The US Stock Market
As of the closing bell on June 16, all U.S. Equity indexes were all down set new 52-week lows:
Source: https://www.cnbc.com/quotes/.SPX
We are in a Bear Market with a recession looming and there is mass exodus of cash from the public markets to other investments to weather the storm.
Crypto
Remember seeing Matt Damon’s commercial this past Super Bowl Sunday for crypto.com informing you that “Fortune Favors the brave”? Those who were brave enough to open a crypro wallet that evening and invest $1,000 are now down more than 50%. Good thing, Matt Damon kept his day job. In May CNBC reported that 40% of all crypto investors are upside down on their investments (Dow Jones Newswires).
Photo Source: crypro.com
Inflation
U.S. Inflation market a 40-Year high as the Consumer Price Index (CPI) reached 8.6% in May of this year. The cost of everything is going up! It costs well over $100 to fill up my SUV, the grocery bill is up 10-15%, and your summer vacations (air travel, hotels, dinning) are all up as well. We suffered through the pandemic and lock down only to be set free to travel with family at a much higher cost.
Interest Rates
The cost of borrowing money is higher than it has been in recent years, and it is going to continue to go up! The Fed just raised rates by another 75 basis points on June 15th. They already raised rates by 50 basis points in May of this year. The Fed raises rates to drive all of us to save more and spend less. It is the Fed’s way of saying “stop spending” but has material impact on businesses abilities to grow as most businesses rely on debt financing for acquisitions and new projects.
Banks that used to offer long term fixed rate debt are now offering floating rate deals to their customers. What was once a known cost of business (fixed rate debt), now becomes an unknown, and growing cost due to the rising interest rate environment that we are in.
In light of all of this news, how are Dental Practice Values Still at All Time Highs?
Smart money always finds ways to grow, even in down markets.
Photo Source: https://www.greenbiz.com
When the public markets begin to crater and risk permeates markets, smart money finds it ways into businesses and investments that have historically served as a shelter from the storm. Dentistry is one of those safe havens. When the dot-com bubble burst, and when the subprime loan / housing crisis hit, U.S. spending on dental services did not go down! Dentistry just survived a pandemic with a global lockdown after it was foolishly deemed non-essential for weeks in some states and months in others. Investors have taken note: Dentistry has proven to be both recession and pandemic resistant. This drives smart money into our economy. We are getting multiple calls per week of new investors looking for opportunities to buy dental groups. They are unphased by this current short-term blip.
When you add all these new investors to the existing 120+ PE-backed IDSOs in the market and you have unprecedented demand for dental practice.
19 of our last 20 deals have traded higher than our initial expectations set with our clients! We are bringing new buyers to every deal and are astounded to see the prices continue to rise. Competition for deals is fierce and today we can negotiate better economics and terms then ever before.
It is not all good news though…
Some legacy DSOs and IDSOs are beginning to show signs that they cannot keep up with the rising costs of practices. These groups are likely have too much debt and their lenders are concerned and holding them back from paying more on deals. The rising cost of debt, due to floating, increasing rates has them up against the ropes. These DSOs complain to us that prices have gotten too high, yet we are connecting our clients with buyers offering 1-3x higher than they can / are willing to offer. Quick reminder, the market sets the price, not TUSK. We simply bring the entire market to our clients and push them all to their highest and best offers by running a competitive process.
Other DSOs and IDSOs are feeling the pinch on their EBITDA margin and are pushing their world view onto their prospective future partners. We heard recently from a buyer that our client’s 30%+ EBITDA margin was unsustainable, and they could not bid on the true trailing 12-month EBITDA. Instead, they wanted to burden our client’s EBITDA with their expected costs going forward. This buyer was not invited back for second round bids.
As we see more legacy buyers fall off, demand will go down. The question is, can the new buyers grow fast enough to keep prices where they are today?
Summary
Practice valuations are still at all-time highs and trading well above our expectations. It does feel like we are heading to a plateau for valuations if not a correction by early 2023. If you are on solid ground and have no need to sell in the next 24 months, go into cash saving mode and prepare for a buying spree in the coming 18-24 months and practice values will likely be coming down.
If you are considering a sale in the next 24 months, it is time to act. Give us a call so that we can provide you a complimentary practice evaluation.
Wherever you are in your journey, you should certainly join us in Denver for our M&A Workshop where we will provide you insights into the M&A markets, give you insights into how buyers think about deals and details on how to ensure that you Exit at the Top.
About TUSK Partners: TUSK Partners (“TUSK”) provides M&A Advisory services in the dental industry. TUSK has completed over $650M of transactions across all specialties. With an in-depth understanding of the marketplace and access to 100’s of buyers nationwide, we help our clients confidently pursue M&A transactions that maximize their long-term value. With our significant collective experience of over 40+ years of dental practice transactions, we offer our clients solutions that help them achieve their strategic and financial objectives. For more information, visit https://tusk-partners.com
