State of the Arizona Dental Market 2024

By Mark Soelberg, CVA, Vice President of Arizona Practice Sales

As 2023 came to a close, we reflected on the exciting activity we have seen in the Arizona dental market. Looking forward, we also wanted to dive into the current state of affairs and share insights into what the future might hold for dental professionals in Arizona.

Economic Factors

Rising interest rates have had one of the biggest impacts on the dental transitions market. The Federal Reserve has raised interest rates multiple times to try to curb inflation without tipping the economy into recession. If the Fed successfully achieves a soft landing, we should hopefully see rates start to come back down by the end of 2024.

The economy is always a bit unpredictable, so if unemployment begins to rise or other unexpected events take place, we could see a harder landing, prompting rapid rate cuts. These conditions could cause adverse effects for valuations in all industries, including dentistry.

Valuations

In 2023, dental practice valuations held fairly steady. Due in part to rising interest rates, practice valuations are not rising at the same rate as they did in the past, but we also have not seen a decrease in valuations.

Going into 2024, valuations will depend on general economic conditions, as outlined above. Barring any black swan events, we will likely see valuations maintain their current levels.

Financing

Buyers’ ability to procure financing is a helpful way to gauge the health of an industry. To date, financing is still readily available. In particular, dental-specific lenders continue to offer a variety of products, including acquisition and start-up loans, with terms of 10, 15 or sometimes even 20 years.

For the time being, interest rates have plateaued; further, practice cash flows net of debt service still remain strong, despite the higher rates. We expect this trend to continue into next year.

DSOs and Corporate Groups

Over the last 12 to 18 months, capital markets for DSOs have tightened substantially. This has limited and/or delayed the ability for some DSOs to successfully recap, which is an important step through which DSOs provide value to their investors and doctor partners.

The current state of the market has shed a light on which groups are the strongest and most resilient. These groups are still acquiring practices as aggressively as ever, which is favorable for selling dentists.

Consolidation of dentistry has proliferated nationwide. If this trend continues as expected, dentistry is likely to encounter results similar to those seen in more mature medical verticals (hospital groups, veterinary, pharmaceuticals, etc.). In other words, rather than experiencing “peaks” and “troughs” that fluctuate with economic cycles, resale values for solo practices could reach a single “peak” in the coming years, once DSOs have saturated enough of the market.

Advice to Sellers

Despite the changing economy, now is still a good time to sell. The demand for dental practices remains higher than the supply. This means there is a surplus of active buyers, even if some of them have become a bit more selective. The minor dip we saw in interest rates in Q4 led to a slight uptick in buyer activity, illustrating just how quickly the market responds to change.

If you are looking to sell in the next three to five years, engage a transition broker as soon as possible. By initiating conversations early, you will have plenty of time to evaluate your options and find your ideal buyer. The market currently offers a favorable landscape for sellers, but it’s important to be prepared for every scenario.

Advice to Buyers

Starting a dental practice is still difficult due to low inventory, so many aspiring practice owners focus on acquisitions. To set yourself apart from other buyers, get prequalified with a dental-specific lender. Despite potential softening in valuations, you should not expect a significant dip in sales prices. By acquiring a practice sooner rather than later, you will be able to build equity in an asset you control and take advantage of the numerous tax and other benefits obtained through practice ownership.

Whether you are buying or selling, navigating the current market landscape requires a strategic approach. Contact us to discuss your practice goals for 2024.