Early 2012 Market Observations
Surprisingly, one of the stats least considered by many looking to acquire a practice is whether or not they can make a living in that practice. Unlike real estate where the three most important factors in the desirability of the property are location, location and location, evaluating cash flow should be the first order of business in considering a practice location. In this forum, we have previously discussed concepts useful in analyzing practice financials such as deriving “Excess Earnings” from a profit and loss statement or tax return, minimum viable practice size and access to capital. Let’s tune in on a few hot topics of the New Year.
1. Rural practices continue to be great opportunities. In the 70s and 80s, hundreds of newly graduated dentists went out into the marketplace and started practices. Even though there was an expectation that the large number of grads (there were 160 in my 1977 UMKC class) were going to be needed by the huge Baby Boomer portion of the population, it was obvious that we could not all stay within 25 miles of downtown KC. Hundreds of rural offices were built around the Midwest and what those docs found was that they could make a very good living on lower overhead businesses in areas where the cost of living was lower than their big city colleagues. In other words, they were very profitable, they did not have to work as hard and they got to keep or invest a good percentage of their earnings. The time has come for these docs to retire, and in the interest of making sure that their staff and patients are provided for, they tend to be much more flexible about the asking price for their businesses and practice real estate. Do yourself a favor and take a look at some of these opportunities. We find sale prices to be as much as 20% less than their metro counterparts and have seen overhead at less than 50%. If the target office is less than an hour’s drive from a “Big City” you should give it serious consideration. Fresh air, less stress, great family opportunities and a high standard living are hard to argue with.
2. To my knowledge, interest rates for practice acquisition loans have never been lower. While the historic norm of 8-9% always seemed like pretty cheap money to a guy that paid over 18% on his practice loans in the early 80s, we are now seeing fixed rate loans in the low 6s. The difference between the payments of those rates pays for a new car. We have always done our cash flow projections based on a 7 year amortization unless the office was really up to date and the buyer could avoid significant upfront capital improvements. In those cases, we stretched repayment out to 10 years. It seems to me that 10 year financing has now become more of the norm, allowing a lower payment but leaving open the possibility of an earlier payoff. The potential difference in monthly payments on a $500,000 loan could be as much as $2200! Whatever strategy you and your financial advisors decide on, it’s hard to imagine that rates will ever again be this friendly.
3. We’re starting to see a little breaking down of the notion that doctors in their 60s are just going to work until they die. For the first time in the last couple of years, we are getting calls from 1970’s era grads that are ready to hang up the handpiece and retire. While this is great news for a company that stays in business by selling dental practices, the “Good News / Bad News” component of this phenomenon will have to be closely watched. Many have hypothesized that sooner or later there was going to be a glut of practices on the market. Is this the beginning of the selloff by all of the large class grads from the 70s and 80s or is it just a little loosening? Will practice values decline if a true buyer’s market comes to pass or have potential sellers been grooming their practices to keep them attractive to the market? Has the “have your cake and eat it too” mentality (sell and then work for the buyer) finally hit the reality wall and owners are ready to let a new doctor take over? Maybe it’s just the realization that although everything is not hunky-dory, we have survived the Great Recession and older docs don’t want to die at the chair. We’ll see. Whether Buyer or Seller, it might be a good idea to give us a call for a free consultation to see how you could be affected.
Steve Wolff, DDS
UMKC Class of 1977
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