The two elephants in the room
Two major conversations within the dental market are that of the inflation rise and NHS contracts. These elephants in the room have no doubt prompted many prospective sellers to consider whether now is a good time to sell.
Until 16th December 2021, the Bank of England base rate was 0.1%, having sat at or below 0.75% for the past decade, but at the time of writing it’s 2.25% – and it almost certain to increase again the committee meet again. If a prospective buyer was looking to acquire a dental practice worth £1 million, and put in around 20% of their money as a deposit, then they’d be borrowing roughly £800,000. An interest rate margin of 2% plus base means c£5,185 will be paid back per month on the basis of a 15-year term. Right now, buyers would be paying c£833 more per month compared to what they would have paid a year ago. If the base rate rises to 5%, then these repayments would increase to approximately c£7,191… That’s an increase of c£2,000 compared to what buyers would have been paying monthly only a year ago.
For a practice worth £1 million, the associate led earnings before interest, taxes, depreciation, and amortization (EBITDA) on the underlying practice would typically be in the region of £125,000. If a buyer were already paying back £62,220 a year, that would leave them around £62,280 for their pocket (ignoring tax). If they had to pay back an additional £24,000 in interest, before tax, they’d be left with around £38,780. The restated increase in corporation tax leaves a thin margin for error, so while dental practice assets will continue to trade, we expect that buyers will be keener on those where they can more easily unlock additional value, and any EBITDA slippage is less likely.
The big question for many dental practices is whether they should hand back their NHS contracts and grow their private services. Over the past 6 months, there have been a number of practices looking to hand back around hundreds of thousands of pounds worth of NHS contracts, and put their dental practice on the market within the year. However, in this scenario, it would be wise to hold onto those contracts and concentrate on transitioning your practice to private, which includes converting your patients, updating your accounts and ensuring the team are on board with the switch. This will take about two years, but once this is done then the practice can be put on the market – any earlier and the market will penalise you.
For instance, take an NHS practice (coming out the back of an NHS contract) with a contract value of £240,000, 7,500 UDAs at a value of £32 and £12 per UDA for associates. This kind of practice will have a gross profit of £126,000. Then, in terms of a private practice, in order to achieve that same gross profit of £126,000, the practice would need to generate around £300,000 in private income. It also depends on the type of private dentistry the practice is doing – for instance, if it’s adult orthodontics or dental implants, then lab fees and materials will likely sit at around 20%, rather than at the 13% it would sit at for an NHS or general private practice. In this instance, more than £300,000 might have to be generated. These numbers are not absolute, they fluctuate from practice to practice.
Ahead of any conversion with a short-term sale key, questions have to be asked – how quickly could this £300,000 be achieved? If a practice owner wishes to sell in the next few years, but only achieves around £200,000 in private income, will they have to hold the business longer than anticipated in order to maintain the value of the practice? As previously mentioned, this depends on the individual practice. There’s a lot to consider when it comes to converting the practice to fully private – will there be a stable volume of patients moving over? Are there other private practices in the area that will compete? Giving back NHS contracts is not a straightforward process.
Making decisions for the future of your practice
These topics were discussed in the Dental Elite session at Dentistry Show London 2022. It was encouraging to see and chat to the attendees – one delegate, Janos Kiss (from Dentozen Dental Practice) said the presentation was “excellent”, while Dr Anjali Kaushik (Greenwich Dental Practice) said it was “very informative and engaging, with all topics covered and questions answered”.
Selling a dental practice is a monumental milestone, so it’s unsurprising that many practice owners have been unsure on what to do in this current climate. It’s always worth remembering that the dental market is a cycle – not easy to predict, but it does continue to go round which is definitely a positive to bear in mind. Dental Elite are running a number of webinars and in-person seminars across the Autumn.