With Interest Rates so High, is it Still a Good Time to Sell my Practice?
Have you been contemplating a practice transition, but have held off because of the current interest rate environment, concerned that your practice will sell at a discount or not at all? Rest assured, the market is still competitive, values remain strong for attractive practices, and listings continue to draw multiple offers.
From February 2022 to June 2023, the banks’ prime rate has risen 450 basis points (bps) from 2.45% to 6.95%, meaning for every $1 million in practice loan, a purchaser is paying an incremental $45K in interest per year. Given most practice purchases are 100% financed, the key concern has been that the increased cost of borrowing would make it more challenging for a purchaser to finance the transaction at historical earnings multiples. In other words, the interest would consume more of the practice’s cashflow, decreasing the amount the bank could fund for the purchase to ensure its debt service coverage ratios are satisfied.
Fortunately, despite the high interest rates, it is still a sellers’ market, and practice values and selling prices for highly desirable practices have been largely unaffected. That is not necessarily the case for mediocre practices or those with particular challenges, where prices have dipped between 5% and 20%. Attributes of a highly desirable practice include such things as: a strong hygiene program, upside in dentistry, a sought-after location and a great lease or option to buy real estate. The reason the market has remained favourable for these practices is fourfold.
- Creative Financing Solutions:
Banks have been more creative in finding financing solutions for buyers. In some cases, banks are loosening debt service coverage ratios, waiving principal payments for up to two years and/or being more innovative with projections. For example, if the practice value builds-in $300K of market compensation for the dentist, and an owner-operator buyer is willing to live on $200K, then that frees up an additional $100K of cashflow for loan repayment.
Alternatively, if a buyer can demonstrate the potential for incremental earnings, through expanding the patient base, growing the hygiene program, improving the cost structure and/or keeping more procedures in house, the bank may be more likely to fund at a higher level.
- Personal Capital:
Whereas historically the vast majority of practice purchases have been 100% financed, in this environment, some buyers are willing to inject some of their own capital to ensure their offer is competitive. Banks like this because with the buyer’s own money on the line, there is “skin in the game” and in the bank’s view, the purchaser may be more motivated to ensure the transition is successful.
- Large Buyer Pool:
There is still an abundance of buyers! Perhaps not all buyers are back as some have been advised by their accountant and/or banker to wait until interest rates come down; however, those are the exception and are often the risk averse buyers. A truly motivated purchaser is not going to miss out on a great opportunity and will often find a way to make the finances work.
Furthermore, over time the market has evolved to incorporate a much wider breadth of buyers. It is no longer just associates looking to buy their first practice; now there are large DSOs, an increasing number of “investor dentists” looking to own 2-50+ practices and foreign trained dentists wanting to re-enter ownership after obtaining licensure in Canada.
- Market Indications:
The market is telling us that interest rates are more likely to go down than up in the coming years. At June 27, 2023, the yield curve on Canada Government Bonds showed that the market expected interest rates to fall from 2 to 5 years out.
If you are ready for retirement or want to scale back your hours and management responsibilities to enjoy a more balanced lifestyle, you may want to contemplate a transition sooner rather than later while you are still on top of your game. Tier Three Brokerage is a national, leading dental practice brokerage with sales representatives and transition consultants across the country to assist you in exploring your transition options and timeline.
For more information, contact Dr. Patti-Anne Jones, a Transition Consultant and Sales Representative with Tier Three Brokerage (see her bio here). Patti-Anne works with dentists in Ontario and British Columbia. She can be reached at email@example.com, 289-888-1814 or https://www.linkedin.com/in/dr-pajones