A Dental Practice Buying Guide for Dentists
How to find the right dental practice
If you are thinking about buying a dental practice, sometimes it is hard to know where to start.
You will no doubt have many questions; how are practices valued, what practice information do I need, how do I find the right practice? Read on to find out.
Demand for practices
The demand for dental practices remains high, and the low cost of borrowing makes practice purchases affordable. Owner occupiers are often looking at moving their career from an associate to principal and may wish to step into the shoes of the retiring principal or may have grand ideas to expand the practice.
Body Corporates have remained very active for suitable (larger) practices. However, we have seen some changes where Corporates are now also looking to purchase smaller sites where there are opportunities for the practice to be merged into one of their existing sites.
Which practice is right for me?
Whilst the demand for practices can be high, rushing into a dental practice purchase should be avoided. You need to consider what you want from the practice and make sure that the target practice is offering (most of) what you want:
- Where do you want the practice to be? Consider how far you are willing to travel – practices in more rural locations typically offer better value for money.
- How many surgeries do you want? Do you want to start off on your own in a smaller practice, or are you able to manage a larger practice?
- Do you plan to work there yourself, or are you only looking for an associate led practice?
- Do you have a preference of income type? Remember that this is not necessarily fixed and can therefore change under your ownership. For example, you may identify an NHS practice that is ripe for a private conversion.
Once you have determined the above, make sure to check which model the practice has been valued on, as this may determine whether the practice is suitable for you.
How is a practice valued?
Gone are the days where every practice was valued as a % of the turnover. These days, practices are valued using a multiple of the projected profit under one of two models; an associate led EBITDA, or a principal led EBITDA.
EBITDA stands for ‘Earnings before Interest, Tax, Depreciation and Amortisation’. The calculation therefore gives you the projected profit before any of your personal costs, drawing or loan repayments.
It is important that you understand the difference between the ‘associate led’ and ‘principal led’ models and which would work for you. For example, if you already have a principal led practice (defined by the fact that you need to be working in the practice), there would be little advantage in purchasing a further principal led practice as you cannot be in both practices at the same time.
As a rough rule of thumb:
Associate led – suitable for any buyer (whether a Body Corporate or individual) looking to work in the practice.
Principal led– at the time of buying would generally suit someone looking to work in the practice, although you may see potential to grow the practice so that in the future it could be worked associate led.
It is also important to remember that the model is not necessarily based on how the practice is running at the moment (i.e. with the principal working in the practice), but how the practice can be worked to determine the value of the practice.
Associate Led EBITDA
An associate led EBITDA is calculated assuming that all income at the practice is generated by associates. Therefore, there will be a cost attributed against all gross fees. This will show the “true” profit of the practice itself. You will typically see this calculation used on larger practices.
If the practice works on an ‘associate led’ basis, you do not necessarily have to run it this way and can still choose to work in the practice yourself if you wish. If you choose to work in the practice, your projected profit will be the EBITDA figure provided, plus your own earnings.
Note that for these types of practices, you will be competing against a larger number of purchasers as the practice will be suitable for mini corporates and body corporates, as well as individuals.
Due to higher demand for associate led practices, prices are higher. You will typically see a profit multiple of 6-8 x associate led EBITDA used.
Principal Led EBITDA
A principal led EBITDA is calculated assuming that a full-time principal is working in the practice. The projected profit is therefore the practice profit and your personal income, combined.
Double-check what income it has been assumed the principal will generate, as you need to make sure that you can maintain this level of gross fees to generate the projected profit presented in the sales prospectus.
If you only plan to work in the practice part-time, your projected profit will be lower than stated in the sales prospectus as there will be higher associate costs to factor in.
In addition, if you are looking to run an associate led practice, it is unlikely you will want to, or be able to, purchase a practice valued under a principal led EBITDA, as the practice may be too small to work for you financially under an associate led model.
As principal led valued practices are mostly attractive to buyers looking to work in the practice full-time, there is a smaller pool of potential buyers. Valuation multiples used reflect this, however, can vary greatly depending on the practice. You could see anywhere between 2.5-4 x principal led EBITDA used.
In addition to the valuation model impacting the profit multiple used, you will also see that practice values vary depending on location and perceived demand.
What practice information do I need?
You will want to ask for the following (as applicable):
- Current NHS contract value and UDA/UOA requirement, and performance of these
- Current monthly private plan income and number of registered patients
- Last 12 months private fee per item income
- Breakdown of staff costs
- Breakdown of items removed from the accounts for the valuation*
*When you look at accounts vs a projected P&L in a sales prospectus, you may see that there are items in the accounts that are not included in the projections. It is important to verify the costs that have been removed, rather than accepting a cost should be reduced as ‘normalised’, as these costs can be significantly underestimated and can lead to a practice being significantly overvalued.
View the practice
Remember that the vendor has the final say on who they sell to. Be honest about your intentions for the purchase and the practice’s future. Being polite to the seller and considerate to their practice is key.
You are there to look around and ask questions but, likewise, the seller is also trying to suss you out and decide if you would be a good fit for their patients and staff. The sale process can take 6-12 months, so the seller will want to know whether you can work well together to get to completion.
Get a buyer’s assessment
You may be asked to pay a deposit on the practice once your offer is accepted. Before you offer, you will want to ensure that you have the right financial information and that the practice is valued correctly.
PFM Dental offer a buyer’s assessment to help you do just that. All financial information is reviewed in detail by our experienced practice valuers. They will highlight any discrepancies or missing information and help guide you towards offering the right sum for the practice. This costs just £700 + VAT and could save you thousands. Click here for more information.
Offer on the practice
It is the agent’s job to ensure that the seller has enough information from each buyer to decide which offer to accept. Be sure to confirm the following to the agent:
- Your offer sum for the practice.
- Your offer sum for the freehold (if applicable).
- Are there any terms associated with the offer, e.g. do you want the seller to stay on as an associate post-completion. Sellers are unlikely to accept additional terms implemented during the sale process, so be upfront about these.
- Your financial position – you will need an Agreement in Principle from a lender in relation to the practice and may also need to provide evidence of your cash deposit.
- Timescales – do you plan to relocate for the practice, do you need to wait until a certain month to complete, etc.
- Other information – do you intend to purchase through a limited company? Is this your dream practice? Give as much detail as possible.
PFM Dental are practice sales agents, finance and insurance brokers, dental specialist accountants, financial advisers and dental specialist solicitors.
If you need any help or assistance with any stage of your practice purchase, please contact us for more information.
Remember, there is a right practice for everyone. Good luck!
