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Opting Into—Or Out of—Typical Transitions by Jeffrey Blanchard

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Header: Opting Into Or Out of Typical Transitions
by Jeffrey Blanchard

Selling a practice is one of the biggest decisions a dentist will make in his or her career. Years—usually decades—of hard work and dedication go into building a successful dental practice, and when the time comes to retire, dentists would naturally want to ensure the product of their life's work is left in the best of hands.

Traditional transition options
Historically, there have been a few common exit strategies available for dentists to pursue, including the walk-away sale, the presale and the associate buy-in/out. Each option comes with its own merits and potential concerns.

In a walk-away sale, the selling dentist ceases practicing immediately, with a new dentist taking the reins. This approach is quick and clean with no uncertainty for the seller, but it can be a volatile option for the patients and staff.

A presale is when the selling dentist continues to work in the practice after the closing, typically alongside a new owner. The selling doctor can continue to work and earn income, while at the same time harvesting the equity of the practice. However, the new owner often ends up competing with the seller for both patients and staff loyalty, which can lead to a negative outcome.

In some cases, the selling doctor hires an associate with the expectation that the associate will eventually acquire part or all of the practice. This is known as an associate buy-in. In this case, the seller can maintain a higher level of control, having the opportunity to get to know the associate and determine if he or she is an appropriate fit before selling. The downside is a high fail rate because associates often can't afford to buy the practice when the deadline arrives, often because of large dental school debt and other life expenses such as marriage, buying a home or starting a family.

The transition marketplace has generally been a seller's market, with several options available to dentists considering their retirement options. But these traditional strategies are becoming increasingly challenged. Retiring dentists may soon find themselves facing increased competition among their transitioning peers and a corresponding decrease in the value of their practices.

An aging demographic
A primary factor attributing to the aforementioned phenomenon is the baby-boomer generation reaching retirement age and the resulting demographic imbalance in the dental workforce. The boomer generation was the pinnacle of dental school enrollment, leading to an influx of dentists practicing in the United States.

According to the American Dental Education Association, there were approximately 6,300 graduates from U.S. dental schools in 1977. This number, however, dropped drastically in the period from 1982 to 2000. The U.S. saw the closure of seven dental schools, while increasing costs led to decreased class sizes at schools that remained open.

Dental school graduate counts have recently experienced a slight rebound, though the average annual number of graduates today remains below the counts from the boomer generation. Boomers will soon be facing a shortage of eligible younger buyers when they prepare to sell their practices.

Header: Opting Into Or Out of Typical Transitions

The high cost of education
Further compounding this issue is the financial uncertainty new grads are experiencing today. According to the American Dental Association, the average total cost for all four years of dental school for a resident increased by an average of 7.6 percent annually between the 2001–02 and 2010–11 school years. The total cost for all four years averaged $171,023 for a resident student graduating in 2011—almost double the total from 2002.

Per the same report, nonresident students meanwhile are facing average four-year totals of more than $200,000. Most dental students need to take out loans to cover these expenses and, as a result, new graduates are finding themselves in greater amounts of debt than ever before.

With these trends likely to continue, a large number of the already limited supply of young dentists may not have the financial means to purchase a practice of their own for many years after graduation.

Facing an uncertain future
Concerns regarding young dentists aren't the only factors contributing to the limitations in practice transition options. Tenured dentists themselves are also playing a role. For multiple reasons, many professionals of the baby-boomer generation—across all industries—are working beyond the standard retirement age.

One of the main causes of this trend is today's uncertain economic landscape, which has many doctors feeling the need to continue practicing in order to maintain financial stability. As recently as 2006, doctors 45 years and older composed about 65 percent of active dentists.

This number is likely to continue growing as more dentists practice longer into their careers. That bubble will eventually burst when a large portion of the dental workforce suddenly looks to retire. This could result in a mass selloff, rapidly shifting the current seller's market into a buyer's market.

A decline in dental patients
Adding to this building problem is the trend of decreasing dental care utilization among adults—even those with dental insurance. Changes in the health insurance landscape, paired with lean economic times, have changed consumer behavior about seeking dental services.

Adults are pickier about their health care spending today and because dental care often falls lower on a health care consumer's priority list, more people are limiting their dental visits and only going in if they encounter a significant problem.

According to the ADA, adult dental care utilization decreased by 10 percent between 2003 and 2010 and that decrease is likely to continue for some time, resulting in lower production numbers for many dentists.

Combined, these factors stand to collectively create a growing barrier to boomer dentists seeking an exit strategy in the next few years. Increased competition with peers, paired with decreasing production, has the potential to reduce practice values and limit dentists' ability to find suitable buyers.

Header: Opting Into Or Out of Typical Transitions

Header: Opting Into Or Out of Typical Transitions The DSO option
Dental service organizations, or DSOs, may offer an appealing alternative to traditional transition options. They account for a relatively small portion of total dental receipts annually, but the DSO approach has seen steady growth over the last couple of decades as new dentists become receptive to its merits. There are numerous DSO models, each one appealing to different dentists based on their practice preferences and patient care philosophies.
  • Compared to the traditional associate buy-in transition, DSOs are more reliable in their ability to offer a fair value and follow through on the purchase of a practice.
  • DSOs generally pay a majority percentage of the total purchase price up front in a lump sum on the date of the transaction, with the remaining percentage deferred to future payments. The exact structure varies between organizations.
  • When affiliating with a dental practice, the DSO is purchasing the future earning stream of the business. Since DSOs usually give the selling doctor the opportunity to continue working after the sale, the seller is still able to continue earning an income on top of the equity he or she harvests from the purchase price
  • Because a second dentist is generally not introduced for a while after the partnership, the selling doctor continues to work while avoiding competition for production and income.
  • DSOs assist with recruiting a suitable associate doctor to assume leadership of the practice once the selling doctor is ready to retire or reduce hours.
  • DSOs help consolidate and manage vendor and payer relationships.
  • DSOs provide dental practices with comprehensive administrative support services, including finance, marketing, IT support, human resources and training. This allows the office staff to focus more time on providing dental care to patients.
Conclusion
The DSO structure is not necessarily a fit for every dentist seeking an exit strategy, but it can provide a solution for more practice owners than you might have previously thought. It is important to do due diligence and perform research to identify which option is best for you. This is one of the most important decisions you will make in your career, so be sure to take the time to weigh your options carefully and find your exit strategy.



Jeffrey Blanchard Jeffrey Blanchard is a marketing specialist with Midwest Dental. Blanchard's primary focus is supporting the business development team in acquiring new business and promoting company growth; he also provides direct, hands-on marketing support for Midwest's newly acquired dental practices. In addition, he has assisted in the development of case studies related to dental practice acquisitions.



Dentaltown Magazine
April 2024
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