Will COVID 19 affect practice value?
These are unprecedented times. Dental offices closed for weeks on end while practicing social distancing. Social distancing and dental visits do not go together and sadly until 2020 social distancing was not a mainstream term. But here we are and social distancing is everyday reality that permeates the news and our lives. What does this mean for your dental practice value going forward?
If by forward we mean today, the reality is that very, very few practices are changing hands at this time. Who wants to take over a dental practice that cannot be open? Or in the case of an endodontic office, even one that is open is most likely limited to emergencies. There are a very small percentage of transitions that do make sense to be occurring at this time. If you are interested in making aesthetic changes to your new practice purchase this is a great time to do so with the office closed. Or perhaps you are adding a satellite and want to integrate the two offices together; the doctor and staff are available to work on the non-clinical aspects while social distancing and this gives you an opportunity to have everything ready to go when your market opens up. Fortunately, for some of you the COVID-19 closure time may already be passed and your practice has returned to normal and for the rest of you hopefully this issue is coming to an end. So what happens to the value of your practice?
Prior to COVID-19 the economy was thriving and sound. It was a time of economic boom and robust markets. While we cannot assume that coming out of COVID-19 the economy will be as strong, the good news is that your practice value should not have decreased much, if any by COVID-19. Yes, you will have a dip in collections during your closed period, but that should not reflect poorly, nor affect the value of your practice. Rather we will refer to this closed time, and thus reduced collections, as an outlier to your practice.
The main consideration for practice value should be based on the cash flow of the practice. While your collections, and thus your cash flow, will obviously be affected during the COVID-19 closures, the anticipation is that the closures will be short term and your practice will be back to business as usual. The short term practice closures associated with COVID-19, the outlier months, should not reduce the value of your practice. Banks are aware of and understand the reason for the decrease in collections is due to social distancing resulting in short term closures and your decreased collections have nothing to do with your practice being less desirable than it was.
The next question is that if COVID-19 does have a further negative impact on the economy will your practice be worth less? What if we enter a recession? Is your practice worth less then? George Santayana said, “Those who cannot remember the past are condemned to repeat it.” So let’s look at what happened to practice values during the 2009 recession. In 2009 what we experienced was practices with healthy cash flow were actually more in demand than they were during times of economic prosperity. Due to the demand to find a quality practice to purchase in 2009-2010 practice values did not decrease during the 2009 recession. Associate jobs were hard to obtain during this recession and many associates were let go as the practices simply didn’t have enough work for two, or more dentists. Additionally dentists were more willing to consider practice opportunities outside of metropolitan areas and practices in more remote areas were in demand. These are additional factors that kept practice values from decreasing as many associates made the choice during this economic recession to purchase a practice and be in control of their own futures.
So how should your practice value be calculated? A purchase price based heavily on cash flow should represent a fair number to both seller and purchaser. This should be the main consideration when calculating practice values. If you have an endodontic practice there are additional items worth considering one of which is the age of your referrals. There are obviously other factors for an endodontic practice, general practices and of course other specialty practices, but cash flow should be the main consideration. During these COVID-19 months, obviously cash flow will be disrupted, but the reality is that much dental work that is not being done at this time still needs to be performed. The expectation is that once the social distancing guidelines are relaxed and dentistry can open again there will be an increased need for dental services.
Many dentists throw around a percentage of collections determine value. Yes, that is a much easier calculation and anyone can do it, but it most likely doesn’t represent the value of your practice. If you are using an arbitrary percentage of collections you are assuming that all practices are equal, or that your practice is average when likely that is not reality. This is a great tool for practices that aren’t being managed properly for the result is that the price is likely set higher than what the practice is worth. It is also a great tool for those unwilling to take the time to consult a specialist in practice valuations to figure out the true value of the practice.
As a purchaser it would seem the important number to know is how much will be deposited in my bank account after purchasing the practice and also after paying the expenses. That number should be of much greater value and importance than a percentage rule of thumb that is arbitrarily calculated. How much money is taken home after all expenses, that is the important figure. Does it matter what the percentage of collections is? Certainly that number is not important in comparison to the money that will be profit.
Fortunately the expectation is that during these uncertain times dental practice values should not be impacted by COVID-19. And if our economy cannot recover as quickly as everyone would like, that should not have a negative impact on your dental practice either.
About the Author
Lisa Radman White is the president of Radman, White & Associates, Inc., a firm dedicated exclusively to endodontic practice transitions. The company was founded in 1998 after her father discovered firsthand how difficult it was to sell his endodontic practice as the transition market did not understand an endodontic practice. Radman, White specializes in endodontic transitions.
