2023 has seen unprecedented valuations for dentists consolidating their practice across the country. Many doctors have capitalized on this gold rush of reducing risk and administrative burden by taking some chips off the table while continuing to have minority ownership in their practice moving forward with a silent partner. A lot of doctors will reap the upside gains of equity along with chairside compensation as well.
But what about the economic climate? How is that going to affect valuations in the future? Glad you asked! Dentists will see increases in supply costs, lab costs, and wages due to interest rates increasing and inflation. We know this. Margins will (are) being compressed so the profitability of the practice is taking a hit (without increases in schedule fees and no help on the reimbursement rate side either).
As profits decrease, so does the valuation of your business. Many economists are saying the “real” recession will begin in Q1/2024 and bleed into AT LEAST 2025. So, doctors will either try to partner now ahead of the recession or wait out the storm and partner after 2025. Keep in mind most dentists will have to commit to 3-5 years when you partner with a DSO so you would be looking at practicing until about 2030.
Here are 2 examples of deal values and the potential shift that will occur. Feel free to adjust accordingly based on your personal revenues.
EXAMPLE 1 (EBITDA MULTIPLES REMAIN THE SAME):
CURRENT DENTAL MARKET:
Prev 12 Months Collections: $4M
After doctor’s comp EBITDA: $800,000
Cost Increases (Supplies, Wages, Lab Fees): $0.00
EBITDA Margin %: 20%
EBITDA Multiple: 7.5x
ENTERPRISE VALUE: $6,000,000
SAME MULTIPLES IN 2025/COSTS INCREASE:
Prev 12 Months Collections: $4M
After doctor’s comp EBITDA: $800,000
Cost Increase(Supplies, Wages, Labs):$100,000
EBITDA change/Margin : 700,000/17.5% (2.5%)
EBITDA Multiple: 7.5x
ENTERPRISE VALUE: $5,250,000
EXAMPLE 2 (EBITDA MULTIPLES DROP IN 2025):
CURRENT DENTAL MARKET:
Prev 12 Months Collections: $4M
After doctor’s comp EBITDA: $800,000
Cost Increases (Supplies, Wages, Lab Fees): $0.00
EBITDA Margin %: 20%
EBITDA Multiple: 7.5x
ENTERPRISE VALUE: $6,000,000
MULTIPLES DECLINE IN 2025/COSTS INCREASE:
Prev 12 Months Collections: $4M
After doctor’s comp EBITDA: $800,000
Cost Increase(Supplies, Wages, Labs): $100,000
EBITDA change/Margin: 700,000/17.5% (-2.5%)
EBITDA Multiple: 6.5x
ENTERPRISE VALUE: $4,550,000
As you can see by these hypothetical numbers, the potential to wait just two years (!) in consolidating your practice could be a difference in Enterprise Value of $1.5M. That’s quite a bit of money to leave on the table.
Not only do IDSO’s pay a premium (for the next 2 years) for your business compared to a doctor-to-doctor transaction, but they have exceptional back-end office support to alleviate a lot of the demand’s doctors face. You will continue to run the practice like you always have under your strategy, your brand, and your team, but now you have a better work-life balance and a savvy financial partner backing you. You can use the same lab, same supplies, and keep the same schedule. You are not micromanaged (if you pick the right IDSO) and you keep your clinical autonomy (if you pick the right IDSO).
Consolidation is here to stay whether we like it or not. And let’s be honest, it will be VERY hard to find an associate in the future that will be able to pay what your practice is truly worth, not to mention these groups are scooping them up the day after graduation/residency is complete so the pool of opportunity is dwindling. This is certainly something every doctor should be paying attention to as these valuations will not last forever.
My role in this process is pretty simple: I help doctors understand all their options in this important decision. My service is free, and you will never pay me a penny. Your practice is one of the biggest assets you have, and I don’t take that lightly. Feel free to ask me any questions you may have.
