The orthodontic marketplace has changed significantly over the past three years and even greater changes are coming. Practices that increased significantly in size for a decade have suddenly turned downward. The economy has soured and many older orthodontists have decided to ride into semi-retirement working their practices one or two days a week. The Orthodontic programs are graduating more orthodontists while at the same time fewer orthodontic practices are coming up for sale.
The future looks spotty for the newer orthodontist with fewer opportunities available, significantly greater school debt and senior orthodontists wanting a full valuation and sometimes more for their practices. The orthodontic practice is looking more and more like a small business than a profession and what used to be a handshake and “welcome to my practice as a partner,” with no down payment, has turned into an investment asset with much greater risk placed on the Buyer’s shoulders as a lump sum payment from the bank is often expected at the time of closing.
This consultant sees four major issues muddying the transition landscape requiring caution to anyone who desires to apply a “Rule of Thumb” approach to valuation without the help of an experienced transitions consultant:
1. Higher valuation multiples are being given to practices in the sunny and more desirable areas of the country at the same time that those areas have an increasing glut of orthodontists. Supply and demand in the more desirable areas often means many more years to pay off a practice purchase price while battling even greater competition.
2. Contracts Balances are decreasing as payments are accelerated and if the appraiser is not intimately familiar with the mechanism by which each practice is collecting its revenues a profit margin may be assumed that is unsustainable that will artificially inflate the sales price. The double whammy of both a higher sales price and a lower stream of revenue can sack a new Buyer with many lean years before financial success takes hold.
3. Capitation insurance plans (HMO’s) are being routinely accepted in some practices along with no down payment options. Let the “Buyer Beware” that some of what they may be purchasing may be simply a lot of extra work with little reward, or little chance that the full fee will be collected AND they may be paying a higher price for this extra work.
4. Many more “retirement” practices are coming up for sale and these transactions pose some of the greatest challenges to forecast the future stream of revenues or profitability, especially when the facility and equipment are dated. The Buyer cannot be purchasing the past, but is instead purchasing an opportunity that extends into the future. The quote: “Past performance is no guarantee of future success” is not to be taken lightly.
Ken Alexander, Founder