COVID-19: Thinking of Selling? Top 5 Things Dentists Need To Know

We have a lot to cover in this blog! But in a nutshell:

1. DMC hasn’t stopped working.  The office is physically closed and we’re working from home.  We’re super busy answering dentists’ questions and getting practices ready for sale and we’re offering a great deal for dentists to do so (pay disbursements only until we close!). Contact me (647.680.9530) or David Mayzel if you’re thinking of selling and we’ll walk you through the process.
2. Dental Strategy is now offering a 40% discount on their appraisals for the time being (subject to certain conditions noted below and also subject to change).  Contact Matt Bladowski (1.519.614.7911) for more info.
3. RECESSION?  Likely to happen, but how deep and how long of a recession will depend on how long it takes for us to get back to normal.  1-3 months of not working = lower impact on practice valuations (it’s an industry-wide and explainable blip) vs. 3-6 months of not working = bigger impact on practice valuations given that a lot of business simply won’t recover (meaning patients will be unemployed and without dental benefits).  Dental practices, per my previous blog, are recession-resistant, but not recession-proof.  Patients will come back; they aren’t lost forever.  Revenues are hopefully just delayed.  And there could very well be a backlog of cases and high demand once things resume.
4. DSOs (Dental Service Organizations): have lots of cash (hundreds of millions) in their bank accounts and on their balance sheets and are still proceeding to evaluate practices, submit offers, do due diligence, and take it all the way to closing (but won’t close on dark/empty practices).  Some have said they’re still prepared to pay pre Covid-19 values, while others have said prices will have to necessarily come down to reflect an increased risk of a pending recession.
5. BIG BANKs: haven’t stopped evaluating new transactions but won’t close on dark/empty practices.  Are cautiously optimistic and are making accommodations to dentists (examples: principal/interest deferrals on commercial and residential mortgages and equipment leases; speak with your dental accountant for details).

So with that summary in mind, let’s get into the details, shall we?

DMC Hasn’t Stopped Working For Dentists

Since the onset of the Covid-19 crisis, David Mayzel and I have been talking to dentists every day about employment law matters, completing their Wills and Powers of Attorneys and yes, even Selling / Buying Dental Practices (more on selling below).

Many dentists who were previously ON THE FENCE about selling are now 150% ready to sell.  Previously, dentists were reeling from the aches and pains of EMPLOYMENT LAW changes from the Kathleen Wynne government (2018), the IPAC crisis that saw many dentists buy new equipment and train staff (2018), the new TAX laws from the Trudeau government that effectively prevented dentists from income splitting with spouses (2018), the increased competition among dentists and aggressive marketing campaigns (over the past 5 years), and the general stress of owning/operating a business.  But now COVID-19 has made all of those seem so insignificant and manageable compared to having to shut down and self-isolate!

Dentists have been calling us NON-STOP to talk about things like:

• What’s going to happen to practice values? ANSWER: they could stay the same or could foreseeably go down a significant amount.  See more on what the DSOs and Big Banks are saying below about funding the purchase of dental practice purchases.
• How long does it take to sell a practice from start to finish?  ANSWER: normally, 2-3 months generally, assuming your landlord cooperates.
• What’s the process like? Get an appraisal, have us market the practice (it’s being done virtually during the Covid-19 crisis), get offers, facilitate due diligence, negotiate legal paperwork, and move towards closing eventually when the office starts up again.
• What do I do with my team members?  We wrote a blog about Employment Law Considerations when Covid-19 was first starting to have an impact on dental offices and the RCDSO came out with its recommendation that offices only treat emergencies if they had appropriate PPE and were following proper protocol.

Dentists Have an Opportunity to Get Organized NOW

Let’s face it, we are all kind of stuck at home, watching Netflix, taking online CE courses, cooking, doing our taxes, using social media, working out, reading the daily news, etc.  But if you were quasi- or seriously thinking of selling before Covid-19, you should know that it takes a LOT of prep-work to get things moving in order to ACTUALLY sell.  And, as I said above, it takes months to sell anyways.  And now you have the time to actually gather the required paperwork, such as:

• your last 3 years of practice financial statements;
• your last 3 years of production reports (by procedure and by provider);
•  your lease documents;
• team agreements (staff and associates); and
• a comprehensive list of assets in your practice.

Note: typically these things are put into a Dental Strategy Appraisal and Matt Bladowski (the owner) is having an incredible 40% off special on his appraisals (best in the industry).  More on that below…

If you’re thinking about selling, you should ALSO be talking to us and your accountant about whether you need to clean up (purify) your corporation prior to any sale.  This is done in order for you to qualify for the lifetime capital gains tax (so that you don’t end up paying the government capital gains tax on the sale of your shares when you do sell).   This process needs to be planned ahead of a sale as it could take up to 2-3 years to execute BEFORE you sell.

So if you were previously thinking about selling and you’re worried about the buy/sell market, it doesn’t hurt to get the process started.

What Are The Costs For Getting Started On Selling?

So what’s the real financial risk to you to get started now on selling (keeping in mind it takes months to sell anyways in a normal environment)?  Well, we at DMC know you need money for groceries, rent, mortgage payments, medication, etc.  You shouldn’t risk paying your lawyer hourly when you likely have limited income coming in (note: the Trudeau government may be opening up EI soon for small business owners who didn’t previously qualify to go on EI like dentists to weather the Covid-19 storm).

So you’ll ONLY owe us for our out-of-pocket expenses/disbursements for us to get started and take you all the way to the finish line (i.e. closing).  For a sale, disbursements are typically around $3k-5k. In other words, you need to cover our out-of-pocket expenses (including HST) and we’ll happily start working on your transaction and put in the time and effort to get you to the day where we hand you a cheque.  We get paid when you get paid.  Also, unlike Broke-Ers, we charge flate-rate pricing (determined in advance in an up-front quote) and not commissions.  And we only get paid when your deal closes.  And if your deal doesn’t close and you walk away or we walk away, then you only owe us disbursements.  That’s the special promotion that we’re offering for the next little while (which is subject to change).

Also, if you’re looking for the best appraisal on the market, Matt Bladowksi of Dental Strategy is offering a whopping 40% discount on his regular fees for all of his comprehensive appraisals for the next little while (which is subject to change).  There are certain conditions that must be met, so please contact Matt for more information (his contact info matt@dentalstrategy.ca and his phone number is 1.519.614.7911).

Recession Is Highly Likely Now

WAY BACK on March 12, 2020 (a few days before the craziness of Covid-19 took hold of everyone’s normal lives), I wrote a blog about how Covid-19 could lead us into a recession.  Damn.  I didn’t want that blog to be true.  But now it looks like it’s going to happen. But how deep and how long depends on how long it takes for us to get back to work.

Predictions at the moment (and these change daily) are that: (1) the school year is done until September at the earliest, (2) small businesses will be back to work in September at the earliest, (3) it will take 12-18 months to get a COVID-19 vaccine in place, (4) even when small businesses do go back to work, things will be very slow to start and (5) travel restrictions will still be in place.  For these reasons, it’s highly likely that the next 3 quarters (9 months) will show an economy in decline.

Gone are the days of buying luxury goods.  You’ll substitute your barber/hairstylist for a comb, pair of scissors and your spouse’s hands; you’ll stop eating out at fancy restaurants; you’ll vacation in your backyard; etc.

Fiscal Q4 for the Federal Government (Jan / Feb / March 2020) will end on a sour note for sure. But then Fiscal Q1 (April / May / June) will be negative, followed by Fiscal Q2 (July / August / September), which means 2 consecutive quarters of negative growth.  This is the very definition of a recession (2 or more consecutive quarters showing a drop in Gross Domestic Product).

And per that previous blog, dental practices are recession-resistant but not recession-proof.

DSOs Haven’t Stopped Purchasing

We’ve sold many of our client’s dental practices to Dental Service Organizations (big corporate dental groups).  We’ve also spoken to each one of them and their message is consistent: while banks and owner/operator buyers may not be able or willing to move forward on purchasing, they certainly are!  They all mentioned how they have HUNDREDS OF MILLIONS of dollars in cash sitting in their bank accounts that came from raising capital and they are still proceeding to evaluate practices, put offers in, do due diligence, and prepare legal paperwork for an eventual closing.  Note: they won’t close deals on an empty/dark dental practice (i.e. a practice without patients/team and which is shut down temporarily), but they’ll get right to the finish line and wait. They’ll be looking carefully at how the practice had been doing up until February 2020 in their assessments.

Some DSOs are cautiously optimistic that things will return back to normal and valuations will still be similar to what it was prior to Covid-19.  They view dental practices as great investments over the next 5-10 years and that this is just a blip in an otherwise great industry.  Practices offer essential services and patients still need to go to the dentist.  This as an industry-wide event that isn’t impairing a dental practice due to poor management, but rather due to broader economic factors.  With all that said, they’re WAITING for things to return to normal before they will complete the transaction.

Some DSOs are of the view, however, that the heyday of getting a 7-8x multiple of cashflow (Earnings Before Interest, Taxes, Depreciation and Amortization) is OVER NOW and that we’ll be returning to the 5x multiple of cashflow that existed not too long ago.  Why?  Simply put: the price needs to factor in big risks – namely, a possibly very deep and very long-lasting recession.  Such a recession could last longer than the previous one and see upwards of 30-35% of the workforce unemployed.  That means fewer patients coming to the dentist as they won’t have the insurance benefits to cover them.  The recession would certainly have positive money-saving impacts – for example, commercial rental rates coming down and a pool of cheaper labour that wasn’t available before Covid-19, but the tradeoff is that practices that are assignment-heavy will see less patients coming through their doors.  Startups will suffer tremendously.

That’s the theory and it could become a reality IF THINGS RETURN TO NORMALCY VERY SOON.  How soon do we need things to return to normal?  My guess is that the economy and practice valuations could recover to Pre COVID-19 levels if we’re off for just 1-3 months, but at 4-6 months the impact would be longer-term.  What makes me think this?  Basically, I’m conservatively assuming that small businesses (which employ 80% of the Canadian workforce) could manage to have 1-3 months’ worth of commercial rent saved up and get deferrals on paying their loans or can get access to more money so they can get back to it.  But even if they do, a recession is likely a very real possibility now more than ever and that means their businesses will be very slow at the beginning and many businesses simply won’t make it at all…

Big Banks Haven’t Stopped Evaluating

We’ve spoken with the BANKS and, as of today (March 25th), they are still operating under the guise of “business as usual” (their words).  They have NOT stopped evaluating deals.  That said, they have not closed/funded new startups or transactions involving dental practices that are sitting dark/empty.  Their approach is to keep things going as normal for now but to proceed cautiously to the finish line and then be ready for when things do actually return to normal so that they can close or re-assess the situation.

They are also looking at things from a case-by-case perspective.  The Big 3 – TD, Scotia and RBC – are all trying to help dentists out by doing things like:

• Deferring principal payments on commercial loans (6 months).
• Deferring principal and interest payments on residential mortgages (not home lines of equity) (6 months).
• Deferring principal and interest payments on commercial leases (6 months).
• Providing expanded lines of credit.

We’ve been told that whatever principal is deferred gets added to the end of the term.  NOTE: this could all change and has been changing day-to-day so please consult your PROFESSIONAL (i.e. dental) banker and don’t just go into your branch to speak with whoever is there.  People like Nadia di Felice (Scotia), Ross Aberdeen (TD) and Tasha Lai (RBC) are there to assist dentists.

Of the BANKS that we spoke with, they are cautiously optimistic that what is happening will TEMPORARILY impact dental practices.  Specifically, with dark/empty practices, the 2 main expenses will be related to paying the landlord (for which dentists should speak with their landlords about deferring payment and paying their loans (which can be deferred or which dentists can access bigger lines of credit to avoid defaulting their loans).  The hope is that dentists can stomach these expenses for a few months until practices are allowed to re-open at full strength.

Plan Ahead | Don’t Succumb To The Fear!

Should you take advantage of your extra time off by preparing for a sale?  If you were thinking about it before, then there’s no real risk of getting yourself organized. Actually, going through the process of seeing what you have makes you realize what things you could / still may be able to fix. Maybe you were spending too much on sundries or wages and should have better managed these expenses?  Maybe you reviewed your charts and realized you should be offering regular COEs (which you weren’t doing before)?  Maybe you’re thinking more about what marketing campaigns you’ll employ to get patients and their family/friends back into your chair ASAP after things return to normal.

PLEASE NOTE: there’s a lot of fear-mongering these days.  We wrote this article to EDUCATE you on what’s been happening in the industry, but not to scare you into forcing you to make a decision you’ll later regret.  Things tend to get resolved without being forced.  And that’s the same thing we’re saying here: if you were previously thinking about selling and want to get started on the process, we’re here to help.  If you weren’t thinking about selling and can stomach being shut down for a few months and a likely recession, perhaps you should NOT be selling.  And if you’re in a tough spot and selling is the only way out to cut your losses, again, we’ll try to help you as much as we can.  But let me make this clear: we at DMC will not help you if we believe you are selling for the WRONG reasons.  You need to live with this decision and have no remorse/guilt.  We need to sleep well at night as well and we will never pressure anyone to sell.  Don’t believe me?   Just ask our many clients who’ve been on the fence at the last minute (we can give you names) and what did we do?  We told them the exact same thing we’re telling you: YOU have to live with that decision and we won’t pressure you, even if it means that we don’t get paid.  Why?  Because our integrity and reputation in the industry is more important to us than making a buck.  And we’re in this for the long haul.

Finally, and I don’t really think I need to remind you, but please make sure that if you do decide to sell, Skip Going Broke-Er.  You need to demand value for your $$$ now more than ever.  If you’re selling out of legitimate desperation OR because you were planning to do so before, you need to keep as much in your pocket at the end of the day as possible.  This could be your retirement.  Broke-Ers, in our humble opinion, do not offer value (they prepare an appraisal and run an open house) for the 10% commissions that they’re charging you.  We, along with Dental Strategy, have saved dentists close to $7-million in commissions by listing our clients’ practices on DentalPlace.ca to date (since 2015).  And more specifically, we’ve saved dentists tens of thousands of dollars and sometimes (for the much larger offices) hundreds of thousands of dollars vs. them going with a Broke-Er and dental lawyer combo.  Plus, we’re a one-stop-shop and we do it all – Employment Contracts and Policy Manuals, Wills and Powers of Attorneys, Marketing and Selling, Associate Agreements, Lease review and negotiations, Corporate Re-organizations, etc.  WE DO IT ALL and we save you $$$ in the process.