Activity returns to the dental practice sales market
Featured Products Promotional FeaturesPosted by: Dental Design 26th June 2021
It’s been a year of challenges, new experiences and innovation across the dental industry. The pandemic wrought havoc on UK dental practices in early 2020 and disrupted the entire population much until spring of 2021. If you’d have asked me this time last year whether a dental practice sold in February 2020 would have held its value, I would probably have answered in the negative – especially as, at this point, dental practices were re-opening with significant fallow times and no real concept of how long this would go on for, or even if this would become an annual event. As social restrictions continue to ease according to the Government’s roadmap, at time of writing, life looks set to resume some real normality in just a few days. In dentistry, business has already recovered, with many practitioners reporting an increased appetite for services – especially cosmetic solutions – among patients, which will help greatly in their financial recovery.
With regards to the practice sales and acquisitions market, similar trends have occurred over the past 12 months. A significant dip in activity was an unsurprising consequence of the first full lockdown, as well as the very gradual return to normal that followed with no real completion activity until September 2020. Growing public confidence in general has been mirrored by the return of practice acquisitions, arguably a year with proportionally greater consolidator activity than the norm, as they were able to return to the market quickly in the Autumn. Many individuals had to wait for management accounts demonstrating a solid recovery to satisfy their lenders before being able to transact, meaning that in reality, there was little significant activity amongst those borrowing from high street lenders until early 2021.
A buyer’s market to borrow
In fact, the market right now is especially acquisitive, with some fantastic deals available for finance from various lenders. These include cheap debt options with 20% contribution levels, as well as still fairly cheap debt at 10% contribution levels. Similarly, the current dental market landscape is attractive for private equity, attracting new investment and fuelling consolidation amongst the dental groups that they fund.
The data
While Dental Elite’s Annual Goodwill Report for the end of financial year 2021 offers some useful insights into the market, it is important to remember that a smaller number of sales were completed than in a typical year. However, notwithstanding my earlier comments, just over 55% of sales were still to those buying their 1st, 2nd or 3rd practice, with the next largest group being tier 2 consolidators (groups with 10+ sites but not the Big 5).
When looking at the data according to region, those in London and the South-East continue to attract the highest multiple of EBITDA for a mixed practice; 13.18x EBITDA, 10.76x Adjusted EBITDA. Nationally, the average multiple of EBITDA paid is up to 8.36x from 7.21x in the 2019 report, a trend we are seeing continue in newly agreed sales with multiple of adjusted net profit. This is the valuation metric typically used for smaller practices, which has broadly remained flat with a slight fall from 3.53x to 3.42x. In contrast, the average percentage of gross fees fell 10 percentiles – a likely indication that the average dental practice has become less profitable in the last two years, even after modification for the COVID-19 pandemic.
There are various potential reasons for this. As is it especially true of NHS practices, these have faced significant upward pressure on associate remuneration whilst revenue remained broadly flat. It could also be a key driving force in the consolidation we have seen in the market for mixed and private practices.
To focus on average sale values, these were above £1 million for the first time since the inception of this report.
Emerging trends
Interestingly, there was little activity amongst those owning between 4-10 practices. Why is this? It may be that owners in this range were finding it more difficult to secure competitive lending, or they might be looking to consolidate their estates after the pandemic, rather than expand.
The data also indicates that in a number of cases, smaller groups seem to be offering more competitive terms than the largest corporates. The average EBITDA multiple paid by tier 1 buyers – the big 5 groups – was 7.14x (averaged at 7.10x), while tier 2 buyers – 10+ practices – offered 7.70x for practices in the most popular locations (averaged at 6.53x). This could be due to a difference in strategy – smaller groups tend to be more open to paying slightly above the original multiple where they are confident that organic growth can be readily achieved. Larger groups don’t commonly take this approach.
Finally, current evidence suggests that location continues to be an ever-more important factor in business value. The price gap between practices sold in the North, North-West, Midlands, London and the South-East, compared to those sold in Scotland, the South-West and Wales, is growing. With the continued resourcing challenges in the latter regions, this is unlikely to change drastically any time soon.
Takeaways
The latest Annual Goodwill Report provides evidence that the dental practice sales market is bouncing back after the disruption caused by COVID-19, despite the smaller pool size from which to obtain data. To access the full report, please visit the Dental Elite website https://www.dentalelite.co.uk/goodwill-guide/ to request your free copy.
For more information contact Dental Elite. Visit www.dentalelite.co.uk,
email info@dentalelite.co.uk or call 01788 545 900
Luke Moore is one of the Founders and Directors of Dental Elite and has overseen well in excess of 750 practice sales and valuations. With over 11 years working in the dental industry, Luke has extensive knowledge in both dental practice transfers and recruitment and understands the complexities of NHS and Private practices.
