Record Buyer Interest Spurring Traditional Practice Sales

By Wade Coleman, JD*

Many doctors approaching retirement are convinced that young doctors can’t afford to buy their practice due to rising interest rates, record student loan debt, and their desire for work/life balance. Actually – it’s just the opposite! Young doctors can’t afford to NOT buy a practice!

During the 10 years ending in 2022, private equity funded corporate groups bought dental practices at a blistering pace. Since then, private equity DSO acquisitions have declined by more than 30%. Rising interest rates, shortages of hygienists, and staffing issues at the front desk have all squeezed profit margins for DSOs. These groups are now proceeding with utmost caution, buying fewer practices at lower prices and requiring more rigorous terms for the sellers.

In 2021, most senior doctors could’ve easily found a private equity backed DSO group to buy their practice. Now, groups are looking to acquire practices from younger doctors on more favorable terms. Sellers are rarely receiving 80% or more of the sales price in cash at closing, as groups are forcing them to take Preferred Equity, otherwise known as a seller financed note, instead for the balance. Receiving only 60% to 75% of the sales price in cash isn’t very appealing, leading many doctors to reconsider a potential sale to a traditional buyer.

For those looking to sell to private equity, opportunities still abound for the right practices. Just be certain you have proper representation to avoid costly pitfalls.

On the other side of the equation, young doctors are increasingly desiring private practice opportunities, driven by unfavorable terms in DSO associate contracts, their need for higher incomes, and a desire to control the way they practice. Lured by promises of high incomes and financial freedom, many young doctors signed on to work for DSOs. With many DSOs leaning on PPO plans to help drive new patient flow, young doctors often have to produce 40% to 70% more to make the same income their peers earn in traditional practice with no PPO plans.

Other DSO-related concerns from young doctors include questionable ethics, clawbacks of bonus money and/or monthly income if production goals aren’t met, and the looming threat of being terminated quickly if production falls short of goals.

We recently spoke to a group of students at the North Carolina State Dental Meeting. Surprisingly they relayed these concerns, a dramatic shift from a few years ago when many were pursuing corporate jobs. This has led to a dramatic increase in phone calls from prospective purchasers, and now our transitions firm has a record 1,200 young doctors waiting patiently for the right practice opportunity.

What This Means Moving Forward

Expect many more young doctors, both recent graduates and those with a few years of experience, to enter the traditional sale market as buyers. Not only are these young doctors eager to purchase practices, but many are willing to pay above historical norms for practices with the cash flow that can justify it.

For example, we were recently contacted by a seller that was a great candidate for a traditional DSO sale. However, this doctor had no interest in working for a corporate group, preferring to pass his practice and legacy onto a traditional buyer in the next generation. Not only did he feel an obligation to take care of his patients, but also found it rewarding that the legacy of his practice would live on to provide the same lifestyle and memories for a young dentist.

Since he was selling to a traditional buyer, he expected to receive only 70% of collections at sale, rather than over 100% of collections from a corporate buyer. He was laboring under the same false impression that has affected many doctors selling their practices. However, this doctor had an exceptional practice. The location was stellar, the overhead was low, and the demand for new patients exceeded his ability to serve them! To this doctor’s surprise, not only did he receive a sales price equal to 110% of his collections, but the purchaser thanked him for the privilege!

In summary, more young doctors are now looking to buy a practice, and doctor to doctor transitions are making a roaring comeback! Before selling your practice, consider all available options, including a corporate and traditional sale. While there’s no one-size-fits-all for practice transitions, there IS a transition option that’s best for you!

*Wade Coleman is an attorney and Transitions Advisor at Roger K. Hill & Company Inc. Wade helps doctors properly evaluate all their transition options and help them choose the path that works best for them. To schedule a call with Wade to discuss your situation, contact erica.flory@mcgillhillgroup.com.