Coronavirus Practice Value Update: The Brief Moment in Time for 2019 Practice Values, Or Wait 3+ Years
In 2019 we urged clients to monetize a part of their dental practices at what we correctly predicted was the peak in values. Over $200,000,000 (two hundred million dollars) of now exceptionally happy clients (ages 38 to 67) listened to us and are sitting on a pile of cash and have larger partners helping them through the crisis. Most doctors did not listen then, but should NOW. FOR ABOUT 60 DAYS, it is NOT too late.
Fortunately, we also closed transactions in Q1 2020 including a $9.2 million-dollar single doctor practice on March 16, 2020. You may recall the Dow Jones Industrial Average dropped a breathtaking 2,997 points that day. That closing speaks volumes about the quality of the Invisible Dental Support Organization (IDSO) partners to which LPS introduces their clients.
|Another “miracle” transaction closed for our now very happy specialist client in Honolulu on Friday, April 3, 2020. The hardest deal we have ever done…|
IDSO Buyers are Still Active, Some More than Others
LPS works with dozens of IDSO groups of all sizes across the country. We also constantly interact with new money interested in entering dental. They call us because we have larger practice clients that will make great platforms upon which to build a new IDSO.
In just the last six months we have completed transactions with Private Equity (PE) backed start up IDSOs, smaller family office backed IDSOs and SBIC backed IDSOs. We even got an offer last week for a large practice client in California from a publicly traded media company wanting to enter the dental space. Their business plan is that their unlimited, low cost, media access can drive new patients to practices to accelerate growth.
In the last two weeks the IDSO partners have clearly divided into three camps. The first are those which have stopped all acquisition activities. Some of these are the largest groups which are focused on managing the carnage of closing hundreds of dental practices, en-masse. Their “pencils are down” on new opportunities for a while.
The second camp is comprised of IDSOs which are moving forward, looking at new acquisitions with a business as usual approach. They are proceeding on the due diligence/legal documentation for transactions negotiated pre-crisis. The goal is to close the $200,000,000+ of LPS clients currently under Letter of Intent (LOI) shortly after practices reopen. These groups are also actively looking at new opportunities, but at a more relaxed pace.
The third group is the most interesting. These are primarily relatively new IDSOs which have capital they need to deploy and are excited to start transactions NOW. Their focus is not on triage of existing practices, but rather they feel that NOW is the best time to add great practices to their portfolios. They are actively working with LPS on existing and new clients and are making offers at record speeds.
Their goal is to buy practices quickly while the typical competitors are “waiting until the dust settles.” We received multiple offers for clients of all specialties LAST WEEK. Fortunately, these offers are valuing practices on 2019 numbers and including offer incentives to ensure a return to pre-crisis collections levels. THIS MAY BE THE MOST IMPORTANT PART OF THIS MEMO.
The Dichotomy Opportunity; Monetize NOW, Not Later!
The overwhelming belief of all three types of IDSO buyers is that once reopened, practices will quickly return to pre-crisis run rates is near universal conviction is tempered by a few of the IDSO players who understand the world has changed. However, their view is that dental will remain a long- term, stable investment and perhaps create even higher exit multiples for their groups in the coming years.
The IDSOs know that more doctors will want the safety and resources of a larger partner to help them navigate the stormy voyage into the new post-crisis world. The doctors are now grasping that millions of dollars of cash in the doctor’s pockets will come in handy in a depression.
This is also a nice way of saying IDSOs expect to crush the wounded, unaffiliated, independent practices with the IDSOs superior management, capital, marketing expertise, purchasing power and payer negotiation leverage, and in some cases FREE MEDIA.
In short, the crisis will accelerate the consolidation of the 150,000 dental practices with many not surviving post crisis. If true, this will be a goldmine for the larger practices and IDSOs with the resources (doctors, money and management) to acquire dying competitors for pennies on the dollar. Doctors will want to be on the giving end of this phenomenon, not the receiving end.
While we are excited that the IDSOs are believers in a rapid return of dental revenues, the now emboldened economists at LPS do not share the “snap back to normal” party line in 2020. We believe it could be years. Goldman Sachs, generally some of the smartest lions in the money jungle, predict Q2 GDP will drop 34% it is a lot to snap back from...
Certainly, there will be pent up demand early in the restart, but tens of millions of unemployed folks don’t put dental on the top of their survival list. This is a very real short- and long-term risk.
Hopefully We Are WRONG!
But if we are right, values negotiated in Q2 and Q3 of 2020 will mark the peak in practice values for the next three years or more. This tells us that the best values will be achieved for transactions started NOW, where the IDSO is willing to use 2019 numbers for base valuation for closes in mid-2020. This is a gift that will not keep on giving for long.
As we reach Q3 2020 and the “snap back to normal” dreams of doctors and IDSOs are dashed on the rocks of reality, they will both be forced to take into account the miserable numbers of March, April and May (and probably June in many states) when calculating practice values. And since values are predominantly based on the previous Trailing Twelve Month (TTM) EBITDA, doctors who wait to START to monetize until late 2020 will effectively be forced to delay any transaction until the horrific numbers of Q2 2020 are no longer counted in TTM. This will put doctors’ exit options at July 2021, at the earliest. We thus have a very, very short window to capture the highest values.
Based upon the volume of new practices seeking to monetize in 2021 and 2022, the laws of supply and demand will kick in and result in lower values for all practices. Certainly, the practices that did “snap back” quickly will have higher values, those that did not could be unsellable at any value. This is a pretty big bet to make with your largest single asset...
Speaking of the Laws of Supply and Demand
The rush to monetize will not wait until 2021. Smart doctors are starting NOW. LPS signed $41,000,000 of new clients in March alone. And April is looking closer to $100,000,000 in new clients grasping our logic and understanding the value of cash now, at low tax rates. LPS is hiring, not laying off.
As a Bonus Problem, Don’t Forget Uncle Sam
Joe Biden has made it clear, in multiple venues, that the RICH are too RICH. (If you are an LPS client, you are within Joe’s definition of rich). He has stated that one of his first acts as President will be to eliminate the Long-Term Capital Gains tax treatment. All gains from business sales or investments will be taxed at ordinary income rates of about 40% nationally. This will effectively cut a doctor’s net, after tax proceeds by 20%. Your $10 million dollar practice sale in 2020 will net you $8,000,000 vs. $6,000,000 in 2021. The math is pretty simple. And if Trump remains on the throne, someone gets to pay for the trillions of dollars in bail outs and it won’t be the poor folks. Taxes are going up either way. I promise.
And on That Cheery Note…
The process to discover the current, “in crisis value” of your practice is easy. It starts with a confidential phone call with me. Please email me at Info@LargePracticeSales.com or phone at 844-976-5332 to set up a convenient time for a call. It should be easier to fit into your schedule at the moment!