Since the coronavirus pandemic, concerns about buying or selling a dental practice are rising. Practitioners worry about practice valuations and if banks will lend them money. There’s also debate about the pros and cons of a DSO vs. and IDP.
Thankfully, we’re here to help answer some frequentely asked questions.
Q: How are DSOs faring in the current COVID-19 environment? How does this differ from individual practices? What are the pros/cons of being part of a DSO vs. private practice owner?
A: When dental offices closed across the US, they were only treating emergency patients. The definition of an “emergency patient” varies from state to state depending on the individual state dental governing agency. The restrictions on dental procedures had a tremendous impact on practice revenue. This reduction in revenue had a negative effect on both independent practitioners and DSOs. DSOs that are well capitalized and responded quickly to crisis will survive just as IDPs that are well managed with cash reserves. However, DSOs that are not well capitalized and IDPs that have traditionally struggled financially month to month are going to find it difficult to survive.
A practice that sold to a DSO that is finically sound and has access to cash reserves will have a better chance of survival then an IDP that has historically struggled. On the other hand, an IDP that is finically sound may have more flexibility to react to their struggle with limited cash flow than a weak DSO. The bottom line, it depends on the DSO and it depends on the IDP.
Q: How does COVID-19 impact the market for practice affiliations for DSOs? Are DSOs going to continue to be active? If so, what sort of timeline will it look like?
A: Dental brokers indicate most DSO acquisitions have been temporarily put on hold. How long until these acquisitions take place or if they even take place will depend on four events:
1) When dentists are able to re-open their office
2) How long until patients feel safe from COVID-19 to go to the dentist
3) How long until the economy recovers and patients have money to go to the dentist bringing dental revenue back to pre-COVID-19 levels
4) The strength of individual DSOs after these events happen. If several months go by with a significant hit to their revenue stream, cash reserves will be depleted. It will then be up to DSOs to go to their other options for acquisition money, i.e., banks or private equity money.
DSOs will continue to be a significant player in the dental market. They will continue to acquire dental practices and create startups until they reach a saturation point and these acquisitions don’t make sense anymore.
DSOs will become active again once they, and the dental industry, have recovered financially and lending sources are comfortable lending money again for acquisitions. I believe the most important timeline of when acquisitions will go back to pre-COVID-19 levels, will be when the economy recovers from this crisis. Kiplinger and many other economists are predicting a sharp rebound in the second half of the year, but the rebound will not be completed by the end of the year. The public will ultimately determine this timeline, when people return to work and get back to their normal lives the economy will recover.
Q: What about COVID-19’s impact on practice sales/transitions to private buyers? Will banks still be willing to lend to them?
A: Dental practice sales to IDPs have been put on hold during the COVID-19 crisis due to the suspension of the release of funds by banks. Going forward there will be an increase in the number of practices for sell. Some doctors feel that this crisis has opened their eyes about making the difficult decision to sell their practice. They are ready to sell because they are not interested in dealing with this, or another event in the future.
Are banks going to be willing to fund buyers to purchase dental practices? The answer to this is yes, banks are still going to fund dental practice purchases. Lending money to a dentist to purchase a practice is one of the safest loans a bank can make. The default rate on these loans is less than 1%. Citibank considers these healthcare loans so safe, that they don’t even require a personal guarantee from the borrower. It is too early to get a clear picture of potential changes, if any, in the terms of these loans. They are approximately two weeks away from being able to determine the direction as to how they will be framing out healthcare lending going forward.
Q: What impact will this have on practice valuations? Are practices going to be valued along the same metrics and lines as the market conditions of pre-COVID19 when buying/selling activity resumes? How will Buyers or Lenders look at the 2-4-month period where there was no real production in the office?
A: Citibank, who has an active healthcare financing program, is still determining how they’re going to assign practice valuations going forward. One assumption is that dental practice valuations are not going up as a result of this down time. Dental practice closings funded by Citibank, that were scheduled to close but were delayed because of the COVID-19 crisis, will in most cases close at a future date after the practices reopen. Citibank will request a post opening 30-day production report that must be 80% of revenue pre-COVID-19 before they will fund it. Practice valuations post Covid-19 will not have consistent evaluation criteria until dentistry and the economy stabilize back to pre-COVID-19 or they establish a new normal. Citibank states going forward they will evaluate each dental practice on a case by case basis as each practice owner runs their P&L expenses (personal and business) a bit different. Dental practice evaluations will also have to be adjusted for the fact that some states will be closed longer than others. Hopefully by July 2020 banks will have a better idea on how they will deal with practice valuations with respect to the lost revenue created by the COVID-19 crisis.
Q: What if when my practice reopens, how much time and information will Buyers want to see before being able to make an acquisition?
A: Buyers and lenders will be comfortable with two to three months of post COVID-19 revenue that equals pre COVID-19 numbers. It’s possible that it takes longer for dentistry to reach pre COVID-19 revenue. If that’s the case, this presents an opportunity for the buyer to benefit from a reduced sale price. Buyers and lending institutions are also going to need confidence in the economy going forward for patients to afford dental care.