Private practice values – not all practices are equal

There is a disparity in the sale values achieved for different types of practice. Steve McCarron explores what affects the price buyers will pay

There has been much in the press about the increase in goodwill values of dental practices over recent years. Often this relates to NHS practices and it is a common misconception that private practices are valued in a similar fashion. The basis of payments for treatment that the practice generates will often impact on the goodwill value being achieved. Prior to the start of NHS contracts in 2006, private practices often achieved values around 20 per cent higher than their NHS counterparts. So what has changed to reverse this?

Two important changes

After 2006, two fundamental events changed the landscape of goodwill values. First, the new NHS contract limited funding and removed the option to create new NHS practices or increase NHS turnover. This ‘barrier to entry’ immediately inflated the value of NHS practices. Second, we endured one of the worst financial recessions in living memory, shining a harsh light on the cost of private dentistry, especially for non-essential and top-end treatments. Fast forward to 2013 and the value tables remain turned, with NHS practices routinely selling at a premium over private practices.

However, generalisations can be unhelpful and within private dentistry not all practice values are equal. A useful gauge to measure goodwill values is the current demand from purchasers and specifically what they look for in a private practice. In any business purchase the buyer looks for reassurance that future income levels are sustainable. As such, capitation schemes offer a number of advantages over a fee per item payment basis. Put simply, we have witnessed in recent years capitation schemes delivering more consistent income than fee per item. Buyers favour regular income (similar to an NHS contract) evidenced by a monthly direct debit payment to the practice.

The scope of the scheme counts

‘Good for you and your practice’ is a strapline of UK payment plan market leader, Denplan (1.8m patients and 6,500 dentists), and a key sales message on its website promotes ‘a predictable monthly income’. The dental shows (e.g. BDTA Dental Showcase) are testament to the competitive nature of patient payment schemes with key players wielding a substantial marketing budget. The actual scheme brand does not necessarily influence the value of goodwill. However, the scope of the scheme may well do. Basic plans include routine but not premium value treatment. More sophisticated plans provide the option to set a higher regular fee scale. The more sophisticated the scheme underpinning your business, the more a potential purchaser is likely to pay. A relevant comparison to NHS dentistry might be the premium price a buyer will pay for a practice with a relatively high UDA value, compared to one with a below average UDA value.

Due diligence (the provision of information prior to selling a business) can be a headache for dentists selling their practice. Another advantage of the capitation scheme often comes to light here. The lesser fluctuation in income with a private capitation practice often commands a lighter touch when a purchaser reviews the financial information. Typically, this might involve scrutiny of the last 12 months income rather than the standard three years applicable to fee per item practices.

Profit is still key

Despite all of this, the most important factor attributed to goodwill values is the income level (turnover) and, more importantly, the level of profitability that a practice generates. Recently, the push from body corporates acquiring practices is defined by reliance on a valuation method known as EBITDA. The key factor here is profitability and for the larger practice, which is less likely to be owner-occupier, it involves measuring earnings before interest, tax, depreciation and amortisation (EBITDA). If your practice might be suitable for a corporate acquisition (a discussion too lengthy for this article) the expenditure should be carefully monitored in order to maximise profitability. At the risk of stating the obvious, this is a principle practice owners should observe; whatever stage their business is at.

Where an individual dentist/principal generates higher than average fees, careful planning needs to take place – primarily to reassure a corporate or private individual that this is sustainable post-sale. For example, how many purchasers (often in their early 30s) are capable of sustaining the fees of a retiring principal in excess of £500,000? Those who can may be in short supply. A mitigating strategy could be to divert some patients to an associate or, for some specialist/highly skilled work, continue at the practice to mentor the new buyer.

What banks think

There has been an increase in the number of banks seeking to lend to the healthcare sector. Dental practices are deemed by many to have a relatively safe business model. However, lenders are not immune to the points raised in this article. A number of banks are limiting the funding of private practice purchases, as opposed to NHS practices. This will undoubtedly impact on private goodwill values as a whole because it limits the buying power of each purchaser. There perhaps should be argument in favour of private practices, due to the risk associated with new NHS contracts. However, this logic seems to have been largely ignored. In conclusion, no two private practices are the same and those looking to sell are well advised to examine the basis of how patients pay for their dental care.

Finally, on a positive note, there remains a strong market for goodwill in the private dental sector. If you own a private practice you may be reassured to know we have a healthy list of registered buyers looking for all types of practices.

About the author

Steve McCarron, formerly acquisitions manager with IDH, joined practice sales agents PFM Dental recently, bringing over 10 years experience from the corporate dental world. He heads up PFM Dental’s expanding operations in the south of England from a new office in Oxford.

Visit www.pfmdental for further details.

Original Article: