You snooze you lose: guarantee your optimum exit before it’s too late
By Jonathan Fine. January 11, 2017.
The signs have been around for a while: retirement is getting trickier for dentists. It’s a bad time for pensions anyway thanks to historically low interest rates (the Pension Protection Fund expects 600 funds to collapse by 2026), but the time honoured tradition of counting on your practice freehold to see you through your twilight years is also looking fraught.
There are quite a few reasons for this. One is that many practices that are in the right location today won’t be in the right location in five or 10 years, depending on the catchment and local conditions. Increasingly, patients are favouring easy seven-day access with parking in places that are convenient and tie in nicely with other chores like shopping. I call this the ‘retailisation’ of dentistry — it’s happening all over the UK and it’s gathering momentum at a fair old pace. The upshot is that lots of practices won’t be fit for purpose when their owners decide it’s time to sell and so they may have to be sold with change of use and conversion costs.
Another reason is that practice values are quite varied depending on geography and the value of goodwill is enjoying something of a bubble. All the practice value figures at our disposal show that from 2008 onwards the trend has been upwards and goodwill now regularly exceeds 100 per cent of gross fee income. But you shouldn’t bank on practice values staying so buoyant because goodwill is only worth something in real terms if patients decide to stay with the practice during and after transition of ownership. It’s inevitable that, at some point, prices will respond to this reality and contract.
The usual way of valuing a business is through a multiple of EBIT (earnings before interest and tax) and I would expect this to be the norm in dentistry in five years — clearly a practice has to be profitable in strict trading terms with the multiple being applied indicating the desirability of the practice. Expect variables of multiples between three and 14. The simple truth is that if you wish to ensure maximum value of your practice at exit you need to ensure that the practice is in peak condition and that includes being in the right retail location. If it’s not in peak condition and is underleveraged then the multiplier applied to the valuation will be three or four as opposed to seven or 12.
My experience with quite a number of practices where the owner wants to exit is that sadly they usually leave thinking about it until the revenue line starts to gently slip downwards. They are in their 50s and are financially comfortable — kids left home/mortgage paid — and they just want to sell and don’t have the energy for a move and all the disruption and financial implications associated with a relocation. The result is they end up selling their practice at a significantly underleveraged price and handing over hundreds of thousands of asset value to the new owners.
Thinking ahead, particularly for the youngish associate who wants their own shop, there’s a nice workaround that takes some of the risk out called the 50:50 partnership model. It’s just been rolled out by Denplan and Simplyhealth in a couple of practices in Yorkshire. The idea is to reduce the barriers to an associate taking over a practice, allowing for 50 per cent-at-a-time buy-in. It sets out the basis on which the remaining 50 per cent of a practice will be valued, providing certainty to dentists when they might have concerns over retirement. In essence, the 50:50 partnership model makes sure your exit plan when you actually exit looks a lot less disappointing than the one many dentists are forced to swallow, having overestimated their wealth. Another bonus is it encourages fidelity among staff, which existing patients really like.
If you’d like to sort out your exit plan and avoid any nasty surprises before it’s too late, we have some really innovative approaches that include the partnership model, not to mention our remarkable site finding service.
Get in touch with me to find out more.
“Lots of practices won’t be fit for purpose when their owners decide it’s time to sell”
Jonathan Fine, MD