The Post COVID-19 Marketplace
At some stage, this storm will pass.
Things may not get back to normal right away; in fact, we don’t really know what the new day to day operational normal is going to look like.
What we can do, however, is make some educated speculations as to what might happen to the marketplace. Historically speaking, practice values have always recovered very well after significant financial crises. A relatively recent example of this is the very strong growth in practice values since the financial crisis of 2008. Dental practice values have always been very resilient and somewhat immune to financial downturns.
Currently, however, we are dealing with both a pandemic and an economic crisis which is different than the crisis’ we have dealt with in the past. There will likely be an unorderly short-term post-virus period followed by a long-term or “new normal” period. There will be “stressed sellers” who will sell in a panic and there will be “composed sellers” who will wait out the short-term turmoil and sell into an orderly market. There will also be dentists who will find that they may not be able to sell after the crisis, and it is those particular sellers and the issues they face that I will address in another blog.
There will be buyers looking for deals in the short-term who will leap before they look and there will still be lots of buyers after the crisis, just as there was before. I also anticipate that “the Corps” (a.k.a. DSOs or Dental Service Organizations) will be very actively trying to get the first shot at the stressed sellers.
How this will all actually play out is anyone’s guess, but let’s give it a try:
The most chaotic time will be in the short-term because that’s when everyone will be trying to figure out the new rules. The short-term will also be dependent on the economic mood. There is lots of speculation about the nature of the looming recession. Some experts are suggesting a severe but brief recession while others are suggesting an elongated recession. It is very possible that the initial market will be somewhat neutral. A neutral market is one where the buyers and sellers are essentially evenly balanced and would be a function of panicked sellers and very cautious, hesitant buyers. If there is no indication of a strong recession, then the selling will be less frantic, and the market should remain strong.
On the longer term, once things have stabilized, we should revert to something like the pre-virus sellers’ marketplace, but perhaps a little more driven by practice cashflow. I anticipate that the banks will be more cashflow sensitive. The value of a business is a function of profit and risk. If practice profitability returns to current levels, then practice values (assuming no great change in risk factors) should return, more or less, to pre-virus levels.
To summarize, the short-term will likely be chaotic and more of a neutral market. In the longer term, as more things return to what we think of as “normal”, the more the dental market will return to its pre-virus state – a strong sellers’ market. The overriding factor, of course, is whether or not things will return to anything resembling what once was our “normal.” The reason for hope around this metric is that dental disease is not going to disappear because of the pandemic.
There will be two kinds of post-virus sellers. There will be sellers who will calmly execute their Pre-pandemic succession plans and there will be sellers who will panic-sell motivated by fear. Regardless of the kind of seller you are going to be, you need to be prepared.
If selling is anywhere in your 5-year horizon you should make sure you have an appraisal, either for the purposes of selling your practice or planning your ultimate succession. Once the shutdown is lifted, you need to be talking and planning with your trusted advisors. You need to be discussing timing and making final decisions as to whether you are going to sell right away or are going to wait for a longer-term sale.
If you don’t need to sell right away, it will likely be beneficial to wait until the beginning of the third quarter in 2021 when it is expected the economy will be fully recovered. If this is your strategy you should be in the planning mode now, with an appraisal in hand, so that you will have time to prepare your practice for a profit enhanced sale
As a seller, you may also be approached by one of “the Corps” who will be looking to buy and close quickly. Truthfully, selling to a Corp can be a good experience or it can be a not-so-good experience, but the key is to make sure you have the right team of advisors, including a broker; and never sign anything before you speak to your team – if the Corps want to buy you this week, they are going to want to buy you next week.
Generally, a sale to a Corp is much more complicated than a sale to another dentist, as there are more moving pieces and more complicated sale structures to navigate through, so be sure to have a dental-specific team that also has experience dealing with the Corps. For advice on how to advantageously engage one or all of the Corps in the buying process, you are best to reach out to a broker.
If you are a buyer, and if you are prepared to act quickly, you may be able to acquire a practice from one of the panicked sellers for a better than average price. You will need to be careful because the pricing immediately after everyone goes back to work may be a little erratic. It is likely, however, that short-term sale prices (not appraised value) will be lower than pre-virus prices and lower than longer-term post-virus prices. If you are going to make a purchase in the short-term, I suggest that you get a second opinion on the asking price. One other factor to keep in mind is that the Corps will be aggressively looking to acquire any good practices for sale by the panicked sellers, so you need to proceed in a timely fashion if you hope to get a bargain.
In summary, whenever there is a significant change in the landscape there is usually also a great potential for advantageous opportunities. Given that these times are so unique it makes sense to proceed with caution. Whether you are a seller or a buyer, with careful scrutiny your possibilities of finding a good sale or purchase are very good.
During the COVID-19 shutdown we are offering appraisals at 50% of our normal fee with only a $100 deposit. We can complete 90% of the appraisal remotely with no need to visit your office.