How to Sell a Dental Practice: Valuation & Process Guide

Selling your dental practice is likely to be one of the biggest financial decisions of your life, and it is important to go in with eyes wide open and with the best professional advisers that can deal with this for you.

The first step is to have a specialist practice valuation of the dental practice.  It is important to understand that a dental valuer will make a number of adjustments to the financials of your practice and also calculate the value of your dental practice using a couple of financial models.  This makes sure that the practice is de-personalised (removing all your personal expenditures) but also looks at the practice under both an ‘associate led’ and a ‘principal led’ model.

When valuing a dental practice we will calculate the EBITDA (which is the earnings before interest, tax, depreciation and amortisation).  For some people they may not have amortisation within their accounts (which is the writing down of goodwill).

Put simply, when calculating the EBITDA, we are calculating the profit of the dental practice.  However, we are removing any personal costs such as spouse wages (if not working in the practice), personal purchases, indemnity insurance, subscriptions and training courses – to name a few.  The dental valuer will also remove tax reducers such as depreciation, use of home as office, motor expenses, etc.

When calculating the EBITDA, for example under a ‘principal led’ model, we also assume a full-time principal.  Thus, in a simple scenario, if there was a principal working three days per week and an associate working two days per week, then the associate cost can be removed from the calculation as the EBITDA would assume a full-time principal.  The fact that you are working differently should not impact the valuation of the practice and, all other things being equal, should be valued the same as a dental practice where the principal works five days per week.

The calculation of the EBITDA is both a science and an art and having an experienced dental practice valuer undertaking this can take all these matters into account.  The calculation of the EBITDA is very important, undervalue this by only £10,000 and you may have lost out by £75,000 of sale price.  Overestimate and you could have an aborted sale part way through the legal process when due diligence has been provided.

An experienced valuer will also know how to deal with the likes of underperformance of UDAs.

There are two EBITDA models that we use:

Under an associate led model, this assumes that all income of the practice is generated by associates.

Just to note that the practice does not need to be working like this under your ownership.  You may well have you as the principal and three associates.  Therefore to calculate the associate led, there would be an additional associate cost against the income that you generate.

Under a principal led model, this assumes that there is a full-time principal working in the practice.

Again, this does not necessarily reflect how you are working at the dental practice.  If you are working part-time, we would add back some associate cost to make this based on a full-time principal.

A multiple is then applied to the above EBITDAs.  Under an associate led model we may have between a 6-8 multiple and under a principal led model we may have somewhere between a 2-4.5 multiple.  The multiple is affected by the location of the dental practice as well as treatment types and likely demand.

A dental valuer would then calculate the values of the dental practice both under a principal led and an associate led model, and the higher of the two values can be used.  This will often also have a bearing on the likely purchaser of the dental practice.

For example, if the principal led gave us the higher value, then to achieve this a buyer who is going to work in the practice would be required.  This could be a single-handed or smaller practice where there would not be sufficient profit/EBITDA if the practice was run purely by associates.  However, if the associate led model provides the higher value, then not only would you have Corporate interest but also smaller Corporate groups and dentists who are looking to work in the practice.

To ensure that a valuation is as up to date as possible it is important that we, as your dental practice valuer, get up to date financials.  A valuation cannot simply rely on the accounts of the practice which may be months out of date and may not show any growth in the practice.  Information required:

When undertaking a valuation of the practice and understanding the detail, this allows us to confirm any ways where the practice value could be enhanced.  A typical example that is frequently mentioned relates to hygiene recharge.  Some practices have benefitted from £10,000s of cost savings, and under an associate led model of say 7.5 the difference in value can be significant.  Other discussions over principal earnings and one-off costs can also make considerable differences.

It is very important for the valuer to also have experience with the different set ups of dental practices, whether this is a sole trader, partnership of limited company.  Each would be sold in a different way, and for limited companies can then be a share sale or asset sale.

A limited company can also have cash within the business that can be sold alongside the goodwill, potentially benefiting from more favourable tax rates than drawing out as income.  Making sure that the structure is tax efficient from the start, before the practice is marketed, is important to maximise the sales proceeds.

Typically when selling a dental practice, the sales agent would market the practice.  Good agents, like PFM Dental, will have thousands of registered buyers looking for practices, generally recorded by location.  They will also have regular contact with buyers of all types, but especially Corporates and group buyers as these can be an attractive option for some larger practices, especially where they do not want the practice to be openly marketed.

Open Market – Around 50% of the dental practices that we sell would go to the open market.  Details would be sent and discussed with all types of buyers; principals looking to buy a dental practice that they wish to work in, Body Corporates and smaller groups that may own a handful of dental practices in a geographical area.

It is important that your dental practice sales agent can deal with these buyers in a professional way.  Having all the details of the practice to hand and being able to discuss the financial information with them provides comfort to the buyers that all is correct.

When we market, PFM Dental send details to PFM Dental’s ‘priority buyers’ in the first instance.  These people tend to be more active and include the majority of Body Corporates and smaller groups as well as a good number of individuals.  This type of buyer receives details one week prior to us going to general market, and for this agree to cover the agency fees on the vendor’s behalf.  The payment is made to the vendor’s solicitor along with the sales proceeds, for full transparency.

Body Corporate/Groups – After discussing options with clients, a number may decide that they would like to sell to a Corporate and therefore details can be discussed with agreed Corporates and smaller groups.  Typically, this may still be a dozen or more potential buyers, but allowing the practice to be sold without being ‘openly’ marketed.

Again, as the Corporates are registered as PFM Dental priority buyers, these types of sales are fee free.

It is important that offers on the practice are considered carefully and that the buyer’s finance is vetted to ensure that they can proceed with the purchase of the practice.

A number of large Corporates may require deferred payments, which are often conditional on certain criteria being met; being future turnover based targets, future EBITDA based targets or simply the principal remaining in place for a number of years.  An experienced sales agent will know what elements can be negotiated more favourably for their clients and what each of the Corporates/group buyers require to find the most suitable deal for the principal.

Smaller, lesser-known groups can often provide clean offers or more favourable terms than the major Corporates, so having these to compare and being an option to sell to can be useful.

The agent should put as many offers as they can in front of you, giving you the most choice.

Once a buyer is found and the deal is agreed, it is important to get an experienced solicitor to deal with the due diligence and sale of the business and property for you.  There are a number of specialist dental solicitors who deal with the sales and purchases of dental practices. 

Included in the sale purchase agreement will be warranties and indemnities.  The job of your solicitor is to ensure that you don’t over promise on the agreement and to protect you.  Experience allows them to understand what should be agreed and what should not.

We understand the importance of the legal process and because of this have invested in our own legal team, headed up by Stephen Knowles, who has over 20 years of experience with the sales and purchases of dental practices.

It is important to consider the likely timescales of a sale from marketing to the legal work.  Typically, the legal process can take around 5-6 months for a Corporate transaction and 6-12 months for an owner/occupier. 

For some practices, they can be sold in the matter of months, if not weeks, but some other practices can take far longer to find a suitable buyer. 

Also, if considering a Corporate, they may require the principal to remain at the practice for 3-4 years which also needs to be taken into account when considering retirement dates.

If you are considering the sale of your dental practice then you should seek professional guidance.  Having a good dental practice valuer/sales agent should be able to provide you with not only the best price and terms, but also to give you the most options of buyers to choose from.  Then having a specialist dental solicitor alongside should make the process much smoother.