Each year, approximately 4,500 to 5,000 dental school graduates enter the dental market looking for practice opportunities. Some graduates go on to post-graduate programs or the military, but an equal number of residents and military dentists complete their term or program each year.

Eighty percent of these new dentists are general dentists, so it’s fair to say that approximately 3,600 to 4,000 new general dentists look for practice opportunities each year. Many dentists are practicing for more years than ever, which is affecting supply. Approximately 2,200 general dental practices come up for sale each year (they had fewer dental graduates 40 years ago). Some 20% of those practices are in less desirable rural areas, and the remaining 80% are in the preferable large metro areas or resort areas. That amounts to approximately 1,680 general dental practices that may be available for sale in preferred areas in any one year.

Also, many multi-office, commercial dental groups, or Dental Service Organizations (DSOs) buy approximately 20% of those existing dental practices in those preferred markets. The existing dental practices amount to 350 to 400 practices being acquired by DSOs each year, leaving about 1,300 general dental practices available for acquisition and 3,600 to 4,000 new general dentists looking for practice opportunities.

When demand for practices exceeds supply, practice values will rise. DSOs are paying more for practices today than ever before. It is no longer unusual to see a general dental practice selling for 100% of annual gross revenues and even more. DSOs need volume and are willing to pay for it. When a DSO reaches $100M or more in annual revenues, those DSOs will sell for 300% to 400% of annual revenues (or 12 to 16 times EBITDA). DSOs will buy practices for 100% of gross and sell the company for 300% to 400% of gross later. To them, acquiring practices for 100% of gross revenues is like printing money; they will do it all year long.

So, what does a new dentist do in this scenario? Compete or retreat? Take a job with a DSO and compromise an otherwise promising career? Alternatively, try to beat the DSOs at their own game?

The laws of supply and demand are in play, and if you want to play and win, you will have to be willing to outbid the competition. Waiting for an opportunity to knock is no longer a viable business option. If you want to acquire a practice in a preferred area, you need to motivate the current owner to sell, and offering only 70% of gross does not provide motivation to sell, but 100% will get some owners to sell now. If your advisor complains that you are paying too much money, then challenge them to find you a practice you want in the price range they say you should pay. Then listen when they tell you that they have no such practices available, and now you begin to understand the rule of supply and demand.

Keep things in perspective, if you buy a $1M practice, it is not a $1M transaction; you are acquiring a gross income stream of $1M per year for every year you own this practice. If you keep this practice for 40 years, then this is a $40M transaction in today’s dollars. At an average of 30% profit, this transaction will provide you with $12M of pre-tax, lifetime net income to you. Should you decide to sell this practice 30 or 40 years from now, you will sell it and get your entire practice investment of $1M paid back.

Don’t let “dentalvision” prevent you from becoming a dental entrepreneur and lose an opportunity to invest in a business you already know. It’s time to take a stand and compete with the DSOs and make your mark. Call AFTCO for more information.