Selling a Dental Practice? The Importance of Timing
Compendium features peer-reviewed articles and continuing education opportunities on restorative techniques, clinical insights, and dental innovations, offering essential knowledge for dental professionals.
March 1, 2024
Volume 45, Issue 3, March 2024
Page(s):
Josh Swearingen
For most dentists, their dental practice not only serves as their primary source of income but is likely their most valuable asset as well. (The author's firm's clients sell at an average of 252% of collections.) Selling a dental practice is a momentous decision that goes beyond a typical real estate transaction. With patients' and team members' futures and the dentist's professional reputation at stake, careful planning is essential, as the practice owner is effectively swapping cash flow from the business (taxed at ordinary income tax rates) for a lump sum payment of many years of cash flow (5 to 10 years) on which they will only pay long-term capital gains at today's rates. Dentists only get one chance to sell their business; the following suggestions can help them make a well-informed decision.
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What is the business worth, today? It is hard for dentists to plan their exit if they don't know what their business is worth today. There is no zillow.com for dental practices. Therefore, seeking expert advice becomes crucial. The author's firm, for example, performs hundreds of practice valuations each year to help owners understand the value of their business. It then provides doctors with a market read of where the value is likely to trend based on previous transactions, current buyer sentiment, and general economic trends, like cost of capital and private equity activity. Having this knowledge will help practice owners make strategic adjustments to maximize their practice's value before it hits the market and confidently make informed decisions about their sale.
Timing the sale wisely. The right time to sell is when the seller is ready, and the market value meets the seller's needs. Trying to time the market is "fool's gold" because merger and acquisition (M&A) markets, like the stock market, move in cycles. The market recently saw the greatest rise in practice values in the history of M&A. This run-up in values was driven by private equity demand and a low interest rate environment. While demand remains strong, increased borrowing costs have made buyers more selective. When working with an M&A advisory firm, sellers should choose one that is confident it can meet or exceed their valuation expectations.
The January factor. A recurring trend in the industry is the rush to close transactions by the end of the calendar year. This rush creates a scarcity of deals in the market at the beginning of January, coinciding with high demand from dental service organizations (DSOs). The basic principles of supply and demand come into play, leading to a surge in prices. The deals that the author's firm took to market in Q1 last year enjoyed a nice premium over other deals throughout the year. For dental practices wanting take advantage of this tendency, it is not too early to start working with an M&A advisory firm and preparing to go to market in January of next year.
The "boogie man" in the closet.Markets hate uncertainty. When there is uncertainty in the US economy, CEOs stall decisions, lenders get nervous, and capital freezes up. At the time of this article being published (early 2024), the markets are solid, and capital is flowing. As the US presidential election in November approaches, things could become choppy in September and October if the polling is close and the presidency is projected to come down to a few Electoral College votes from swing states. There were concerns in the last presidential election cycle about long-term capital gains taxes being increased. With the current national debt being more than $30 billion (the highest in recorded history) and 123% of gross domestic product (GDP), there may be renewed concerns about more taxes depending on which party wins the White House. Additionally, the lifetime estate tax exemption (currently at $12.9 million) is scheduled to sunset on January 1, 2026, and could be cut in half, again depending on who is president. This could lead to a glut of businesses for sale in 2025. If the supply of businesses for sale exceeds demand from buyers, a precipitous decline in pricing is likely.
Where to start? In this dynamic environment, it is essential not to panic but to take proactive steps. An M&A advisor can assist dental practice owners throughout the selling process, offering practice valuations that provide clarity on the practice's current standing and guidance through the many intricacies involved. Making informed decisions can help ensure a successful and fulfilling dental practice sale.
Josh Swearingen
Director, Mergers & Acquisitions, TUSK Practice Sales, Charlotte, North Carolina (TuskPracticeSales.com), a dental M&A advisory firm for large practices and DSOs
