Our thoughts . . . 07-29-10

MAYBE NOW IS NOT THE TIME TO SELL

It seems that hardly a week goes by that I don't find myself talking with someone about the lack of practices for sale in the Midwest. Whether it is another ADS broker, a lender hoping to finance an acquisition or a prospective buyer looking for a place to call home, everyone wonders why there seems to be an imbalance between the numbers of potential buyers and sellers. Looking at dental school enrollment statistics over the last 40 years or so only adds to the confusion

Peak dental school enrollment occurred during the 1980/1981 academic year with a graduation rate about 15% higher than the 2008 class of 4,796. While that may not seem like an Earth shattering decrease, the actual percentage is much higher in the Midwest. While new schools have opened around the country, we have closed two schools and generally decreased enrollment. In numbers close to home, my UMKC class of 1977 graduated 160 students (as did several classes before and after) while on May 9th, 2010 only 96 DDS degrees were conferred. That's a 40% decrease! If you were to filter out the graduates from each class that went on to specialty training, public service or careers in the military, there should in theory be about two practices for sale for every potential buyer. I think I can say with confidence that the current ratio is much lower.

So, what has changed the balance? With the exception of one other factor that we will discuss later, I believe James Carville said it best during the 1992 Clinton campaign for President; "It's the economy, stupid!" The fact is, now may just not be a very good time to retire and live off of your investments. While the following reasons may not affect everyone, I'll bet you'll recognize a couple that hit close to home.

  1. Investment portfolios have taken two major hits in the last 10 years. I lost the value of a beautifully restored 1960 Chevy Impala hardtop from my SEP-IRA in just the last quarter! I'm not talking about a stripped down six cylinder either.
     
  2. Predictable, guaranteed earnings on invested capital are weak and withdrawals for living expenses may result in a loss of principle.
     
  3. If you are living in an average (or heaven forbid, an upper bracket) home you have suffered a loss of equity, and in many cases, substantial loss of liquidity. If you recently tapped into the equity to buy a new Cessna, Carver, or Corvette you may well be upside down in your mortgage on a property you can't sell.
     
  4. There is little prospect for part time work as a dentist to supplement your income after retirement. Many recent grads are still in the hunt for a quality job. Don't assume you could (or should) edge them out.
     
  5. Unlike truffles and Beanie Babies, practice values are not highly sensitive to laws of supply and demand. Dental practices are still primarily valued on their cash flow. The bottom line for practice valuation is; can a buyer pay the overhead, debt service, and taxes and still make a living? Thinking that it is a seller's market and arbitrarily increasing the asking price to a new grad with $200,000 in student loan debt is not a good sales strategy.

There is one other factor to consider besides the economy, and that is the fact that 65 is just not as old as it used to be. Most people in their early to mid 60's are healthy and are enjoying a vigorous and active lifestyle. Most dentists are non-smokers, exercise regularly, and are much more health and diet conscious than previous generations. Statistics show that if you are 65 now, there is a 50% chance you will live well past 80 and this is precisely where the problems intersect. Most find the thought of running out of money and moving into their children's basement terrifying. While some have facetiously planned to just "work till I die", many have in fact delayed retirement past their planned retirement date in order to add to the nest egg, continue to pay health insurance, and avoid drawing down on their savings. Hence the field is no longer level.

In spite of all of this, there are still valid reasons to retire.

  1. 35 years should be enough. The ideal scenario for every dentist should be to get out before either the practice or their health deteriorates.
     
  2. There is a huge need and opportunity for volunteer service in this country. Whether or not you continue to use your treatment skills, churches, civic organizations and communities can always use a hand. There are organizations in which you can function as a business mentor. If you have children whose lifestyle requires both parents to work (or not) to make ends meet, giving your time to care for your grandchildren may in the final analysis be your greatest contribution to mankind.
     
  3. There are qualified buyers eager for quality practices. If your practice has good curb appeal and numbers adequate for a new owner to make a living, you may owe it to your patients, staff and your profession to consider a transition.
     
  4. I'm frequently asked about possible changes to the tax laws and rates changes. My guess is that they will change and probably not for the better as proposals I have seen will have a negative effect on the net proceeds of a practice sale. While this is something to be considered, I don't believe it should be a primary factor in making a decision to sell and retire.
     
  5. Spousal pressure – this may be the mother of all motivators to retire. I mean this literally as most dentists of retirement age are men and after 35-40 years as the wife of a dental student and then dentist, those women are ready to pursue their vision of retirement.

Obviously the decision to retire calls for a careful balancing of the scales. Financial and lifestyle issues have to be carefully considered before making a move. Sometimes health and disability issues get in the way but most should be able to pick their last day of practice. Remember, that even though the statistics show that 50% of those now age 65 will live to be past 80, 50% will not. Most of us would not choose slumping over at the chair as our exit strategy.

We at EMA will be there to help. Since a good part of our business also involves consulting and brokerage for "transitional sellers", (only 5 of our last 12 sales involved a doctor planning full retirement), we continue to cultivate relationships with prospective buyers, students, and financing sources. We maintain a widely viewed website that both markets and educates. We look forward to being of service to you when the time is right.

Steve Wolff, DDS
UMKC Class of 1977

EMA DENTAL PRACTICE SALES
Wolff Dental Services Group, LLC.
6220 Arlington
Kansas City, MO 64133
1-800-311-2039
email: info@EMAdentalpracticesales.com