PFM Dental considers
Covid- 19 - What does this mean for the value of my dental practice?
Practice owners have undoubtedly been left reeling by recent events. After a period of panic and dismay, reassurance where possible for staff and associates, the unhelpful delay to NHS England’s COVID-19 response and patchy government financial support, some practice owners are considering their long-term future in dentistry. Does your exit strategy need to be delayed? Will buyers be able to finance a purchase? Will your business be worth less post COVID-19?
To avoid rumour and speculation let’s look at what has happened to the practice sale market. At the start of the outbreak we had around 40 practice sale transactions underway. Of these, 1 buyer decided not to proceed and 3 buyers put their legal work on hold, with a view to resurrecting this as soon as possible, once lockdown measures relax. What is hugely positive to see is the remainder of buyers continuing with the legal work with a view to getting the practice ready for exchange of contracts. In an already lengthy legal process this seems to be a sensible approach and understandably all of our selling clients were happy with this. Further to this we have had several completions during March and April, with 3 offers accepted on practices where viewings had taken place pre-lockdown.
So, there has certainly been some resilience in the market. In fact, there is a strong but unfulfilled appetite for viewings during this time. We are confident that the same encouraging response will be applied to new practices coming to market. With sale transactions under normal circumstances taking on average 9-12 months and some much longer, perhaps now is the time to consider preparing the ground for your sale?
I’m thinking of selling – how will a COVID-19 loss of income impact on my practice value?
This will very much depend on the type of treatments that the practice is performing:
NHS – With the albeit slow NHSE announcements (and equivalent in Scotland), there is no doubt that NHS practices are being supported through the crisis with the continuation of NHS income, subject to certain criteria being met, such as the continued payments made to associates. Importantly the NHS income (and goodwill value) is unlikely to be significantly impacted. In fact, many buyers are likely to assess NHS practices as more secure than ever.
Plan Income- Although the monthly direct debit is a pre-payment for one/two annual treatments, some dental practices have been hit hard with cancellations from their plan patients. Plan providers have responded to this by giving the Principal the option of allowing patients to suspend the payments. Other practices have seen payments remain consistent with limited loss. The extent of this loss will determine the impact on goodwill values.
Private Fee Per Item Income – The ‘pay as you go’ nature of this income has meant that practices of this type are suffering greater and possibly irretrievable loss of turnover. It is likely to take longer for buyers to be reassured that practice income has returned to normal levels.
So what post-COVID19 valuation factors, are there that will be palatable for the seller and at the same time have a realistic chance of being accepted by buyers? On the basis that this crisis is a one off ‘worst case scenario’, we believe that income for the purposes of our valuation should include: the normal NHS contract value; plan income being last month annualised (or income to February 2020 depending on how this has been affected) and PFPI income for the 12 months to February 2020. This we feel shows a fair reflection on the ongoing income of the practice.
But don’t take our word for it. We have formulated these conclusions after consulting various interested parties including: Healthcare Banks, Corporate bodies and several individual buyers.
What about the buyers?
It may be considered that purchasing a business in these times is a huge risk. On reflection the opposite is probably true. We have seen an increase in the number of dentists registering on our buyer database and an increase in the number of people wishing to view. Many associates are realising the fragility of their position and lack of control in their destiny. Those at private practices have seen their income disappear (generally they are not eligible for government financial support) and realise that they are vulnerable to changes. As such we anticipate the market benefiting from more not less buyers. We see that Corporates continue to view practice details, albeit without practice visits, getting ready to make their move as soon as they can.
Are banks still lending?
The majority of the banks that we have spoken to are still lending and are happy for clients to exchange and complete on deals. Some banks have delayed finance approval for new practices during the lockdown. We are told that this is to urgently prioritise the Coronavirus Business Interruption Loan Scheme (CBILS) rather than a policy change. For others it is business as usual.
Summary and conclusions
Despite the catastrophic short-term impact of COVID-19 on many practices the long-term prospects for selling remain positive. Not least the combined effect of the resilient goodwill values and a new influx of buyers seeking job security. The process of selling is not a quick one and I therefore urge anyone who is looking to sell their dental practice to consider this sooner rather than later. There may be a few practice owners with similar intentions and getting ahead of the game could be worthwhile.