The Impact of Inflation on Dental Practice Valuations

Historical Trends in Dental Practice Valuations 

As dentists in most countries grapple with soaring inflation, some potential buyers and sellers of dental clinics may have paused to rethink their options. Dental Tribune International spoke with Kyle Francis, president and founder of Professional Transition Strategies, about how inflation is reshaping the practice transition landscape. According to Francis, rising interest rates in 2023 could increase private equity interest in dentistry and have a downward impact on the values of US dental practices that generate US$1 million in annual revenue.

Francis explains that there has been an inverse relationship between inflation rates and the value of a dental practice to individual buyers. He notes that a practice generating US$1 million in revenue in 2007 would have been valued at 80% of its revenue, or US$800,000. Even as revenues rise with inflation, the valuation methodology has remained consistent, which means that cash flow improvements may not translate to significantly higher practice values.

Inflation’s Role in Cash Flow and Practice Value Metrics

The perceived value of practices increases with inflation, but only proportionally to the rise in revenues and expenses. This equilibrium ensures that net outcomes for practice owners remain relatively unchanged despite broader economic shifts.

Rising Costs and Their Effects on Dental Practices

Increased Supply and Labor Costs

Timing is critical when assessing the effects of inflation on practice acquisitions. Dentists are among the first professionals to feel inflation’s impact, particularly through rising clinical supply and laboratory costs. Staff wages often increase soon after, as employers adjust pay to keep up with the rising costs of everyday goods.

Fee Adjustments for In-Network vs. Fee-for-Service Dentists

While fee-for-service dentists can increase patient fees more easily, in-network providers face restrictions from insurance contracts. These providers often have to wait for insurers to raise reimbursement rates, which can lag behind inflation, leaving practices temporarily operating on thinner margins.

Market Dynamics in 2023: Challenges and Opportunities

High Inflation and Delayed Revenue Catch-Up

High inflation rates may lead to short-term declines in profit margins for dental practices. As costs rise and revenues lag behind, practice valuations can dip. However, insurers are gradually increasing reimbursement rates to address these gaps, which should help stabilize revenues over time.

Changes in Buyer and Seller Behavior During Economic Uncertainty

Despite inflation, Francis notes that valuation methodologies have not significantly shifted. Practices with temporarily lower profit margins may still transact, but sellers and buyers must navigate uncertainty carefully. Earn-ups—where additional payments are made if profitability improves post-sale—are becoming more common.

Strategic Approaches in a Shifting Landscape

Creative Selling Options for Practice Owners

When uncertainty looms, practice owners can explore alternative transition strategies, such as:

  • Partnering with dental support organizations (DSOs) or private equity groups.

  • Merging with similar practices for greater operational efficiency.

  • Establishing employee stock ownership plans (ESOPs).

Opportunistic Buying Strategies Amid Market Uncertainty

For buyers, the current environment presents unique opportunities. Rising interest rates are comparable to those seen during the boom of the early 2000s, yet many potential buyers remain hesitant. This creates room for savvy buyers to secure favorable deals and access a wider array of practices.

Long-Term Resilience of the Dental Industry

Lessons from the 2008 Recession and COVID-19 Lockdowns

The dental industry has proven its resilience during past economic challenges, such as the 2008 financial crisis and the COVID-19 pandemic. Practices that adapt to changing market conditions often recover and thrive.

The Growing Gap Between Low-Profit and High-Performing Practices

However, small, low-profit practices in areas with declining populations face steeper challenges. For these practices, securing buyers or financing can be difficult, further widening the gap between high-performing and struggling clinics.

Key Takeaways for Buyers and Sellers in 2023

Navigating Interest Rates and Market Volatility

Inflation and rising interest rates have created both challenges and opportunities. Buyers and sellers who take proactive, strategic approaches can navigate the current environment successfully.

Preparing for Market Normalization and Strategic Growth

Despite short-term fluctuations, the dental industry remains a stable investment. As market dynamics normalize, both buyers and sellers should position themselves for growth by staying informed and adaptable.