Is the rising cost of borrowing impacting on practice sales?
There has been plenty of press over the last 12 months reporting some significant increases to the Bank of England (BoE) base rate. For context, between March 2009 and March 2022 the BoE rate had been no higher than 0.75%. Recent and dramatic rises now leave us with a rate of 5.25%. However, younger buyers may not appreciate that pre banking crisis of 2008 the base rate was also round 5% and the previous 40-year average is 7.2%. The current rate is probably trending back to ‘normal’
We must note that when interest rates fell (from 2009) there was a significant increase in the demand for dental practices and as such with rates now rising, does this mean that the levels of interest may fall?
Is demand all about interest rates?
It would be worth caveating that whilst low rates increased demand, this was not the sole reason for increased practice values. In fact, the NHS contracts of 2006 created a ‘barrier to entry’ in which a dental practice could not typically expand their NHS fee output, and as such there was more demand for purchasing, as opposed to setting up a squat or being able to organically grow a practice. Secondly in 2006 there was a change in The Dental Act which allowed dentists to Incorporate, (trading as a limited company), allowing people to purchase multiple practices in a more tax efficient manner and generally at a faster pace.
Around 2006 the way in which practices were valued changed from using a percentage of turnover to a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation). As such a multiple of an adjusted profit figure was used. It is important to consider that for the purposes of the EBITDA calculation ‘interest’, i.e. bank borrowing is ignored. As such, historically low borrowing rates over the last 15 years has in reality driven demand and values higher without affecting the buyer’s affordability (take home profit after tax and finance). Thus, the multiple used on the EBITDA calculation crept up quite quickly from a circa 5x multiple to 7.5-8x multiple. It is no surprise that some Corporate buyers are taking a good look at the multiple that they are willing to pay and adjusting this downwards.
A new reality?
Examining the affordability of practices (profit less tax, less loan interest) there is no doubt that the previous multiples cannot unfortunately be sustained, based on the increased cost of borrowing. This is the same for Corporates and individuals. However, it is important to also confirm that we have only seen a softening of the multiples with a reduction in the region of 0.5-1 times and there is still strong demand for practices.
With interest rates unlikely to fall back significantly anytime soon, vendors waiting for a swift uplift to multiples may find that they are worse off for the delay. Going to market with your practice before a lower EBITDA multiple become the norm may be the best way forward.
As the financial viability of practices tightens, it is important that vendors show their practice in the best light, whilst ensuring that the buyer is confident with the figures presented. As a professional agency we will demonstrate the current income and costs whilst removing personal costs. This is vital to ensuring the highest valuation. Such costs may include indemnity insurance, personal GDC registrations and other personal items. We are highly competent in reviewing the EBITDA of the practice and calculating this under an ‘associate led’ and ‘principal led’ model.
It is also important that a buyer and their professional advisers are confident with the figures that have been put to them, something that an experienced and trusted sales agency can do with ease with a comprehensive brochure of the practice for sale. This ensures that a buyers can put in their best offers, knowing that they are able to proceed with confidence.
