Selling your practice?
Should I sell to a Body Corporate?
If you are thinking of selling direct to a Corporate then there are a few things to consider before you take the plunge. Beware - they will want you to deal with them direct and what initially might appear as a highly attractive offer may not be all it seems.
Despite there being some big ‘household’ names in corporate dentistry there are a multitude of smaller corporates, often owned by dentists with 10, 20 or 30 plus practices. We deal with these groups, large and small, on a weekly basis. We know the type of practice they like to buy, what they will pay, what their valuation methods are, what terms are negotiable and which are not.
Does size matter?
Most Body Corporates will not entertain smaller practices as financially they have to work as 'associate-led' models. For example, a £400,000 turnover practice with £200,000 of associate fees and £150,000 of fixed costs, lab and materials, would only give an 'associate-led' profit of £50,000. Such practices are much better suited to an owner occupier who is seeking to work in the practice and would not be paying half of the associate costs – as they would be generating the income personally. Most corporates are looking at annual turnover of £700,000 or greater.
These practices may also appeal to private buyers but when they get to a certain size, it is questionable whether a private buyer (purchasing their first practice) can afford them. Lately, we have undertaken a significant number of dental practice sales with values between £2,000,000 and £5,000,000 and most have been sold to Body Corporates as they can afford them several times over. Body Corporates are generally well financed and the size of the practice is not a concern – to some degree, the bigger the better for them!
What prices are being paid?
Interestingly, Body Corporates will generally pay the same multiple of EBITDA (see below) for NHS or private practices, which is not the case for smaller practices being purchased by owner occupiers. Corporates are generally not concerned how the income is generated (i.e. through the NHS, by dental plan or as private fees per item) but are more focused on the profitability they are generating. We typically see multiples between 6 and 6.5 being paid for most practices but this can be influenced by the area the practice is in and the level of interest that it will be generate.
However, it should be noted that the calculation of the multiple is as important (if not more) than the multiple itself. Where someone approaches a corporate themselves, they may realise they need to add a cost for them working as an associate (let’s say £90,000) and this gives them the correct associate-led EBITDA (earnings before interest, tax, depreciation and amortisation), correct? No! There are many other adjustments required when undertaking this calculation. If, for example, they amount to £60,000 and we use a 6.5 multiple, the difference in value is £390,000. Some adjustments include lowering personal items and tax reducers, while others bring the practice costs back to national averages – and must be undertaken by an experienced valuer.
It is not the responsibility of a Body Corporate to tell you about all of the items that should be adjusted and it would often not understand the practice well enough to make them in any case. Therefore, I urge any prospective seller not to go it alone. Corporates are familiar with the process and you need the same level experience on your side.
How can you help me negotiate the ‘tie in’
Good or bad, the Body Corporate is likely to want the principal to remain as an associate post-sale. This can often be advantageous for principals who are 'cashing in' on their value but are not quite ready to stop dentistry or retire. Therefore, the fact that the practice is being sold to a Body Corporate (running an associate-led model) means they are still required as a dentist and have job security without the worry of selling the practice when they do decide to retire. For those principals who do not wish to carry on, a tie-in will be a burden and they are likely to want it to be the minimum possible.
There are ways in which the principal tie-in can be reduced by removing the dependency on the principal by shifting patients/income to other associates prior to sale. However, this comes with a warning – you don't want to see turnover reducing if those associates cannot maintain the same levels of income. This would fundamentally bring down the value of the practice.
The timescales that you as a principal would be tied into should be considered when planning the retirement/sale. Don't leave it too late and then find out your retirement will be delayed by, say, three years beyond the date you had planned. The terms of the tie-in can often be negotiated but will largely depend on the specifics of the practice.
Do they give me all the money up front?
This depends on a number of factors. If the principal has agreed to stay, let's say for four years, what protection will the Body Corporate require? Most will ask for a retention or a deferred payment of the sale price on the principal staying. Thus, if the practice was valued at say £1,000,000 and the Body Corporate asked for 20 per cent to be deferred this would mean £800,000 of the sale price would be paid upfront with £200,000 deferred. At the end of each year, £50,000 (£200,000/4) would be paid based on the principal staying at the practice and at the end of the four years they will have achieved the full £1,000,000 sale price.
Some Body Corporates will go a step further. Some will ask that that the turnover is maintained also, which could be the personal gross fees of the principal or could be the whole practice turnover. Should there be a reduction in income, the retention amount
would be reduced accordingly, generally £1 for £1. Going back to my earlier statement about corporates paying the same values for private practices as well as NHS ones, this is why – they reduce their risk (which is seen as higher for private practices) by putting this type of target and penalty in place for under performance. At PFM Dental we can help you review the tax implications of a retention and the typical net pay you would receive when continuing as an associate.
Speed of sale
One main advantage with the Body Corporates is that they are often quite good in getting the deals done in a timely manner. They do not need to spend weeks raising finance or worrying about small matters which may concern a private buyer. In our experience, the process can often be completed in as little as four months. In a recent conversation with a client who is selling to a corporate, he expressed amazement at how well organised they were. They had an 'implementation team' who visited the principal, the card machines were ordered (but not sent to the practice to alert anyone), the contracts were made ready and the staff meeting was duly organised. Such efficiency comes from having bought numerous practices.
Share or asset sale?
This next point is relevant for every limited company sale regardless of whether it be to a Body Corporate or not, however, corporates are more relaxed about how they purchase a practice. For an NHS practice, ideally the NHS contract would be held within the limited company. However, for limited companies there can be some significant advantages in selling the shares of the company. Not only is this often the most tax-advantageous route (always seek your accountant’s advice before deciding on this) but if you have cash in the business this can be sold as part of the business. Thus, if the practice was worth £1,000,000 and there was £200,000 held in cash, then the business can be sold at £1,200,000 on which you could benefit from Entrepreneurs’ Relief, i.e. pay just 10 per cent tax on the gain of the practice sale. As always with any tax matters you should always seek advice from your accountant.
How PFM Dental will help you choose a corporate
With any prospective practice sale, it is generally best to have as many offers as you can in front of you, with the price they will pay and the terms of the deal – only then can you be reassured that you are entering into the best deal. Although it may seem easiest to simply contact a corporate, have them view and then make an offer on your practice, will you really be getting the best price and terms? A practice sales agent speaking to the same corporate would most likely gain a better price and terms due to their experience of dealing with Corporates. Corporate buyers have vast experience and I urge vendors not to go it alone – get good advice and professional support to ensure that everything is considered for your benefit. My experience is that this can leave clients tens of thousands of pounds better off.
The type of practice and location will impact on the likely buyers and, as mentioned previously, the smaller less well-known Corporates are very active in the market. Smaller Corporates will often not ask for the tie-ins or retentions that the household names do, and are therefore certainly worth considering alongside the bigger players.