Practice sales after COVID-19: The Probe

Practice sales after COVID-19

Over the past two years, the dental market has had to adapt to numerous changes and challenges. It’s worth having a look at how the pandemic affected it during this time, and how the market has modified its processes to cater to these changes.

What’s been happening?

There has been some interesting activity among bigger groups and corporates recently. At the moment, a lot of these buyers are coming to the market and making more conscious choices about the types of practices they purchase. Practices with smaller earnings before interest, taxes, depreciation and amortisation (EBITDA) are not as favourable to bigger groups, who are going for practices that have a turnover of around £1 million, or smaller practices that have the potential to be expanded. However, there have been new groups that are seeking acquisitions within the £500,000 to £800,00 bracket, which are the practices that larger consolidators are tending to favour less at the moment.

This behaviour demonstrates that if you own a practice that falls into this price range, you don’t have to sell just to an individual buyer, as there are some groups looking to form smaller groups in their area where the competition isn’t too high. For practices with a turnover of around a million, there’s a lot of competition among groups and corporates. But, depending on the time of year, the market can shift and these larger acquirers may look back at the smaller practices if they are unsuccessful in finding a larger one. When looking the EBITDA multiples over the past two years, the current market activity would explain the increase in EDBITDA multiples for private practices, which has risen by 0.55% since March 2020.i Furthermore, a number of groups are coming to the end of their investment cycles, which is pushing the multiples up too. So it’s not uncommon for private practices to have a multiple of eight or above if it’s looking like a fairly competitive deal, in the right area with the right risk profile. Of course some larger sites still sell to individuals for double digit multiples in the right area as they are less focused on arbritrage.

Back in March 2021, there was a mix of some successful sales and sales that went through at the sale price agreed prior to COVID but with different terms (for instance, on a longer tie-in period or more defer consideration). There were also sales that went through at a discounted price, for numerous reasons. One of which was that many professionals decided to sell up quickly whether due to a life change or that they just didn’t know what was going to happen in the following months. The March 2021 figures are warped slightly, but they did demonstrate the increase in adjusted net profit for private practice valuations. There has also been an increase in the adjusted net profit for mixed practices too, where in March 2021 it sat at 7.31, whereas now it sits at 7.52, which is around a 0.2-0.25% jump.[i]

It’s worth noting that despite the larger EBITDA practices being sold to groups and corporates, over the past year or so around 80% of practices have actually been sold to individual buyers,i or buyers who are acquiring their second practice. When you focus on the numbers, it may seem that the market is being consolidated by big dental bodies, but this isn’t necessarily the case.

Handing back NHS contracts?

Recently, many dentists have been handing back their NHS contracts or seeking to reduce it. Many are struggling to recruit and grapple with the rising staff and material costs, as well as patient demand. If you are thinking about handing back your NHS contract, it’s worth taking a step back and evaluating whether this is feasible for your business. Ultimately, it’s worth holding on to your NHS contract if you can maintain both that and your private commitments.

For instance, if you had:

  • An NHS contract value of around £240,000
  • 7,500 UDAs at £32
  • Associate costs of around £12 per UDA
  • Lab materials at around 10%
  • You would have gross profit of roughly £126,000.

However, if you had:

  • £300,000 of private income
  • Associate costs at 45% (£135,000)
  • Lab materials at 13%
  • You’d still have a profit of around £126,000, based on the same five clinical days.

So, unless you can predict growing your practice to £300,000 in additional private revenue, it’s worth holding on to your NHS contract if it’s still viable for you. It’s also worth noting whether this increase in private work could still be sustained once practices are back up and running at 100% of their NHS contracts.

If you’ve got a five-year exit strategy, for instance, then handing back your NHS contract might be feasible. But, if you’re thinking about selling in the near future, then you should evaluate whether you’d want to make this change, as you would need to demonstrate this increase in private revenue within your financial accounts.

[i] Dental Elite data