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Dental Tribune United Kingdom Edition

May 16-22, 2011United Kingdom Edition L ike it or not, the dental sector is consolidating and fast. A sector for- merly run by clinicians is in- creasingly now a sector run by entrepreneurs and accountants with a stronger emphasis on underlying profitability. As a result of these changes the business of dental prac- tice valuation is becoming less of an art and more of science and the banks, burnt by overly ambitious practitioners, look for lending opportunities with good profits or business plans with substantial marketing budgets. I first joined the sector when dental practices changed hands for as little as 20-30 per cent of Gross Fees, a figure that would see a buyer laughed out of town these days with the latest NAS- DA statistics stating averages of 84 per cent of gross fees. However, I am not alone in finding this expression of valu- ation a complete lunacy. As someone with an accountancy background I simply cannot comprehend how businesses with identical turnovers can be regarded as the same when the rent and utility bills are fre- quently £15,000 different. Simi- larly, EBIDTA (Earnings before Interest, Tax, Depreciation & Amortisation) is often used as the more mathematical method of valuing dental practices but business risk and likely cost savings are often ignored. It is worthwhile remember- ing that whilst all of the den- tal corporates use EBITDA as a method of valuing what the business is worth to them, their EBITDA calculation will of- ten be substantially different. As with any investor they will look at cost savings within the business; the most obvious and potentially largest saving being associate fees. However, they will also con- sider whether your practice awards them any ‘marriage value’ ie not only can they save £10,000 on your staff costs by asking the practice manager to look after another site down the road, but this could also in- crease the EBITDA of the prac- tice down the road they already own. Similarly, each group buy- er will have different ideas on average associate fees, lab fees and staff costs in any given area. Whilst as standalone figures, these numbers may be fractions of percentages and collectively they can equate up to £5,000 of EBITDA, which could be a purchase price differential of £30,000. It sounds obvious but many forget they also have to factor in an associate fee for the principal or someone replacing their clinical output. I will also guarantee that the figure that you equate to be your EBITDA will be substantially different to that of the net profit figure prepared for the ‘taxman’ by your accountant, so it isn’t as simple as just taking your net profit figures from your latest accounts and then adding back a salary for yourself. This figure is then multiplied by a factor less any projected capital ex- penditure and acquisition costs to come to the indicative offer for the goodwill and equipment of your dental business. The factor can be anything from 3.5 to 6.0 and varies on a large number of factors. Unfortunately, private prac- tices are often valued at lower multiples given the associated risk, but it is worthwhile re- membering that high-end pri- vate practices often have larger fee incomes against similar cost bases so can often equate to similar values proportionally. Remember that group buy- ers will always be dictated by their multiple of EBITDA and not a percentage of turnover calculation. In my experience, when group buyers start talking in terms of percentages of gross it is normally because they see a good deal coming their way! It is important to work out which group buyer assumes which risks and who can benefit from other local branches. However, this is not the be all end all as some buyers have different strategies than others and you never know what other local practices are currently up for sale. Therefore the ac- tual multiple at which practices change hands is largely irrel- evant as one buyer’s 4.6 is more than another’s 5.4. In a recent case I had £182,500 different! It is worthwhile remember- ing that the bigger the risk the lower the multiple. You can look to mitigate against this risk before sale in order to increase this multiple. For instance, a principal performing more than £250,000 per annum worth of treatment, be that private or NHS, would instantly be deemed high risk and the outgoing vendor will have three options: 1Stay on for a period beyond completion, in an ideal world this would cover the purchas- er’s payback period of five years What the EBIT? Luke Moore discusses understanding the value of your practice Sectors formerly run by clinicians are increasingly now run by entrepreneurs and accountants