Strategy for a successful sale

26 December 2023

Phil Kolodynski and Nick Moore share their insights on the current state of the market.

Phil Kolodynski and Nick Moore share their insights on the current state of the market.

Given the media headlines around the UK’s interest rate hikes, Phil Kolodynski, director of practice sales at Dental Elite, kicked off a recent webinar by putting dental professionals’ minds at ease about how it was affecting the market. 

“We’re in a very cash-rich industry,” he said. “Lots of dentists have significant savings and, due to covid with many practices seeing a boom in increased private income, associates have saved huge deposits to buy their first practice. Not every buyer needs finance, and the bank of mum, dad and family isn’t affected by base rate increases.”

However, Phil believed it was naïve to say there was no impact at all. For example, comparing August 2022 and August 2023 annual repayments on the basis of a 15-year term and borrowing £1m (£92,555 vs £115,696) shows a difference of £23,141. “That’s straight out of the pocket of the buyer. Effectively, that business is £23k less profitable in the buyer’s eyes,” he explained.


As a result, the main impact has been fewer buyers. “Where a mid-sized £1m NHS practice in London 18 months ago would have probably attracted 18 buyers, now it’s only 10 buyers,” Phil said. “What we’ve noticed is that the buyers thinking about if should they buy a practice or stay an associate, have gone into hibernation. There’s still a big pool of serious buyers in the market. We’ve just lost the tyre-kickers.”

Benchmarking report

Nick Moore, a senior valuer for the southwest and London, explored three key areas to examine when it comes to valuing a practice that is covered in Dental Elite’s recent benchmarking report: material and lab expenditure, UDA rates and staff costs.

Its data shows a clear difference in the levels of material and lab expenses when comparing private and NHS practices. The cost goes up as the NHS contingent is reduced. Nick emphasised that private practices have greater control over treatment fees as material costs can be factored in to the price the patient pays. “You don’t have that luxury in an NHS practice,” he said.

He urged practice owners to use the benchmarking percentages in the report to test their own businesses and cost controls, “What it may highlight is that you might need to put your treatment prices up.”

Phil agreed. “Often when we look at these spends, it’s not necessarily about a practice spending too much on the materials, it’s about not charging enough for the work,” he said.

To put this into context, Phil explained that in a £1m turnover practice, if it can save one per cent of EBITDA (£10k) on materials and reducing lab fees then that could mean an additional £70k to £80k to the value of the business.

When it comes to UDA rates, the data shows that the average is up from £10.50 to £11.89 for mixed practices and £13.15 for NHS-focused practices. This is down to the lack of dentists and current challenges in recruitment. “What we’re seeing is the NHS paying more to retain the dentists they have,” Nick said. “If you don’t pay the rates, they’ll look to leave or not do NHS work full stop.”

Staff costs are the biggest expense in a practice and need to be examined regularly. Staff costs as a proportion of gross revenue is greater in NHS practices. This is not because they pay more but because more of their income is delivered by chair time which necessitates more staff. Mixed practices benefit from weighting their hourly rate for private treatments and private practices generate more income from fewer chairs. And fewer chairs equal fewer staff. In terms of valuations, this is crucial, “Too many heads erode your profit margins,” Nick advised.

State of the nation

Nick ran through the various acquisitions and mergers that have recently disrupted the market. “Basically, eight strong buying groups have become four,” he said, with Real Good Dental’s purchase of Enamel Dental Care, Riverdale buying 19 Hanji Dental Care practices, Dentex and Portman merging; and Dental Partners and Rodericks Dental joining forces.

On the upside, he highlighted that MyDentist is now looking to expand and that Todays Dental is ever-expanding and growing into the Midlands. Envisage Dental is also very active.

Phil pointed out that although the report highlights the big groups, there is a tier of buyers below them. “These are people with two or three practices and looking to grow, these buyers can offer competitive prices whilst being more flexible than groups on deal terms,” he said.

Nick and Phil explored the pros and cons of selling to an independent or multi-site buyer. While a corporation will almost always make a higher offer, the deal structure may not be so advantageous. An independent will pay 100% on completion, whereas with a corporate, there will be a tie-in – between three and four years – and the seller will have to stay with the practice.

Nick warned that some corporates may approach dental practices directly but urged dentists to ‘get valued and don’t do it alone’. Dental Elite offers free valuations so those looking to sell have nothing to lose. A recent case in point: a corporate made a direct offer valuing a practice at £1.3m on a multiple of 5.8x and just two weeks later Dental Elite secured a deal valuing the practice at £1.85m, on a multiple of 8.25x. Now, that’s a win!

 

Revisit the webinar at https://webinars.dental-update.co.uk/#/pastwebinars