Hot Market for Dental Practices Challenges Urban-Rural Divide

Final in a three-part series on the changing landscape of dental practices.

Dental practice values have risen substantially over the past 15 years. That trend is strongest in Canada’s major urban centres, where prices have typically doubled, says Bill Henderson, president of Tier Three Brokerage, which appraises and sells dental practices across Canada. More recently, the trend to rising prices has started to take hold across the country, including in rural and remote areas.

One of the key drivers behind the rise in prices is a dramatic increase in the number of licensed dentists wanting to buy a practice. What’s behind this is a growing number of foreign-trained dentists practising in Canada. Several years ago, the requirement for dentists to have attended a North American university in order to become licensed in Canada was lifted, allowing dentists trained outside of North America to directly write the National Dental Examining Board of Canada exam to obtain their license to practise. This has led to an oversupply of dentists, with more dentists competing for the same number of patients. There are also more investor dentists, which can include everyone from dentists who own a couple of dental practices to large corporate groups.

In the past, demand for dental practices was traditionally driven by the number of dentists who wanted to own a practice, so an increase in the number of dentists alone would have propelled a rise in the value of practices in Canada. Another major trend is the influx of corporate investment capital - large corporate entities and major institutional investors that own more than 100 practices – into the market.

“Buying dental practices is an outstanding investment,” Henderson says, noting dental practices tend to yield anywhere from 15 - 25 per cent in annual return on investment.

Urban Versus Rural Divide Narrows

Prices for rural and remote practices have also seen a significant escalation. In the past, the value of practices in rural and remote areas was limited by the fact only a certain number of dentists were willing to work and live in these areas. However, that trend has changed with the huge surge in the number of dentists in recent years. Many more purchasers are seeking to buy dental practices and a virtually unlimited amount of investment capital is prepared to invest in these locations and hire people to work there.

Dentists who are just launching their careers are paying substantially higher prices for practices compared to what was typical in the past, Henderson notes, and are competing with very serious corporate interests. Yet at the same time, he thinks they still have real competitive advantages. “First, the majority of practice owners would rather see their practice transition to an individual dentist who is starting out in their dental career, just like the owner did. Second, no investor dentist owning multiple practices can ever match the initiative, drive and energy that an owner-operator will have.”

Pick Your Time to Sell

For dentists who are preparing to sell their practice, even though prices are now unprecedented, it is unwise to sell simply because you think the market has peaked, Henderson says. “Overall drivers of demand for practices are not going to change. The smart thing to do is decide when it’s right, from a lifestyle standpoint, to transition out of your practice. Selling your dental practice should never be a financial decision – it should always be a lifestyle decision.”

Henderson’s No. 1 recommendation for any dentist who is considering selling their practice to an investor dentist is to “get a proper appraisal done by a national appraisal and brokerage firm that understands what investment companies are prepared to pay. Only then will you know what the value of your business really is.”

Heather Silverston, a Senior Commercial Account Manager, Health Care Banking for RBC Royal Bank in the greater Toronto area, also sees a general trend toward consolidation and investor dentistry. She agrees that it’s a seller’s market in the Toronto region.

“Toronto practices sell high, similar to major cities in Canada,” Silverston says.

What Banks Want to See

When lending money, banks will look at several factors, Silverston notes: primarily the practice’s cash flow and a personal guarantee from the dentist.

“Banks lend against cash flow and they lend against that dentist. Cash flow is paramount. At the end of the day, we are cash flow lenders.”

The bank will do a combined analysis between a practice’s cash flow and the purchaser’s personal information - their income and debt – to determine whether the purchaser can support 100 per cent financing up to the purchase price. “If there isn’t sufficient cash flow to support 100 per cent financing, the prospective buyer may have to put in money,” Silverston says.

For investor dentists, RBC will look at a client’s practices on a consolidated basis to maximize the amount of financing they can offer. “We want to help the client. If there is a way to do the deal, we will,” Silverston says.

Dental practices that are being sold are typically appraised by dental practice appraisal companies, such as Tier Three Brokerage. Because it’s still a seller’s market in terms of dental offices, “very seldom are practices sold for their appraised value,” Silverston notes. “It does happen, but it’s unusual.”

For more information on planning your dental practice future, contact Calvin Carpenter, CPA, CA, Vice President, Professional Services, at 780.451.4406 or [email protected]

To read MNP’s new blogs on how consolidation and investor dentists are changing the industry, click here.

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