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New Trends in Purchase/Sale of Dental Practices

A very large component of what we do at DMC LLP is assist sellers and buyers in transitioning. And we notice things.

Buyers Are Getting More Sophisticated

Buyers – thanks to us educating them, no doubt! – are becoming more sophisticated. It typically takes three months from the time an LOI is signed up until the closing is finalized. But now, because buyers are paying more attention to the little things, it’s taking longer in some cases. Buyers are looking at the employee details, doing proper chart audits and equipment inspections, having a dental accountant review the financials, having their lawyer review the lease (to see if there’s a demo or relocation clause). And this sometimes leads buyers to ask for price reductions – for example, if equipment needs to be fixed/repaired or if the appraisal was wrong when it represented there being [x] number of patients who attended the practice.

Banks Are Scrutinizing More Too!

Banks are still financing the purchase and sale of dental practices for 100%+ at prime (currently 2.7%), BUT they are pushing back on a number of fronts. First, they’re calling B.S. on appraisals that are over the top. Certain appraisal companies are known for being very aggressive in their valuations. They do this by over-appraising equipment. Or not factoring in what the TRUE earnings before interest/taxes/depreciation will be (for example, because they don’t look at whether associate fees to a third person need to be paid out of that before the purchaser needs to pay the bank and themselves). At the same time, Banks are looking for nasty clauses in leases that could impact a dentist’s ability to repay the loan – like a demolition/relocation clause. And on top of that, they’re coming up with projections that may require that certain key team members (like hygienists and associates) sign new contracts on closing so that they show that they are both (1) staying and (2) promising not to compete/solicit patients or staff elsewhere. Finally, banks are definitely tightening up on consolidator dentists. If you own two practices, for example, and you want full financing on the next 3, the banks may consider this a bigger risk and ask you to throw in some of your own money.

Landlords Are Still Greedy

Landlords are still asking for money in one form or another. We’ve seen them (with absolutely no right to do so) ask for 5% of the purchase price PLUS the requirement to see the purchase and sale agreement as part of consenting to an assignment of the lease. If they don’t get that, then they’ll ask for $5k as their “reasonable” transfer fees (which may or may not include legal fees). Those in higher-end areas are asking for rent AND security deposit which could amount to between $10-$20k! And, finally, to top it off, they’re still demanding that the sellers stay on to GUARANTEE the lease (in case the new tenant defaults) for the remainder of the term – however long that might be AND including renewal options.

Extreme Pricing

Great practices with solid fundamentals (good location, hygiene program, lots of room for expansion, large + loyal patient base, great cashflow, etc.) are still selling for way over appraised and on the Seller’s terms. BUT we are witnessing something new for practices that are just average or below average: they are selling for LESS than appraised. It has a lot to do with more practices coming on the market, coupled with more sophisticated buyers and bankers who are scrutinizing practices more. We’re also seeing buyers and sellers ask for conditions that we’ve never seen before. For example, a buyer wanted to associate a few days AT a practice BEFORE buying it (which opens up a whole can of legal worms). Another buyer wanted the Vendor to do patient introductions for a set period of time (e.g. 3-6 months) before the Vendor can leave/retire. And some buyers ask for things like liquidated damages clauses, chart fees, and enhanced non-treatment of patients clauses. Just because these things are being asked for doesn’t mean they’re getting them. Now, for their part, sellers are afraid that things might not work out between themselves and the buyer and want to create exceptions to the restrictions (non-compete, non-solicit) that they’ve agreed to. They’re also insisting on things like being able to select their own assistant and getting certain hygiene or lab fees included in their compensation. Again, just because they’re asking for it doesn’t mean the buyer will accept.