The Impact of COVID-19 on Practice Value & Transitions

The Impact of COVID-19 on Practice Value

& Transitions

Over the past few months, we have been inundated with questions and concerns from our clients regarding the expected impact of the COVID-19 pandemic on dental practice valuations and transitions.  While some uncertainty remains regarding what the “new normal” will look like and how quickly the economy will recover, this article provides our perspective on the current environment for dental practice transitions.

Practice Value

We are happy to report that the pandemic has yet to have a significant impact on dental practice valuations, as practices are currently being valued based upon their pre-Covid operating levels (we are excluding the financial performance of offices during the shutdown period from our practice valuations).   However, as we get further into 2020, it’s important to note that the operating results of dental offices during January and February of 2020 combined with the financial performance in the 2-3 month period following re-opening will begin to play a much more prominent role in practice valuations.  While we understand that many of our clients have been dealing with challenges related to dental board requirements, scheduling, staffing, and PPE, we have been ecstatic to hear that many offices have seen strong demand from their patients during the first few weeks following re-opening.  This demand is fueled in large part by the backlog of missed hygiene appointments and/or postponed treatment during the shutdown along with patients’ desire to inject some sense of normalcy back into their lives.  We are optimistic this trend will continue and the demand for dental services will remain strong as the economy begins to recover and we adjust to living with COVID-19. 

With that said, sellers should be prepared to be a little more patient and flexible regarding their expectations, particularly regarding closing timelines and deal structures.  It’s important to keep in mind that the practice transition market was essentially at a standstill during the shutdown, as it was virtually impossible to schedule showings and secure financing.  Therefore, it may take a little longer than sellers or their advisors expected to generate significant interest from potential buyers.  In that same vain, most transactions that went under a Letter of Intent pre-Covid were on hold during the shutdown.  Now that the clouds have begun to part, some buyers (and/or their lenders) have requested to delay closing until the net production of the practice returns to 80%+ of its pre-Covid level.  Other buyers have requested to modify the deal structure (in lieu of delaying closing) to provide the seller with 80-90% cash at closing and put 10-20% of the purchase price on a hold back payable to the seller upon the net production of the practice returning to its pre-Covid level within a certain period of time (typically 6-12 months following closing).  Both of the aforementioned options provide the seller with the opportunity to obtain the full pre-Covid value of his/her practice while allowing the buyer and their lender to mitigate any perceived risk associated with a lasting adverse impact on the performance of the practice from Covid.

Buyer Demand

While buyer demand was at a standstill during the Covid shutdown, we have been excited to see a tremendous surge in buyer activity over the past few weeks.  This rebound in demand for quality practice acquisition opportunities is driven by the fact that there was strong buyer demand prior to the pandemic.  Many associate doctors who were considering owning a practice at some point in the future have accelerated their plans due to the loss of their associate position or a significant downturn in available production at their employer’s dental office.  At the same time, we have seen a handful of less confident and less qualified buyers (from an experience and financial standpoint) pull back on purchasing a practice until the economy recovers and there is more certainty about what the “new normal” will look like.

In regards to demand from DSO buyers, it’s been a mixed bag.  Some well-capitalized DSOs are aggressively pursuing practice acquisition opportunities while others have paused their business development efforts to focus on re-opening and ramping their offices back up.  While there may be a downturn in DSO/Private Equity buyers entering the dental market over the next few years, we expect large, highly profitable practices to remain in high demand.

Inventory of Practices Available for Sale

Over the past month, we have seen a significant uptick in seller activity, which is a result of several factors:

The pandemic has been the catalyst for many dentists who were already planning to sell in the near future to accelerate their timeline and take their practices to market now.

·        Some dentists have chosen not to return to their offices post-Covid for several reasons including health concerns, not wanting to deal with PPE requirements and staffing issues, and financial/cash flow problems.

·        With the baby boomer generation reaching retirement age over the past few years, it was inevitable that a large number of dental practices would be coming to market in the near future (with or without the pandemic).  Covid-19 appears to have accelerated that migration.    

What does all of this mean for sellers?  While it has been a seller’s market for the past 5 years in most urban/suburban areas due to a low number of quality practices being available for sale coupled with strong buyer demand, it appears that supply and demand are returning to equilibrium.  We expect that high-quality practices with annual revenue of $600,000+ and 4+ operatories will continue to be in high demand while smaller, antiquated practices will become increasingly difficult to sell.

Practice Financing

The availability of practice financing plays a vital role in the overall health of the dental practice marketplace.  Over the past decade, several large, nationwide dental lenders have served as a consistent source of conventional practice acquisition financing for buyers.  While these lenders have temporarily paused their practice financing programs to help their existing clients obtain government backed loans (i.e. Payroll Protection Program) and consolidate/restructure/refinance their practice debt, we expect them to come back online over the next few weeks.  In the meantime, several local/regional lenders have stepped in to fill the void.  That said, buyers and sellers should be prepared for lenders to have additional requirements that must be met prior to closing.  Luckily, there is ample liquidity in the marketplace, and interest rates are at historical lows, which will help fuel buyer demand.  Assuming demand for dental services remains strong and the economic recovery continues, practice financing should return to some sense of normalcy over the next 3-6 months.

Looking Ahead

With the Covid shutdown behind us and the recovery underway, we remain optimistic about the future of dentistry and dental practice sales.  Given the changing landscape, it is now more critical than ever for you to have proper guidance when selling your practice.  At CTC Associates, we are here to answer your questions and guide you through each step of the process.  We encourage you to contact us to schedule a free, confidential consultation to discuss your plans and how we can be of service.  Be Positive, Stay Healthy, Keep in Touch!