Dental Elite’s Luke Moore: Activity returns to the dental practice sales market
It’s been a year of challenges, new experiences and innovation across the dental profession. The pandemic wrought havoc on UK dental practices in early 2020 and is still disrupting people’s plans with another delay to the Government’s ‘roadmap to freedom’. But how is all this affecting dental practice values?
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 dental practices were faced with significant fallow times and no real concept of how long the situation might continue.
In dentistry, however, business has already recovered, with many practitioners reporting an increased appetite for services – especially cosmetic solutions – which will aid their financial recovery. Over the last 12 months similar trends have emerged in the practice sales and acquisitions market.
There was no surprise regarding the significant dip in activity during the first full lockdown, followed by the very gradual return to normal with no real completion activity until September 2020. Growing confidence 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 people had to wait for management accounts demonstrating a solid recovery to satisfy lenders before being able to transact, meaning that we saw little significant activity amongst those borrowing from high street lenders until early 2021. In fact, the market right now is especially acquisitive, with some fantastic finance deals available from various lenders.
These include cheap debt options with 20% contribution levels, as well as still affordable 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 they fund.
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, 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 including 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.
Potentially there are any number of 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.
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 is 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.
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, visit https://www.dentalelite.co.uk/goodwill-guide/.