from over.

But we’re at a cross-roads.  The economy has experienced the largest gains since 2009 than it ever has.  Home prices have gone through the roof here in the GTA – so much so that new grad millennials coming out of school with huge debt simply cannot afford to buy a home in the Toronto unless they’re making $200-$400k a year (family income) or getting $$$ from the bank of mom and dad.  Interest rates have remained historically low.  The prices for dental practices have gone higher than they’ve ever been – particularly with Dental Service Organizations raising hundreds of millions of dollars and needing to deploy it as well.

But don’t recessions come roughly every 10 years right (1981-1982; 1990-1991; 2000-2001; 2008-2009…)?  So are we do for one?  And what could possibly get us there?   Now, I’m not a pessimist; I’m not calling for a recession; I’m calling for us to be pragmatic and realistic.  Things cannot be rosy all the time.  History teaches that.  So we must be prepared.  You know: stock up on supplies and have a few months’ cash in the bank type thing in case of a rainy day, month or year.

Now, with the Covid-19 spooking markets, some are saying that this is the catalyst that’s going to put the economy into recession.  Entire populations (China, Italy, Iran, South Korea) have been shutting down large parts of business and social life.   Curfews imposed type thing.  Going out in public without hand sanitizer and a mask (which doesn’t really work apparently) is now scary, forget about travel plans (no cruises or trips overseas).  Once the financial data for this period comes out in a few months, it won’t look good for a lot of businesses.

So that brings me to this question: is the heyday of selling dental practices for astronomical multiples gone?  In my opinion: maybe.  Great practices will still sell for great prices; good / average practices will undoubtedly suffer because they’re ill-equipped and haven’t been investing in systems and people; and sub-par practices will feel the most pain.  Those who recently spent $750k on a startup and have no clue about systems, team-building, and branding and have a limited dental skill set will be the most exposed to financial pain (and possibly ruin).  And that’s going to suck and they should consider getting out now.

The saving grace for our beautiful industry is this: dentistry is RECESSION RESISTANT, but not RECESSION PROOF.  Furthermore, it’s not like everyone is going to the dentist when times are good anyways, right?  We only have about 40-50% of the general population visiting the dentist during the best economic times.  Yes, patients should still go to the dentist to get an extraction or root canal (because they’re in pain). But will they go for their cleaning or filling?  Do they really need to have ortho done and veneers / crowns if the weddings they were supposed to go to have all been postponed due to Covid-19?  Plus, think about insurance companies: they’re going to be looking to cut back on non-essential coverage for new policies (new employees no doubt) so that’s where specialists like orthos will suffer the most.

Here are a couple of scientific studies done to address this question of whether a recession impacts dental practices:

1. April 2019 Study: “The effect of the Great Recession on the demand for general oral health care and orthodontic care“.  Bottom line: the great recession of 2018 slowly and steadily decreased demand for dentistry (for which the industry hasn’t fully recovered), reaching a low of about 38.4% for general dentist visits in 2010 with ortho taking the biggest hit.
2. Jan 2014 Article: “The Impact of the Financial Crisis on the U.S. Dental Industry“.  Bottom line: it took about a year for the impact of the recession (unemployment, lower net income, etc.) to negatively affect dental practices (no shows, lower case acceptance, higher A/Rs).

Suggestions for dental practices to better plan for a recession?

1. Start the process to sell your practice. If you’re at that age / state of mind / have health issues / tired of the business admin stuff (team, IPAC, marketing, technology, etc.), and you were going to do it anyways, you better get the process started NOW instead of during a recession. You can speak with me (michael@dentistlawyers.ca) or David Mayzel (david@dentistlawyers.ca) about what you need to get things sorted out.  It typically takes 2+ years to clean your corporation, lease, and employment matters up properly so you get the most $$$ and best terms when you do sell.  And if you’re thinking about selling and associating for 2-5 years, then now is also a good time to have that conversation so you know how to be prepared.
2. Save up from your retained earnings. I suggest saving 3-6 months worth of your current business expenses.  Leave the money in your dentistry professional corporation.  Don’t buy new fancy equipment (e.g. chairs) if the old stuff still works.  Don’t spend on that 4th op if the first 3 ops aren’t fully utilized.  SAVE!
3. Source less expensive dental supplies.  When it comes to supply companies, there are very big discrepancies in what you can buy out there; you just have to be diligent and do your research.  Supplies typically account for 4-7% of overall gross; if you’re well beyond this, you should think about cutting back to manage your expenses better.
4. Cut back on personal expenses. Biggest are paying for luxury items (car, watch, clothes, etc.), travel, hobbies, and meals and entertainment (i.e. non-essential).
5. Borrow working capital if you need to. Go to the bank and get the process started to get a business line of credit.  It takes as few weeks to get all the paperwork done, so don’t wait until the last minute.
6. Be prepared to modify agreements ($$$, compensation structure, hours, benefits) with team members. You don’t want to wait until the last minute and then surprise your staff by firing them because demand has dropped and they cost you too much.  You can give them proper / enough working notice from now that you need them to accept lower wages, or a percentage based compensation or less hours.  P.S. the amount of notice you have to give them depends on how long they’ve been with you and what your employment agreements say.  You can also replace expensive staff (office managers for example) with new hires or delegate their tasks / duties down to receptionists.  Or just get your spouse to take over if they’re not doing anything else!
7. Invest in lean + mean marketing.  The cheapest and most-effective form of marketing is WORD OF MOUTH referrals.  You should be asking / inviting your patients to bring their family members to the practice.
8. Remove barriers.  Accept assignment if you are historically non-assignment.  Offer third party financing if you haven’t offered this before.  Find and offer less-expensive labs for patients to consider.  Do smaller treatment plans at a time.  Do whatever you need to do to remove barriers to getting cases accepted!
9. Add Value. I’m a big fan of adding value.  That’s why we at DMC do both the marketing / listing / legal work for selling a dental practice AND we come in much less expensive than a traditional Broke-er + lawyer combo. We want to add value.  We want to save you $$$.  We want you to be protected and educated. And that’s why we’re busy nowadays; because dentists understand our value proposition and want to pay less and get more value. This is where you can bundle treatments together at more affordable rates to stay busy (e.g. complete oral exams + cleanings + whitening for a very good price).
10. Pay Attention to the Broader Market.  You can’t chug along with your head buried in the sand.  What I’ve been talking about above are all MICRO-factors that you CAN CONTROL.  It’s the MACRO-factor of a recession happening that was beyond your control that lead you to make some or all of those changes.  But you need to keep yourself educated at all times as to what’s happening in the broader market.  When the recovery finally happens, remember the lessons you learned this time around!