By Pete Newcomb
In the best of times, managing a dental practice can be a daily challenge with plenty of headaches. I have learned throughout my years of transitioning practices that being a dentist is one thing, and managing a practice is another.
Unfortunately, these are not the best times. The effects of the COVID-19 pandemic have forced many dentists to drastically alter or temporarily close their practices. Practice leaders have had to wade through social distancing requirements, new special equipment needs, Paycheck Protection Program (PPP) loans, and even employee furloughs.
These added pressures are giving many dentists pause. They’re facing a difficult crossroads in determining the future of their practices, and there are some who are looking to sell their practices altogether, many sooner than they had planned.
Dentistry and COVID-19: Future outlook of today’s dental practices
The pandemic has placed challenges on health-care professionals around the world, and dentistry is one of the sectors that has been impacted significantly. While many dental practices embraced careful and methodical reopening methods after months of being closed, some dentists are considering all possible opportunities amid a questionable future.
A study by the British Dental Journal examined dentistry and the global context of the pandemic. The study highlights the moral status of dental health-care personnel in balancing care for patients and personal welfare. Dental professionals felt a moral duty to reduce routine care for fear of spreading COVID-19 among their patients and beyond, but they were understandably concerned about the financial consequences.
Trends and projections in dental care amid COVID-19
To better understand the impact of COVID-19 on dental practices throughout the US, the American Dental Association’s (ADA) Health Policy Institute started conducting biweekly surveys on the economic conditions during the pandemic. The purpose of this initiative was to quantify the magnitude of the pandemic’s impact on dental practices over time.
The ADA provides an updated dashboard where survey findings are organized, including trends in how dentists respond to key questions surrounding the current status, patient volume, and collections of their practice. It’s clear COVID-19’s impact on the dental care sector was financially devastating in April and May. By the end of July, most dental practices in the US had reopened, but more than half of them (54%) report seeing a lower patient volume.
The ADA has outlined various scenarios forecasting the economic future of the dental sector. As cited in the Health Policy Institute’s research brief, certain scenarios have more optimistic projections compared to others. However, the underlying economic recovery of dentistry is expected to be gradual, with the most optimistic of scenarios anticipating early 2021 before dental care spending returns to baseline. Other ADA scenarios do not predict a return to normal until 2022 or later.
Sentiment among dentists for the rest of 2020
Perhaps most interesting about the Health Policy Institute’s biweekly polls is how dentists feel about the short-term outlook of their practices in the coming fall months. In a survey conducted in early June, the Health Policy Institute asked dentists (whose practices were currently closed or open only for emergencies) if they expected their dental practices to reopen for elective care by the end of the month. While 69% of respondents said yes, 19% were not sure, and 12% said no.
Among those who were unsure or not planning to reopen in June, a follow-up question asked those dentists about their future intentions for their practices over the next six months. Of all applicable options, the Health Policy Institute found that nearly 30% of dentists were considering an exit strategy.
Practices that remained idle longer during the pandemic are up against major challenges, such as financial strains with overhead costs, retaining vital staff members, and maintaining relationships with patients.
Valuation methods for dental practices
During the pandemic, our company has received an uptick of inquiries from dentists exploring their options. With no shortage of buyers in the dental market, now is a good time to learn what your practice is worth. There are three valuation methods we typically look at.
1. Net asset valuation method
The net asset method is based on an appraisal of all tangible assets (real estate, equipment, technology, computers, office furniture, etc.) and intangible assets (goodwill, trademarks, patents, etc.). A good rule of thumb for dental practice valuation is that 80% to 85% of a practice’s value comes from goodwill.
The disadvantage of the net asset valuation method is that it’s often a vague and unreliable measurement of the true value of a practice. Not only is it ambiguous and difficult to accurately appraise goodwill, but this method can undervalue much older dental practices that may have aged systems or technology.
For this reason, net asset methods should be used mainly as a point of reference next to other valuation methods, or under special circumstances in which a practice is financially compromised or has significant real estate holdings.
2. Market-based valuation method
This method considers the historical collections of the practice multiplied by a collection’s multiplier (which often ranges from 60% to 80%)—all while factoring in local market data of other dental practice sales in the area.
This valuation method also has its drawbacks, as it’s based solely on collections and fails to account for profits. To make matters worse, acquiring comparable practice sales figures in a local area can pose limitations with the market-based method. If a practice is not based in a metropolitan area with relevant data available, it can be difficult to compare apples to apples with the market-based valuation method.
3. Income-based practice valuation method
It’s important to note that the value of any business is largely based on its cash flow, the risk of investment, and the return on investment for the buyer. This is why the most knowledgeable buyers and sellers commonly use the income-based method to effectively calculate how much a practice is worth. This approach, which is determined based on capitalized earnings or discounted cash flows, offers a sound solution to accurately establish the fair market value of most dental practices.
Obviously, COVID-19 will have an effect on any valuation right now. Then again, COVID-19 will continue to have effects on the entire dentistry industry for the foreseeable future.
