The Inflation Effect on the Dental Office and Practice Values

Since 1993, inflation measured by the Consumer Price Index (CPI), has averaged 2.55% growth per year; the largest increase up until 2020 was 3.85% in 2008. According to the BLS (Bureau of Labor Statistics) the US annual average inflation rates… 2020 ending with avg 1.24% jumping on average of 4.7% in 2021, 8.01% avg in 2022, 4.12% avg in 2023. The past 3 years have been “painful” to say the least. 

Economic pressure has affected the dental industry on several levels, the most obvious being in the cost of labor and employee retention. In addition, overhead costs have increased, while insurance reimbursements remain flat.

Employees

Staffing is the most important operational component of owning a dental practice. Almost three years removed from the pandemic, and the industry is still feeling the effects of the large portion of employees who left the workforce, never to return. This has created increased demand, driving up the cost to recruit, hire, and retain key employees. It has become more common to see sign-on bonuses based on the area of need and the scarcity of candidates.

Paying a competitive wage is important but not the only factor in hiring/retaining staff members. There are great resources for increasing your HR gameplan. For instance, books like “WHO” discuss having a method for hiring, and offer the owner different ways of enhancing the employee experience. Such as: regular and transparent communication…recognizing hard work…and surprising team members with small perks, like lunch or gift cards to name a few.

Most practice valuations are made with the assumption that the full staff will be transitioning with the practice. From the valuation, to day-to-day performance, staff retention is key. Lack of communication creates confusion, confusion leads to frustration, frustration leads to seeking new opportunities. Whether it pertains to daily operations or transition communication, seek the input of a reputable broker to gain insight on what may work best for you.

Overhead

General overhead cost increases may affect not only operations but values as well. Have a practice valuation analysis conducted by a reputable broker and then schedule an annual review to update that analysis. You will identify “ground zero” and in most cases several areas of general inefficiencies that can increase your profitability and secure the highest possible asking price when the practice is sold. In addition, always search for strategic investments that will

increase your businesses efficiencies (time/cost effect).

Working on Your Business

Dental practices can approach inflation from several angles:

investing in technology to keep more cases in-house; leveraging different strategies to cut costs; optimizing reimbursement rates (if applicable); and enhancing the focus on staff retention. Each may help to manage overhead and stay profitable, but guiding a practice through economic

Pressure begins with the fundamentals. Focus on operational systems and clearly define the team’s mission. Seek advice from a reputable transitions broker who can provide insight pertaining to successful processes needed to attain practice goals.

Practice TRANSITION…Value Affects

Practice valuations are tied to profitability. Example:

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

The answer is “no”, which is why focusing on operational efficiencies is the key. Optimizing efficiencies not only increases real-time cash flow (money in owner’s pocket) it will also have a positive effect on value. Since the practice valuation is based on multiple years’ financials, the owner will want to prepare at least 4 to 5 years ahead of the targeted closing date. One of the more noticeable adjustments in the wake of inflationary pressure has been purchasers seeking longer exclusivity periods with more extensive diligence. Which means, the seller’s practice must be presented in a meticulous way to secure the most value for their business.