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What Will The Recession Do To Practice Values?

Blog Pictures-18Congratulations! Your business survived COVID and the reward waiting on the other side of the pandemic was the Great Resignation. You weathered that storm and now you are greeted with rampant inflation. Additionally, you are being held hostage by your team for more compensation. Now, the benefit of surviving all of this is a looming recession.  It has been a hard run, and likely only going to get harder.

Like you all, I spend a lot of time reading the financial press. Each paper, website, and author have a unique perspective on the US economy. Although the news is great, I also seek out those in the know for their opinions as well. 

I spent most of the spring meeting with leadership at investment banks and owners of private equity companies who have investments in DSOs.  But the most enlightening conversation I had was with an economist from ITR Economics. ITR is an economic think tank with an impressive record for predicting the future with a 94.7% forecast accuracy (per their website). 

I asked their economist how is it possible that in the face of rising interest rates and profit compression due to rising costs of labor, our clients at TUSK are enjoying the highest exit values to date (3 of our clients sold for more than 10x EBITDA and one closed 12.8x)?  He shared with me that he was happy for them, but this is likely going to come to an end as we are not yet in the recession. He shared with me that the US GDP will likely peak in Q4 of this year, and we will enter a recession at least through 2025. He also shared that the dental economy lags the broader US economy by one quarter, so we might see spending on dental begin to dip in Q1 2024.  Either way, we need to brace for the inevitable. 

As I thought through the situation, any dentist that is looking to sell at the top to an IDSO / DSO will have to work back 3-5 years. Thus, if someone decides to wait out the recession and sell on the other side, they very well could be working until 2030!  That is a long time.

You Have a Choice

So here we sit at the crossroads: Sell this year or hunker down and wait on the recession. For many, it makes sense to stay the course and continue to work in and on their business.  For others, particularly anyone thinking of selling in the next 2 years, they need to strongly consider a sale before the markets turn. To give you a preview of what could be coming, take a look at the table below:

Table 1 Recession Practice Values

Today, it is common for $1M of EBITDA to sell for 8x or $8,000,000. Multiples will possibly remain firm, and your business has simply increased operating expenses by $100,000. If that is the case, then you are likely looking at an $800,000 decline in value. But, if you take on those additional expenses and multiples decline from 8x to 7x, then you could be looking at a decline in valuation closer to $1,7000,000. 

Another thing to consider is that selling to a DSO can provide shelter from the storm. Although the big check is nice, many DSOs have loads of infrastructure, and robust teams to help you grow your business, or at least maintain it during challenging times. They can typically provide cost savings and higher reimbursement rates with your in-network insurance providers.  And for those facing turnover, many DSOs are excellent at recruiting and training new team members, including new dentists.

Now that you are armed with this information, how will you benefit from it?

Would You Like To Explore Your Options In Today’s Marketplace? 

Schedule a Call With TUSK!

If you’re wondering where your practice’s value stands today in preparation for the upcoming market conditions, don’t hesitate to pick up the phone and call TUSK. Our team is constantly working with our clients to ensure they receive the highest possible valuation with the deal terms they desire. Picking up the phone today can ensure you exit at the top and maximize the value of your life’s work.

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About TUSK Practice Sales: TUSK Practice Sales is the premier healthcare M&A advisory firm in the United States. Since its founding in 2016, TUSK has closed over $1B in healthcare transactions by providing best-in-class client services and flawless execution for clients nationwide.

TUSK advises large and group healthcare practice owners seeking to maximize the value of their practice with a partnership to a strategic or financial partner. The TUSK proven marketed sales process ensures our clients explore the entirety of the market, securing them the right partner at the highest value. For more information, visit www.TuskPracticeSales.com