With many changes affecting the dental profession and the dental industry, a topical question is: What factors affect my dental practice’s value? Below, we will discuss some of these factors and how they impact the value of a dental practice.
1) Demand/Need for dental services.
A practice with 1400 or more active patients, should generate enough demand to keep one dentist, hygienist, two assistants, and a receptionist, gainfully employed/busy. It is important to understand that an active patient is defined as a patient of the practice for several year and has attended the practice in the last 12 months. Patients, and team members, generate cash flow. We have observed state-of-the-art, aesthetically pleasing facilities with few patients generating little cash flow. On the other hand, some practices with several decades’ old equipment and aesthetics to match have many patients and generate significant cash flow. Cash flow drives practice value.
2) Team members.
The dental business needs a team to service patients. Currently, there is a shortage of team members, (dental associates, RDH, assistants, etc.). This negatively affects production, billings, and cash flow. This, in turn, negatively affects practice values.
3) Interest rates.
The prime interest rate has risen from 2.70% in March 2022 to 5.95% as of December 5, 2022. Rising interest rates negatively affect practice values. Why? Practice values are a function of future cash flows. These future cash flows are discounted in order to convert these amounts into present day (today’s) practice value. A higher interest rate results in a lower present day (today’s) practice value.
4) Inflation.
With inflation being 6.9% as at October 2022, the price of sundries, salaries, and cost of operating a dental practice rises leaving less profit/cash flow. The provincial fee guide usually increases in tandem with inflation, offsetting some of the rising operating costs associated with a dental practice.
5) Internationally trained Dentists and immigration policies.
Internationally trained dentists have increased the demand for practices, as many wish to contribute to Canada by owning their practice, thereby providing employment for Canadians and security for their own family. Increased demand enhances practice values. To the extent, Canada has a welcome and open-door policy for immigrants, this bodes well for practice values. With changes permeating throughout the world, there has been a fundamental shift from globalization (one world) to nationalization (every nation fights to bolster their own interest). If Canada moves toward a closed-door policy, this may negatively affect demand for dental practices and practice values.
6) Dental Investors.
Dental investors with capital, money, have increased the demand for practices. Their presence in Canada and U.S. indicate there is room for both independent practices and dental investors to co-exist, and there is likely ongoing demand for dental practices from dental investors. Recently, with interest rates rising, some dental investors have hit the pause button as far as practice purchases are concerned. This may negatively affect practice values in the short term.
7) Value Synergy.
Some prospective buyers will pay a premium to buy practices close to existing practices. Their goal is to reap synergies by combining an existing practice with the target practice, thereby generating increased cash flow, and enhancing their practice’s value.
8) Licensing of Dentists.
If licensing of all internationally trained dentists is more protracted, this could decrease the demand for dental practices and negatively affect practice values.
9) Government-funded dentistry.
The impact is too early to assess. However, practices with a high component of socio-economically challenged patients will be affected more and likely negatively than practices who serve few of these patients, especially in the presence of staff shortages and inflationary pressures.
10) Location and Competition.
Practices located in densely populated urban areas, where competition is intense, and occupancy/rent costs are higher, have been affected more than those in rural areas where there is little competition and operating costs are less. As one dentist stated, “The Provincial Fee Guide is the same in urban areas and rural areas although the cost structure can be vastly different.” Another dentist quipped, “What was once considered rural is now urban, especially with improved infrastructure/toll highways.” The demand for rural practices may be less than urban although one might expect this to gradually change over time.
11) Premises Lease.
Banks are reluctant to lend money to buy a practice where the term of lease and renewal options is less than the term of the loan, usually 10 -12 years. Additionally, getting loans to buy a practice where a demolition clause exists will be challenging. A demolition clause permits the landlord to demolish the premises so there would not be a physical location for the business to operate.
12) Severance and termination.
Costs associated with employees of the practice who maybe severed or terminated by the buyer also affects the practice’s value.
Dental practice values dipped during March 2020- September 2020, the initial COVID-19 period. Dental practice values have subsequently recovered. Inflationary pressures, rising costs, rising interest rates, along with rising demand for dental practices from internationally trained dentists and moderating demand from dental investors have resulted in stable dental practice values. i.e., practice values today are similar to pre-COVID-19. Further increases in interest rates could reduce practice values.As sure as there will be taxes, there will be future disasters.The business of dentistry has proven to be resilient and disaster resistant. Discussions about a future recession, rising interest rates and inflation have not decreased liquidity as banks are still willing to lend dentists money at less than prime rate to buy dental practices. Dental investor demand has recently waned, due to the rising interest rates. Buying or selling dental practices should be done with a long-term horizon in mind.
As sure as there will be taxes, there will be future disasters. The business of dentistry has proven to be resilient and disaster resistant.
Please send comments to david@dcy.ca
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca / louise@dcy.ca / basil@dcy.ca / eugene@dcy.ca. Visit our website at www.dcy.ca. This article is intended to present ideas and is not intended to replace professional advice.
