Article written by Joanne Richardson and Tammy Wylie, Partners at MNP
Dental practice values have risen substantially over the past 15 years. That trend is strongest in Canada’s major urban centres but has also taken 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. Market trends, such as increased foreign-trained dentists practicing in Canada, investor dentists (dentists owning multiple practices and large corporate groups) and other such trends can lead to an oversupply of dentists competing for the same number of patients; especially in urban centres.
First-time buyers may need to consider finding a practice they can turn around and improve on, further away from large urban centres. Or, a startup is always an option, likely outside of a major city centre in an area where there is a higher ratio of patients to dentists.
Impact of COVID-19
Over the last five years the dental industry has seen steady growth of 1.3%1, however due to COVID-19, dental services are projected to decline by 5.9%1 in 2020. Dental services are impacted by fluctuations in personal disposable income. With unemployment rates increasing and personal disposable income expected to drop, dental revenues are expected to be impacted. Not all provinces and territories will face the same challenges. There are various factors including market saturation, COVID-19 spread, provincial closures and guidelines etc. that will determine how much if any reduction to dental services occur in 2020 and further into 2021.
Canadian dentists have certainly faced challenges in 2020 from full office closures earlier in the year followed by capital improvements requirements, extra PPE and cleaning costs and preparation of health and safety plans for both patients and staff. Government recovery aid has provided some assistance to the industry for programs like wage subsidies (TWS/CEWS), interest free loans (CEBA) and rent subsidies (CECRA).
Moving forward the industry is still expected to grow mainly due to an increase in elderly population. Demand is expected to increase for restoration, cosmetic, periodontal and orthodontic care. Industry growth is currently forecast to increase by approximately 2.9% over five years until 20251.
Your purchase
Even with all of the challenges, dental acquisitions are continuing across all markets.
Understanding that you need a strong advisory team of experts (a healthcare banking specialist, accountant, lawyer, real estate broker) assisting you on your practice purchase is critical. Since this will likely be the biggest purchase of your life, you will want a well vetted plan with comfortable debt repayment terms.
Though there is a projected reduction to profitability for 2020, valuations will take into account extraordinary items and a year of a global pandemic would be considered extraordinary by most. Preparing a cashflow projections with various repayment options and considering any impact of COVID-19 will be important for your piece of mind and will likely be a requirement for borrowing purposes.
With interest rates at a record low this may be a great opportunity to purchase a practice. It is important that you work with your advisory team of experts (a healthcare banking specialist, accountant, lawyer, real estate broker) that understands the healthcare space. In general, when preparing to buy a dental practice, it’s a good idea to consider a variety of factors, such as location; an existing lease of a minimum of 10 years and no demolition clause; associate contracts and employment contracts for employees, including a strong non-compete clause for associates. When contracts are in place for everyone, it strengthens the value of your dental practice.
Borrowing requirements
When lending money, banks will look at several factors, primarily the practice’s cash flow and a personal guarantee from the dentist.
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% financing up to the purchase price. Other items such as credit history and sustained good credit history is important. Banks are also considering the impact of COVID-19 and may be more conservative on the determination of practice cashflow. In cases where cashflow is not significant enough to support 100% financing, the prospective buyer may have to contribute money or collateral. Each customer and their finances are unique, planning early, obtaining advice and consultation with your healthcare banking specialist is the best way to put plans in motion and fully explore financing solutions to help achieve goals and objectives. Borrowing from banks who understand the healthcare industry and specific requirements of dental practice and connected financing is strongly recommended and will work to your advantage in the long run.
Contact a Scotiabank Healthcare Banking Specialist to talk about the financing process and options for purchasing your dental practice.
To learn more, contact your local MNP Professional Services advisor.
