It’s August 11, 2020. Things are settling. They were a bit crazy during COVID-19. Then when the banks started coming back online last month, things started to take shape. Buyers came out of the woodworks. And here’s what’s going on in the market:
- The price of a practice will always (and I mean ALWAYS) come down to what a Seller is prepared to accept and a Buyer is willing to offer. You can justify the math 10 ways to Sunday, but that’s how things work in a laissez-faire capitalist environment. And this assumes no one is being pressured into doing anything.
- Before COVID-19, practices were selling for 7-7.5 x EBITDA (earnings before interest, taxes, depreciation and amortization). If you want to know more about how EBITDA is calculated, read this blog over HERE.
- During COVID-19, it was more like 5 x EBITDA.
- After practices were given the green light to re-open in June, prices were hovering at the 6 x EBITDA. And the 6 x EBITDA assumes the very best in the practice and the purchaser. In other words: production is back up to 95-100% of pre-Covid levels and so too is cashflow. And the purchaser is still a good candidate with the bank.
- Purchasers are using a variety of techniques to mitigate their risks, including:
- Reducing the purchase price they’re offering.
- Closing on the transaction only after production hits 90% for a month or two and 95% in the last month before the deal closes.
- Having the vendor stay on longer as an associate.
- Having the vendor finance the transaction itself through a Vendor Take Back (basically the vendor takes a lower purchase price and technically loans the rest of the purchase price to the purchasers; the purchasers would owe the Vendor the rest of the purchase price over time and pursuant to a loan agreement with a different interest rate than what the banks would charge).
- Having a certain amount of the purchase price held in escrow for 1 year and refunded on a monthly basis to the purchaser to cover the purchaser’s lease and bank loan interest expenses if the practice is shut down or will be shut down due to COVID-19.
If you’re considering SELLING NOW, read THIS BLOG to understand what it takes to prepare, market and sell your practice in today’s climate.
If you’re considering BUYING NOW, make sure you’re subscribed on www.DentalPlace.ca because we have a bunch of new listings coming up in Ontario. Be weary of appraisals from Broke-Ers that are over-valuing practices. Broke-Ers are trying to justify a valuation 10 ways to Sunday, but bankers and buyers see through it all: they’re just trying to justify their 10% commissions and buyers – especially today – should not be forking over their hard earned money to pay for such commissions. Sorry, but I’m not sorry about that at all. Given all of the uncertainty in buying (especially with the return to school Fall season heading our way), buyers need to be smart and navigate the waters carefully and trust professionals who actually CARE about them doing well with a practice. You should only be buying a practice if you can make more $$$ than the seller did; it’s that simple. But you’ll know better than anyone else if you can do that. So don’t trust anyone other than your gut, followed closely by your lawyer, your accountant and your banker.
That’s your market update!