If you’re considering selling your orthodontic practice, you may have been waiting some time to be offered a new 10-year personal dental services (PDS) contract only to receive a letter out of the blue from your Integrated Care Board (ICB).
As those of you waiting to retire will know, securing a new or increased PDS contract does, in fact, add to the value of your business. For some, it could finally enable you to begin retirement planning. Why? Because a practice with only a short-term NHS contract, which encompasses the vast majority of its income, is next to impossible to lend against. From the perception of consolidators, this is also too high a risk to place an offer at a multiple beyond the years remaining on the contract. Thus, a 10-year contract increases the realisable value of your business considerably.
Regular income
A PDS contract signals a secure, regular income stream that will help ease cashflow concerns, which can be music to the ears of potential buyers. Such stability is vital for the financial success of any business. Lenders also look favourably on NHS income so that works for the purchaser too.
NHS orthodontic contracts took a hit a few years ago when the whole system was reviewed and contracts re-tendered. Though the initial reaction was one of concern, which negatively impacted goodwill values, the result was actually quite positive for affected practices. The new contracts awarded were guaranteed for seven years and could be extended for an additional three years – consequentially making them more secure than before. As such, this means that any practices extending or increasing their orthodontic contracts at this time will be more profitable and, therefore, more attractive to potential buyers. This is particularly good news for orthodontic practice owners across the Midlands, considering that many aborted their tender process and have been stuck for the last few years.
The trade off
There is a ‘but’ in this re-procurement, though, which was absent from the letter issued in that there is pressure on the NHS to achieve better value, with most orthodontic contracts issued because of the tender process being done so at a UDA value of £54.89. This has subsequently been up-rated by various Review Body on Doctors’ and Dentists’ Remuneration (DDRB) uplifts, but I believe that those practices who currently enjoy north of £70 per UOA, will have to agree to a lower rate in return for the security of 10 years.
From a terminal value perspective, there is little argument in favour of continuing at a higher rate on a rolling basis. This does mean that for those who had hypothetical valuations based on a continuation at their current rate of, say, £80, for the purposes of argument, they could face a reduction in hypothetical value unless some of the consequential reduction in profit can be recouped by reviewing their cost base. In this respect, if an owner is offered to maintain their contract value for a higher output figure or maintain their output but at a lower contract value, then in the majority of cases, the former should be opted for.
Obviously, a PDS contract, or any other NHS contract for that matter, does not represent guaranteed income. Every pound depends on you, the dental professional or orthodontist in this case, being able to fulfil the terms of the contract. If you’re not able to achieve this, then any monies received will be subject to clawback. This is another reason why retaining good staff who can fulfil contract demands is essential for development and saleability.
Value judgement
Practice valuations provide insight into how much a dental business is worth, and there are multiple factors in the calculation. The type of contract in progress is just one. Others include a practice’s profitability, annual turnover, UDA\UOA value and associate fees. Other expenses such as materials and lab fees, staff and rent are also taken into account.
The vendor’s EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is then calculated, which ultimately determines the true operating performance and profitability of the practice. A multiple – which is normally influenced by the market in its current state – is then applied to the EBITDA figure to ascertain the value of the practice.
It is an intricate and complex process, so getting expert advice and support is crucial. The team at Dental Elite have more than a decade of experience in the buying and selling of dental practices. They can help you optimise the value of your business and prepare for a sale – no matter how far in advance you are thinking about it. They can also help you navigate the complexities of NHS and orthodontic contract values and how they may impact your practice in the long run.
Ultimately, increasing your orthodontic or NHS contract size or value is a very good thing for your practice. With the right support, you can make the right decisions for you, your patients and your business.
For more information visit https://dentalelite.co.uk/