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Practice Values in Decline? (Revisited for Early Career Practitioners)

Our entire team at ADS Florida is fortunate to have the opportunity to put a considerable number of practices through our rigorous review process on a consistent basis. Whether for outright sale or appraisal, our team reviews financial data for a large number of practices in Florida and nationwide, providing us the unique ability to see local, regional and national trends. That, combined with our exclusive partnerships with the best of the industry nationwide, enables us to bring the highest level of expertise and experience to you, our local doctors.

Just a few weeks ago, members of our team were able to spend considerable time with these industry leaders. One topic of particular interest focused on how the transitions market has changed due to the recent economic difficulties. While the discussion from our original article is still valid (click here to read “Practice Values in Decline?”), we felt it would be beneficial to provide a few specific updates:

Declining Three-Year Revenues
In the interest of full disclosure, we have in the past written that you should seriously consider and evaluate the purchase of any practice that has experienced three years of declining revenues. The general sentiment and reasoning behind this is that a practice experiencing this sort of decline may have issues that are a true detriment to the practice. The revenue trend may be caused by a combination of any number of factors.

The foundations of this assertion remain unchanged. What has changed with the economy is that just because a practice has declining collections over three years does not automatically make it bad opportunity. Further, it may not even indicate a practice is truly out of its element or prime. At this point, answers to questions about patients and patient flow, treatment presentation and acceptance, and staff processes and procedures become extremely important to the viability of the opportunity. Ask the questions and get the answers. While a good transition specialist should have already asked these questions and have the answers, your in-office due diligence should focus on detailing answers to questions on those topics.

Another point: Generally speaking, purchasers will significantly discount a purchase offer or simply walk away from a practice that has shown a trend of decreasing revenues. This may be penny-wise and pound-foolish. For a practice where there are acceptable and logical answers backed not only by reason but fact and evidence, the “value” of a practice has already declined due to the decreased revenues. Assuming overhead has remained stable and collections have decreased, net income has, as well. A smaller practice supports a smaller asking price. So, just because a practice may be priced where price-to-gross is 67%, this does not mean that a decline in “value” has not already been accounted for.

Location, Location, Location
If you’re out looking for a bargain, rural practices continue to represent the “Best Value” in the marketplace. While gross collections may be lower and the number of PPO plans a practice serves may be higher, overhead is generally lower and personnel need is also lower. Just as when the economy is good, your willingness to step outside of an urban area can prove to be a boon to you as a practitioner.

General Scarcity
You won’t be surprised to hear there’s a lack of quality ‘inventory’ on the market. If you’re set on an urban locale, you’ve seen that sellers have been reluctant due to their loss of invested retirement funds over the last three years. This has caused them to hold practices, with new plans to sell one, two, even five years further out. Because of this, options to purchase are limited and options to associate or continue associating have also continued to be limited. What does all of this mean for you? When a practice becomes available and has “cash flows” with ample net income and a purchase price amortized over a seven-year period, act responsibly, but quickly.

These are just a few of many factors to consider. The market for practice sales is still strong, and financing is still readily available for purchasers with good credit history. Dental practices have been recession-proof over the long term, as dentists provide services that cover not only cosmetic needs, but health care needs, as well. Owning a practice not only provides job security, but a business that has inherent control, lifestyle and economic benefits that do not come with working for someone else.

It has been increasingly important to conduct proper ‘due diligence’ when purchasing a practice. The importance of really looking and asking questions cannot be understated. This is not only to find out basic information about practice history, patients and staff, but also to consider what it will take to maintain the inherent strength of the business itself. If you are looking at purchasing a practice with declining or stable practice revenue, it is reasonable to seriously question a purchase price predicated on projections showing consistent three, five or ten percent growth over several years, or a deal that requires longer financing terms to be reasonable profitable (10, 15 or more years). A practice that is an historic producer, on track or slightly dipping this year, may be that safe bet for stability, if not future growth, even if only from the pent-up need to complete accepted treatment. And isn’t everybody looking for the safe bet?

Are you considering a purchase? ADS Florida experts are available to assist or represent you in transitions with other brokers, or if you’re working directly with a seller. We provide a range of options that can even save you more money than the cost of our services. You also acquire peace of mind, which is invaluable. Contact us at 800.262.4119 or email us at transition@ADSflorida.com today.

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