Current Factors That Impact Dental Practice Sales

The dental practice sales market has evolved significantly and has been influenced by a range of economic and operational factors. For both buyers and sellers, understanding these shifts is crucial for ensuring a successful and smooth transaction. Whether you're planning to sell or buy, recognizing the current trends that impact practice sales will help you navigate the process more effectively. Here are three critical factors that are affecting the dental practice marketplace today.

1. Fluctuations in Practice Valuations

The way dental practices are valued has changed, and many practices are now selling for less than their appraised value. This divergence between appraised value and sale price can be traced to several key issues:

• Internal Business Metrics: Cash flow, the size of the active patient base, and the overall financial health of the practice play a big role in determining its value. A practice with declining patient numbers or minimal opportunities for growth may struggle to attract buyers at the appraised price, even if it's a well-established operation.
• External Economic Factors: Broader economic conditions such as rising inflation, higher wages, and labor shortages also impact valuations. These factors have increased operational costs, and buyers are taking these into account when determining what they're willing to pay for a practice. Additionally, with interest rates higher than in previous years, buyers are facing steeper borrowing costs, which directly affect how much they can invest in a practice.

For sellers, it's important to be realistic about the market. An appraisal provides a foundation for understanding value, but the final sale price is determined by what buyers are willing to pay in the current environment. Preparing your practice to be as attractive as possible-by improving patient retention, cash flow, and operational efficiency-can help mitigate these valuation challenges.

2. Financing Delays and Challenges

Securing financing for dental practice purchases has become more complicated due to rising interest rates and cautious lending practices. Where banks were once quick to approve loans for dental practice purchases, the process has now slowed, and sellers need to anticipate longer timelines for closing.

• Prolonged Loan Approval: In previous years, loan approvals could happen within a few days to two weeks. Now, it can take up to 20 business days or longer for banks to release funds. This is primarily due to the higher-risk environment, and tighter scrutiny lenders are applying in the current market.
• More Selective Lending: Buyers may also find that their primary bank isn't willing to finance a practice purchase, particularly if the buyer's financial profile doesn't perfectly align with the bank's current lending criteria. In these cases, buyers need to shop around for other lending options, which can add more time and uncertainty to the process.

For sellers, it's essential to understand that these financing delays are part of the current market environment. Managing expectations around timelines and being prepared for possible disruptions in the financing process will help reduce stress and keep the sale on track. Buyers should explore multiple financing avenues early on and obtain firm pre-approval to avoid last-minute issues.

3. Ensuring Employment and Contract Compliance

When buying or selling a dental practice, one of the often overlooked but critical factors is the state of the employment contracts in the practice. After significant legal changes in recent years, many dental practices in Ontario and beyond are finding that their staff contracts may not be fully compliant with current laws. This can create risks for both buyers and sellers.

Employment Contract Issues: A court case in Ontario raised the bar on what is considered an enforceable employment contract, particularly around termination clauses. If a practice's contracts are not up to date or compliant, it creates potential liabilities for the buyer, who may inherit these legal risks.

• Pre-Sale Review: It's important for sellers to ensure that their employee contracts are fully updated and compliant with current legal standards before listing the practice for sale. This not only protects the buyer but also makes the practice more attractive, as it reduces the risk of legal complications after the sale.

For buyers, reviewing the existing contracts within the practice is essential. This helps identify potential risks, especially around staff retention and termination issues. For sellers, working with experts who specialize in dental practice sales and appraisals can help ensure that all these details are handled well in advance of putting the practice on the market, making the transition smoother.

Final Thoughts

The dental practice sales market is currently shaped by several factors, including fluctuating valuations, financing delays, and legal complexities related to employment contracts. Both buyers and sellers need to be prepared for these challenges by staying informed and seeking professional guidance. Understanding these trends and planning accordingly can make the process of buying or selling a dental practice more efficient, ensuring that both parties achieve a successful outcome.

Alan Rustom