The Inflation Effect on Dental Office and Practice Values

Over the past thirty years, inflation as measured by CPI has averaged 2.6% growth per year. From 2000 through 2020, inflation never exceeded 4%. Beginning in the Spring of 2021 and continuing through most of 2023, the annual inflation rate spiked. According to the BLS (Bureau of Labor Statistics), the US annual inflation rate rose to 7% in 2021, 6.5% in 2022, and 3.4% in 2023. 

The economic pressure has affected dentistry on several levels, the most obvious being in the cost of labor, and maintaining core employees. In addition, overhead costs have increased, while insurance reimbursements remain relatively flat.

Employees

Staffing has quickly become the most important operational component of owning a dental practice. Almost three years removed from the pandemic, the industry is still feeling the effects of the large portion of employees who left the workforce, never to return. This has created an increased demand for dental support staff, driving up the cost to hire/retain key employees. It has become commonplace to see sign-on bonuses ranging from $1,000 to $20,000, depending on the area of need and the scarcity of potential candidates.

The majority of solo practitioner dental offices simply cannot keep up with the larger “DSO” run competitors who have deeper pockets and economies of scale that allow them to offer more benefits like 401k plans, etc. 

Fortunately, paying competitive wages is not the only factor in hiring/maintaining excellent employees. There are many great resources for increasing your HR game plan. For instance, books like WHO discuss having a method for hiring and focus on encouraging business owners to treat staff members like customers—with respect. Offer regular and transparent communication. Recognize hard work. Surprise team members with small perks, like lunch or gift cards. Support team building outside of the practice environment. 

Staffing can be one of the most overlooked aspects to receiving the maximum practice value. The fact is that most practice valuations are made with the assumption that the full staff will be transitioning with the practice. This is where selling through a professional can make or break your practice transition. Unfortunately, in practice sales are done by the wrong company or without a broker, “word can spread” that “Dr. X.” is selling. In these scenarios, it's common for the staff to find out indirectly, and begin looking for that sign-on bonus from another local competitor. Transitions typically fall apart If a key staff member leaves during a transition. Confidentiality is key. 

Overhead

General Overhead Cost increases can affect not only operations but values as well. Spending once a year reviewing your Profit and Loss statements with a qualified dental practice transitions specialist is always a great idea. Not only can you get a snapshot of your current practice value, but you should identify several areas of general inefficiencies that can increase your profitability and hence value for when you do decide to list your practice for sale. In addition, always be searching for strategic investments that will increase your business efficiencies (time/cost effect).

Working on Your Business

Dental practices can approach inflation from many angles. They can invest in technology to keep more cases in-house. They can leverage different strategies to cut costs. They can invest in staff retention. They can take a hard look at optimizing reimbursement rates. All of these strategies can help practices manage their overhead and stay profitable, but guiding practice through economic pressure begins with the fundamentals.

Focus on operational systems, clearly define the practice's mission and speak with your trusted dental practice transitions specialist. We have insight into successful dental operations trends and can assist by showing the direction to achieve practice goals.

Practice Mergers and Acquisitions Affects

Practice valuations are largely tied to profitability. Quite simply stated:

“Is a $1,000,000 collecting practice netting $200k worth the same as a $1,000,000 collecting practice netting $400k?”

The answer is obvious, which is why focusing on operational efficiencies is the key to gaining a higher value when it comes time to transition your business. 

Overall, the largest adjustment in the wake of inflationary pressure on the transition market has been purchasers seeking longer exclusivity periods with more extensive diligence. More than ever, the seller must be prepared to dive deep into their business and share an extensive amount of information to secure the most value for their business. 

Organized presentation of KPI data and Financials is essential to closing a dental transition and cutting the transition timeline to a more palatable level for both buyers and sellers.

While Inflation hasn’t necessarily affected the ability to “find a dentist match,” it has certainly made the world of transitions a more complicated one, which must be navigated with precise systems to achieve the ideal outcome.

Please reach out to us to discuss our transition systems, so that we may plan your transition for the best possible outcome.