You might have noticed that dental practice values only seem be going one way: up. Some people, us included, keep saying these things never last. Yet brokers are seeing demand continue to rise. What’s behind this? We asked Frank Taylor & Associates director Chris Strevens.
Chris, if demand is continuing to rise, then why?
There’s a perfect storm. Associate pay rates are under attack so there’s more incentive for them to look to owning their own practice. All 14 major banks want to lend because dentistry still has a green light. And we’re seeing a massive amount of family money coming in — if you were only looking at bank money then yes, there could be stagnation in prices.
We just saw two young brothers put an £800k deposit down for a £1.8m practice. Family money. And family money isn’t always necessarily altruistic; if you have £50k in an account earning 0.1% interest, why wouldn’t you lend to your nephew and earn 3% on it instead? It’s hard to go wrong in dentistry, so people have confidence that debts will get repaid. That could change if interest rates rise though.
Are you seeing more acquisitions by corporates?
Corporates only have about 12% of the market, it’s still mostly private owners. Maybe 20% of private owners have more than one practice. It’s true that some big corporates have had problems, but we only sell about 1% of practices to those big groups.
They are exceptionally good at buying practices because it’s their job, so they tend to not pay the best price. The problem is many dentists aren’t experienced in business and they feel flattered when a corporate comes to them and makes an offer.
Can you give an example?
A couple of months ago a practice in north east London was approached by a corporate and offered £1.38m. We told the owner it was worth £1.5m. They went back with the price and the corporate instantly agreed to pay it.
Then I asked the owner to imagine what we could do if we took it to the open market. We did, and finally accepted an offer of £2.2m. That’s exceptional, but it demonstrates that we’re not seeing any signs of the bubble bursting. Yet with other brokers it would have gone to a private list.
Why doesn’t Frank Taylor & Associates do private lists?
When brokers use private lists it means buyers pay a fee to join. They get first dibs and then pay a commission when they buy, and the seller pays nothing. Instead, we go to the open market for the best price, and we don’t charge the buyer anything.
If I am being paid by the buyer, isn’t there a conflict of interest? It’s the open market that gets you the great prices because it means urgency, competition and access. For example, we have 2,197 people on our books looking for a mixed practice in Hertfordshire. Out of that I’d conservatively expect 400 prospects for any particular purchase, yet you might only have 100 people on a private list for the same area.
How do you value practices, with EBITDA or old fashioned turnover?
Both. We use something called reconstituted profit because we think EBITDA is limiting. It’s basically the same concept as EBITDA but you make adjustments for things that would be applicable to the new owner. For example, if the seller was paying his wife £30k a year for a work role, we’d take that off. And if the owner had done a course in Chicago and taken his wife, multiple times, so that the costs were £25k instead of the £5k average cost of a course, then that would come out too. Then we’d do a turnover calculation.
A few years ago HMRC asked us to do a presentation to tax inspectors in Nottingham who wanted to know what multiples of EBITDA and turnover to use on dental practices. We showed them five or six practices that were all different, demonstrating it wasn’t possible to put into a formula. When we asked one of the HMRC people what is the price of a diamond, he acknowledged that it depends what someone will pay…
How much does location impact the valuation — where in the country, and where on the street?
Massively. A private practice in north west London probably gets a 3.5 or 4.5 multiple of profit, but a practice in Cornwall might get 1. Private practices are more sensitive to location than NHS. An NHS practice somewhere like King’s Lynn in Norfolk would be popular whereas a private practice would get significantly less interest.
You can sell anything anywhere as long as you’re able to find the right price. Sometimes that means waiting a bit, especially in places like Cornwall where, in contrast to the 2,000+ buyers we have in Hertfordshire, there are just 568 people looking to buy.
Convenience is a key factor in price, so parking or a nearby train station helps. But equally if you’re renting a building, some streets are cheaper, and cheaper rent cuts overheads. Future cost savings like this have to be balanced against how they affect traction with patients.
All regions have different demands on them, but we’ve never seen an oversupply of practices. The ultimate number of practices that transition is limited because there are only a finite number to start with, around 11,000.
How much time does it take to sell the average practice?
With an NHS practice you can’t do it quicker than four months because you’ve got the NHS to deal with on top of the CQC. With a private practice it comes down to how quickly the CQC can sort out your DBS, which could be four weeks.
In reality buyers and sellers aren’t necessarily that motivated. It comes in dribs and drabs. With a motivated buyer and seller it can be done in four months, however it takes on average six to nine months.
We saw guys in the US give one contract to both sides and say “you have five days to agree”. Over here there are something like 13 external agencies, none of which are in our control, and most aren’t within the control of the buyer or seller either. It can be quicker with a limited company because quite often all you have to do is switch the names rather than create a new entity.
One of the biggest obstacles is when it’s a third party lease. Often the dentist has been there 20 or 30 years and regards the landlord as a friend. So at valuation stage they expect the landlord to extend the lease, but the landlord sniffs cash and demands £3k or £5k or £10k to renew it.
People can be naïve and expect landlords to forget that they’ve overlooked multiple rent reviews over the years. They won’t, they will add them on now, just when you can least afford to alter the profitability of your business.
Sometimes solicitors won’t run things at the same time because they don’t want to incur extra costs before they know the outcome of the task at hand.
But there are ways to anticipate the roadblocks and speed things up before you start. For example, extending the lease is often necessary for buyers because their loan can’t be over a period as short as six years. The vendor can get this done before they put their practice up for sale.
For a young associate wanting to buy a practice, what sort of funding is available and what are the likely costs?
FTA Finance is the largest referrer of loans in the dental market and we see banks typically ask for a 10% deposit for NHS practices and 20% for private. If you make it fully secured with your house or your parents’ house they will lend 100%. The typical arrangement fee is 1.5% but it varies depending on your circumstances.