20 Jun The Diminishing Practice Value

For the past two decades, we have definitely been in a “seller’s market.” Dental practice market values, as a percentage of gross revenues, has been at all time highs the last 5 years or so. However, the next decade is projected to see a significant change as market conditions are such that a transition into a “buyer’s market” is inevitable. Once this market transition begins to happen, the market value of dental practices, as a percentage of gross revenues, will begin to fall.

The dental industry has experienced an unprecedented trend of rising practice market values since 1983. This “seller’s market” condition has been even more prevalent since 1988. In 1988, it was quite common for prime metro area dental practices to sell in the 50% to 60% of annual gross revenues range. Today, the majority of these same practices would sell in the 80% to 90% of gross revenues range.

However, changing market conditions will soon cause this trend to reverse. The reversal will move slower in some areas of the country than others, but nonetheless, a decrease in dental practice market values will spread nationwide over the next 10 years or so.

The following basic supply and demand factors and/or trends will impact the sale of dental practices over the next decade:

• In 1995, 23.4 percent of professionally active dentists were 55 years of age or older. A recent dental practitioner age study indicates that this percentage is projected to reach 42% in 2010 and just over 57% by 2015. This is the result of the “baby boomer” phenomena that occurred due to the unprecedented birth rate between 1946 and 1964.
• The ”baby boomers” are just now beginning to start selling their practices in numbers. “Baby boomer” sellers will grow significantly each year of the coming decade and will begin to place significant pressure on the market.
• The number of dental school graduates is only slightly increasing at a rate of about 60 per year with approximately 4,400 graduating in 2003 and 4,700 graduating in 2008. As a point of reference, dental school graduates totaled 5,800 in 1983 (an expansion to accommodate the “baby boomers”).
• Demographic projections reveal that, over the next decade, the number of retirees will greatly outnumber dental school graduates.
• 75 percent of all dental practices are solo owned. This percentage is even higher with general dentists.
• Less than 5 percent of all dental practices have a formal transition plan or their “heir apparent” in place.
• Stress levels and burnout symptoms have steadily increased over the past two decades due to business; management; growth; and various government agency demands of dental practices. There are no indications that would cause this trend to change in the foreseeable future. Due to these factors, there will continue to be sellers who sell well before the customary retirement age.

With a market place that is certain to see significantly more sellers than buyers in the coming years, current practice owners will soon be facing a “buyer’s market”. The adverse conditions for seller in such a market are quite straightforward. With more practices for sale and fewer potential buyers, if you wait too long to sell your practice, you are virtually assured of suffering a financial blow. In fact, the real possibility of not selling at all is a fact that must be considered as we progress through the next decade.

To respond to these market trends, we recommend that all dental practice owners create and implement a well-planned practice transition strategy immediately. Does that mean you will need to sell immediately? Maybe… maybe not.

But, keep in mind that selling does not necessarily mean retiring. Many doctors are selling while still in their 40’s and 50’s and continuing to work for the buyer. The most important thing you should do immediately is to have a formal analysis of your practice’s growth potential and current market value prepared. This is the only way to place a pragmatic value on your future options. Your personal needs and goals must be weighed against your transition options to arrive at the optimum course of action for you. Often that action is continuing to “stay the course”, but sometimes, a change is definitely warranted.

The market conditions ahead can be compared to riding the value of a stock investment down because you are certain that the current losing trend will turn around. One day you finally wake up and realize that you could have had so much more money if you had just sold the stock earlier.

Although the timing is not certain, your practice value will be diminishing. What you will do about it remains to be seen! Call PARAGON today and schedule a complimentary consultation to explore your options. No obligation… just a very worthwhile education.