Dental Goodwill Premiums Can Cost You

Is there a difference between price and value when purchasing a dental practice? The short and easy answer is yes. As you can imagine the long answer is far more complex and certainly isn’t as simple as buying a material object like a car. However, unlike a car, where its worth decreases as soon as you drive it away from the garage, a practice can both lose or gain value when it is purchased.

The price of a practice, or the tangible book value, is determined by both its physical worth and current state of the marketplace. As the marketplace has become more business-orientated with measures currently focused on EBITDA (earnings before interest, taxes, depreciation and amortization) and ROI (return on investment), some of the intangible elements associated with goodwill such as a company’s brand name, its customer base’s potential, good customer relations and good employee relations can sometimes be under-valued.

This is where individual purchasers can often become more aggressive in the bidding process than consolidators who are seeking to solely acquire EBITDA meaning they are prepared to pay over the marketing price of a given practice; otherwise known as a dental goodwill premium.

How is the Dental Goodwill Value Determined?

Although dental goodwill values are essentially comprised of subjective views, there are various ways in which you can complete a valuation. The simple multiple approach, used for smaller and more straightforward businesses such as dental practices, involves applying a multiple to sustainable profits before principal remuneration is accounted for. Where a business is showing strong growth and is experiencing high levels of profitability, the multiples used will be at the higher end of the scale. If a business is in decline, the multiples used will be much lower.

How Does It Affect You?

Ultimately, if you’re thinking about or are already buying a practice, this will affect the dental goodwill premiums that you will have to pay on top of the valuation price; this is applicable to all types of practice.

With the market is becoming more and more aggressive and competitive with practices in high demand, goodwill premiums are growing in occurrence and increasing in magnitude. It could be that business standards and expectations are at an all time high or perhaps there is just an increase in dentists wishing to own their own practice; either way, paying a goodwill premium is becoming a common occurrence during an acquisition.

The present market shows that NHS practices and acquisitions in the South East are in the highest demand, though as figures released denote, private practices are starting to narrow the gap.[i] As this will affect the amount of dental goodwill premium you have to pay, it is therefore important to take popularity of an area or type of practice into consideration. What’s more, because these factors are driven by overall current trends and market desire and are subject to change, keeping on top of changes is integral. As a result, it is always best to approach any potential purchase with caution.

Can You Afford the Premium?

When it comes to reviewing what you can afford, it is prudent to add the cost of the goodwill premium into your budget. If you don’t, it may seem as though you can afford a practice that is probably out of your reach. For example, if you were in talks with an independent financial adviser and they’ve said you could afford a practice worth up to a million pounds based on the £200,000 deposit you’ve got available, they will likely be assuming you are going to buy a practice at valuation price alone. For instance, a typical lender might be prepared to lend you 80% of the independent valuation completed by their advisors, so if you make an offer to buy a practice valued at £900,000 for £1million, it is likely the bank valuation will return a maximum of £900,000. What this ultimately means is that they will only lend you £720,000 and you will have to fund the remaining £280,000 yourself. As a result, you can no longer afford your chosen practice.

In addition to being realistic and cautious, there are other approaches you can take to deal with dental goodwill premiums. For instance, by asking the vendor to stay on at the practice, you could potentially reduce the amount of money you have to pay up front. What this essentially means is that by paying the previous principal more when they stay on as an associate, you won’t have to pay as much on paper for the actual practice acquisition.

Buying a practice and taking dental goodwill premiums into account might be a bit of a headache, but by working with companies such as Dental Elite, an experienced practice sales and finance adviser, this kind of insight and guidance can make all the difference.

Don’t get caught out with dental goodwill premiums. There are ways to minimise the risks and protect your investment, but you need to consider your personal situation carefully to assess which are appropriate for you. To increase the chances of a smooth acquisition get some help from the experts, today.

Book a Consultation with One of Our Finance Guys

[i] Average Dental Practice Goodwill Values for Last Year.