28 Ontario Dentist • March 2015

Dr. Bernie Dolansky

business

Practice Management

Information on the businessmanagement of a dental office.

You have heard the mantra for years:“Practice values are much higher thanever before. This is a bubble that hasto burst soon. All those baby boomerdentists will ultimately sell their prac-tices and, combined with an in-evitable rise in interest rates, ‘pop!’the bubble will burst and prices willcome tumbling down.” We hear itfrom owners rushing to sell. We hearit from buyers waiting to buy. And wehear it from those who profit whendentists decide to sell.

Dental Practice ValuesIs there a bubble?

We would like to propose anotherhypothesis and provide some data tosupport it. We suggest that the recentreduction of barriers to entry in theprofession, combined with the arrivalof serious capital investment fundswill increase demand more thanenough to, at a minimum, offset anyincrease in supply from the eventualretirement of the baby boomer den-tists shown in Figure 1. These capitalinvestments, as further explainedbelow, represent investors who wish to

use their own capital or money thatthey manage to buy dental practices. While both the long-term implica-

tions of increasing the number of newdentists entering the profession andthe expanding role of capital givemany of us pause for concern, theyare now undeniable facts. For peopleengaged in the valuation and sale ofdental practices, and for buyers andsellers of dental practices, these are re-alities that cannot be ignored.

Reduced Barriers to EntryFor many years, the entry of new den-tists into the profession was largelylimited by the number of positionsavailable at North American dentalschools, based on the educational rec-iprocity agreements between the CDAand ADA. These reciprocity agree-ments extended mutual recognitionof the quality of the academic pro-grams in both countries and allowedfor a different examination and licen-sure process for Canadian and Ameri-can dental school graduates.Conversely, with a few exceptions forsome Commonwealth dental pro-grams, if you were trained outside ofNorth America, you had to be ac-cepted into one of the limited spots inone of the Canadian university quali-fying programs before getting li-censed. Even with that barrier toentry in place, new entrants to theprofession have significantly ex-ceeded those exiting the profession ineach of the last 10 years, as shown in

Bill Henderson

Figure 1

Source: RCDSO Annual Report

March 2015 • Ontario Dentist 29

Figure 2. Indeed, over that 10-year pe-riod, there was a net increase of 1,890dentists in Ontario — which was a 26percent increase at a time when On-tario’s population grew by only 13percent. In other words, the profes-sion has been growing at twice therate of the population. In 2012, the requirement to attend

an accredited school’s qualifying pro-gram was eliminated, and we are al-ready seeing the impact. Figure 3shows the increased number of inter-nationally trained dentists who werenewly licensed in 2013 alone. Andthis process is just getting started. Uof T is increasing its class sizes by 20students per year. Private traininggroups are also making a business outof preparing internationally traineddentists who want to challenge theboard exams.

Capital Investment FundsThere is another, potentially bigger,factor at work — investment capital.The days when virtually every prac-tice was owner-operated are gone. Therole of dental practices as investmentvehicles is growing in two importantways, both driven by the fact thatdental practices are fantastic invest-ments. Even at the increasingly highprices paid for a practice in southernOntario, it generally yields an appar-ent 15 percent to 25 percent annualreturn on investment. Even afterrolling in conservative costs for capi-tal reinvestment and managementcosts, returns still exceed 10 percentand often exceed 15 percent, withmore stable, predictable earnings thanmany other industries such as con-sumer goods, durable goods, commu-nications, technology, real estate,infrastructure, auto, etc., which indi-viduals or investment types of fundscan invest in. For dentists, there is nobetter investment than owning theirown dental practice. For many years, individual dentists

have realized that, having paid offtheir first practice, they could make a

Practice Management

Figure 2Source: RCDSO Annual reports

Figure 3

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30 Ontario Dentist • March 2015

better return with less volatility by buying another dentalpractice, rather than investing their capital in the stockmarket. If that first investment practice proves successful,they often move on to a third and fourth. Indeed, of all thepractices we sold in the past 15 months, 61 percent weresold to someone who already owns one or more practices. Beyond the individual dentist who invests in multiple

practices, there is another much more powerful influence— formal capital investment funds. When an industry hasthe kind of predictable returns that dentistry enjoys, in-vestment funds are a lot like water surrounding a base-ment: try as you might, to keep them out, eventually thefunds are going to find a way in. And they have. In the U.S., the multiple-ownership segment of the total

number of dental practices has doubled every five years forthe last 20 years. According to the ADA News, April 9, 2012,69 percent of U.S. dental practitioners were in solo practicecompared to 76 percent in 2006, and there is reason to be-lieve that number has fallen further since then. There arethose who believe that this type of trend tends to cross theborder, with Canada lagging behind the U.S. by a few years.Several of the groups buying up dental practices have seri-ous private equity backing. After selling the Toronto MapleLeafs, the Ontario Teacher’s Pension Plan paid a reported11 times the earnings for U.S.-based Heartland Dental. At the time, many scoffed and said that was the U.S. and

it would be much harder to do here. While there is somevalidity to that, like the water around a basement, groupfunding has now found its way into Canada: another largepublic-sector pension fund, the Ontario Public Service Em-ployees Union (OPSEU), recently made a sizeable invest-ment in Dental Corporation of Canada through one oftheir investment firms, OPTrust. This means that one ofthe country’s largest investment funds now has an owner-ship stake in Ontario dental practices — and it would benaïve to think this is an isolated incident.

Some of the medium-sized Canadian dental chains haveswitched from bank financing to private equity backing.With the kind of economic returns dental practices yield,the supply of funds is virtually unlimited, so more andmore investment managers are working on ways to owndental practices. Often when dentists become aware of thissituation, the first question asked is, how can a non-li-censed dentist own or participate in the profits of a dentalpractice? The answer is complicated and beyond the scopeof this article, but the reality is that it is happening and itis happening within the existing regulations. The reduction of barriers to entry to the profession, com-

bined with the gravitational attraction of still-excellentdental practice returns for capital — both individual andlarge-scale — are exceptionally powerful forces that weargue could impact the demand for dental practices wellinto the future. Given these factors, we believe the real in-crease in supply is going to have very little, if any, impacton practice values. This isn’t a bubble that will burst. It isthe new normal.

Dr. Bernard Dolansky is Past President of the ODA, the OttawaDental Society, the CDA, and the Dentistry Canada Fund. Heis currently a partner at Tier Three Brokerage Ltd., and assistsdentists with transition planning, practice purchase and sale,evaluations, associateships, retirement planning and partnershiparrangements. You may reach him at bernie.dolansky@tierthree.caor 613-794-1977.

Bill Henderson is the President of Tier Three Brokerage Ltd.,one of Ontario’s leading dental practice brokerages. A recognised industry expert in dental practice valuations andsales, Bill is a regular presenter for the ODA as well as other industry organisations. He may be contacted atbill.henderson@tierthree.ca, or 416-578-7061.

Practice Management

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