If there’s one thing the UK and global economy has sorely lacked lately, it’s certainty. Certainty governs much of what we do. It is the catalyst that turns attitudes into action. With so many unknown factors having an influence, how can we bring some certainty back?
We must understand that certainty is closely aligned to the confidence people have in the information they have access to. Does a person believe they have complete and accurate information? Does all the information hang together in a coherent way? Does a person have direct experience in the field they are thinking about? If so, they are likely to feel more certain.
One of my motivations in sharing our market data and putting together ‘A View of the Market 2023’ is to provide dentists who are considering buying or selling a dental practice accurate information on this subject. Information which they can take, cross reference against other sources in order to identify the consensus in the market.
It is hard to look back over an extended period in order to predict the future. Simply because there have been too many disruptors to the market in the recent past.
As I look back over dental practice sales completed and agreed in 2022 I have considered the overall picture. The January to August period and separately the September to December period. This is to acknowledge the economic consequences of the September 2022 mini budget.
In 2022 our clients achieved an average sale price of 3.8 x EBITDA when selling to independent buyers. The range of values was 1.8 – 5.07 x EBITDA.
In 2022 our clients achieved an average sale price of 8.47 x EBITDA when selling to a corporate buyer. The range in values was 7.63-9.08 x EBITDA.
Corporate buyers are very focused on specific criteria. Practices with, high turnover and profitability, scope to grow that are associate-led and ones that share their culture are most appealing.
In the last 4 months of 2022 our clients have seen a 3% increase in corporate deal prices, and a 14% fall in values on practices being sold to independent dentists.
During this period we have seen an 33% increase in Principals wanting to go to market.
We have seen the following trends in the market for buyers and sellers.
Corporate buyers are expected to:
- Maintain or have even improved their offers in the last part of the year. What they are doing is flexing the payment terms by deferring more of the purchase price to mitigate any risk of falling profits within the business.
- Extend the tie in’s for Principals. Historically tie in’s were 4-5 years. More recently we have been able to negotiate shorter exit plans, but we are seeing a desire to return to longer tie in’s.
- Switch away from the UK to focus on their interests in Europe and in joint ventures.
- Examine their acquisition pipeline to strength test deals and make sure they still fit their objectives, are viable and can weather today’s uncertainty.
Multi site operators are expected to:
- Look towards acquisitions to expand on their portfolio and in turn, increase future sale value (£) through a more sizeable group of practices
- Instil tried and tested operating models – rolling their experience of what works into newly acquired practices and to gain the benefit of shared resources across closely located sites
- Use the financial security of their existing portfolio to strengthen their lending position
First-time buyers are expected to:
- Continue their ownership ambitions, looking towards best suited opportunities which fulfil their broader acquisition and ownership objectives
- Look towards practices that can prove their sustainable turnover and profit which support any stress-tested lending
Inflation is expected to have peaked at 11% at the end of 2022 and could fall to 5% by the end of 2023, and finally drop below the Bank of England’s target to 1.5% by the end of 2024. We should note that prices will likely stabilise at a high level.
The forecast for the Bank of England’s interest rate has changed since the mini budget of September 2022. The rate is now expected to increase to 5.25% by the end of 2023. The impact of energy and raw material costs on inflation is likely to reduce in 2023, but there remains a likelihood of upward wage pressures.
During times of uncertainty and during recessions, high street banks tend to retrench and focus on a prime customer base – typically, established businesses with healthy and defendable positive operating cash flows. For the most part Dentistry fits this profile perfectly and we continue to see a positive response from lenders. Banks have not increased the margins or pricing and are keen to lend in the sector – where there is lending availability there is a strong market.
Dental Principals continue to consider their position and ultimately want to secure an exit. Existing operators we speak to are keen to expand their portfolios.
First time buyers are still showing strong interest. They want to invest in a practice of their own which they can develop over their career. What we are expecting to see is that budgets may be more constrained by 10-15%. Business sales are different to residential mortgages, it is the business profits which service repayments. Furthermore, the lender will stress test to ensure repayments are affordable even with increasing interest rates. The key for owners is to focus on their business performance and profitability so the business can support the buyers repayments and provide the buyer with more debt capacity.
If you would like to know more about the opportunities for you as a seller or a buyer then please contact us to discuss your situation.
Every day we are supporting our clients by:
- Sharing our market insights.
- Exposing their practice to the entire market rather than a subset of the market.
- Understanding and qualifying buyers to match them to the right practice.
- Negotiating on behalf of dentists to agree deals which make sense to all parties.
- Setting them up for success.
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This article was written by Abi Greenhough, the Managing Director of Lily Head Dental Practice Sales and was first published in the February 2023 edition of The Dentist Magazine.
If you would like to talk about anything to do with buying, selling or financing a dental practice anywhere in the UK then Contact Us today.
