Market conditions for dental practice sales
From the 5th of March 2009 until May 2022 the Bank of England held their base rate below 1%, giving rise to a 13 year ‘historic’ era of low rates. As such, most younger buyers will have never experienced rates as high as they are currently during their adult lifetime. However, when looking at the longer history of base rates, the current rate of 5.25% is more normal than exceptional.
What we saw from 2006, with the introduction of the latest NHS contracts followed by very low interest rates, was a huge increase in the demand for dental practices. With low borrowing costs, lending was affordable giving good profitability (after loan repayments) for purchasers. This created even more demand and pushed up the multiple that we apply to the EBITDA (profit), for valuation purposes.
‘The market for dental practices remains strong, even with the higher interest rates”
In reality, despite the spike in interest rates, the demand for practices has remained strong. Values have, however, come off their recent high due to pressure on borrowing and buyer affordability. In most instances, the EBITDA multiple used has only dropped 0.5 times up to 1 times, so what would have been a 7.5 multiple is now likely to be around 7.
Whilst there are predictions on the Bank of England base rate reducing slightly in 2024, this is not likely to be sufficient to make an immediate impact on values, which tend to react more slowly.
For anyone that is looking to sell their practice, they should be reassured that the market for dental practices remains strong, even with a higher interest rate era. Buyers are scrutinising the financials (affordability) in more detail to ensure that this can work for them but most practices, with a softening of the multiple being used, still demonstrate good affordability.
