December 27, 2020
3 M&A Predictions for Dental Practices in 2021
It would be an understatement to say dental practices were hit hard during the pandemic. While the American Dental Association (ADA) reports revenue is down in total, many practices have managed to turn a profit in the five months since they have been allowed to open up again. However, practice expenses are up as patient visits need to be spaced out and the need for extra cleaning costs and personal protective equipment (PPE) continues to rise. All signs point toward an increased interest in selling dental practices or joining dental service organizations (DSOs), as Professional Transition Strategies Founder and President Kyle Francis offered in a recent article for Dentistry Today. Here are some key takeaways.
Private equity groups have turned toward dental practices as an attractive investment opportunity, particularly specialty practices, such as endodontists and oral surgery groups, since they were deemed essential services. As a result, Francis says, “Revenue and practice valuations for many specialty practices actually increased this year.” Likewise, investors know dental care can’t be postponed over the long haul, and the longer care is put off, the more expensive treatment is.
Investors are looking for new ways to determine the value of a dental practice during these unprecedented times. Typically, investors would analyze the past 12 months of earnings with interest, taxes, depreciation, and amortization, but investors are now either writing off 2020 or looking at the past 15 months to make up for the three months when practices had to close their doors. “Some investors are restructuring deals to decrease the amount paid at closing to offset risks,” Francis says. “Others are aiming for longer-term employment contracts with dentists or structuring deals to ensure the selling dentist still has a performance incentive.”
Dental practices need to continue to rebuild their staff and patient bases in the year ahead, which will inevitably turn up in a valuation down the road. What’s more, while dental practices don’t have the option to work from home, if the owner has invested in the real estate, this may impact the value of the commercial property. Along the same lines, capital gains taxes are likely to increase, cutting into profits when it comes time to sell. “But DSOs have capital, and private equity groups see the dental industry as an attractive investment opportunity,” Francis says. “No one can predict the future, but the 2021 M&A landscape looks positive.”
Contact the experts at Professional Transition Strategies to learn the best steps for moving forward with your dental practice.