Options for dental practice partners considering a sale
It’s early days in 2019 and, as a partner of your dental practice, perhaps you are considering selling your practice. If so, you may be one of the 70 million baby boomers running one of the 12 million owner-operated businesses in the United States, including health care services.
The California Association of Business Brokers expects more than 70 percent of these companies to change ownership in the years to come. The reasons for selling a practice are numerous. In many cases, a practitioner is looking to ease into retirement by reducing the number of patients they see or to retire completely.
Perhaps one partner in a larger practice wants to exit, and selling the practice is an efficient way to change the ownership structure while keeping the remaining dentists together. Maybe it is a matter of the practitioners simply wishing to focus time and energy on patient care rather than spending time handling the administrative aspects of a practice.
Not all ownership transitions of medical practices involve the loss of control. In many transactions, a practice is sold to a financial buyer who is interested in separating the health care component of the practice from the administrative functions. The buyer then centralizes administration and provides those services to multiple practices, thus reducing costs.
This structure presents an alternative to selling a practice through a broker or between providers. The financial buyer establishes a Dental Service Organization (DSO) to handle administration. The DSO contracts with the doctors who continue to provide dental services to their patients. This structure leaves the doctor free to focus on providing the best care to patients and to get compensated based on the volume of patients visiting the practice.
The doctor is not burdened with other tasks such as marketing, accounting or insurance filings. The location of the offices and the office staff rarely change. Additional capital may be invested by the buyer if new equipment would benefit the practice.
The structure works best for practices with multiple offices and doctors. Is it a good time to sell a practice in the current market? The short answer is yes, evidenced by annual increases in the number of transactions since 2016. In the past 12 months, there have been 30 transactions in the dental field and over 100 in the past three years. These statistics do not include brokered transactions.
A positive outlook for dental spending is primarily responsible for increasing interest by financial buyers. The Centers for Medicare and Medicaid Services expect dental spending to accelerate at a compounded annual growth rate of 4.7 percent through 2025. How do financial buyers place a value on a particular dental practice? They look at prior transactions in the market, as well as financial forecasts that attempt to predict the future income of a particular practice.
Valuation is typically measured as a multiple of earnings before interest expenses, taxes and noncash expenses, such as depreciation of equipment (EBITDA). The more offices, dentists and revenue, the higher the multiple and greater the valuation. In today’s market, practices between three and five offices can be valued as high as five times the EBITDA.
Alternatively, estimated valuations can be calculated as a percentage of collections that ranges from 60-100 percent. For example, a practice with $5 million could have an estimated value of $3 million-$5 million.
It is believed these estimated valuations exceed those achieved in private deals. Newly founded financial investors, such as private equity funds, family offices or independent investors, are increasing market demand.
According to PitchBook, financial buyers have in excess of $1 trillion available for acquisitions, including those in the health care field. Just as no two practices are the same, no two transactions are the same. Each has its own characteristics, and each doctor has unique reasons to sell. To the doctor managing a successful practice: What are you waiting for? The current market is receptive to buying your practice.
Brooks Crankshaw is a managing director and partner of The Chicago Corporation, a boutique investment bank specializing in raising debt and equity capital and providing M&A advisory services to company owners wishing to sell their businesses. He is a Michigan native and manages the Grand Rapids office of the firm.