- Dental Market Values vs FTSE 100
- The Arbitrage Opportunity
- Valuation Methodologies
- How to establish the Dental Practice EBITDA
- Deferred Consideration
- Our View of the Dental Market & Lending Criteria
- Valuing your Dental Practice for Free
Dental Market Values vs FTSE 100
Over the last 10 years, dental practice valuations have outperformed many of the more common investment opportunities.
If we look at the market back in 2008, dental practices were valued at around 50% of turnover.
Therefore a £100,000 investment would have bought you a practice with a turnover of £200,000 at the time. Assuming turnover and profitability remained flat, valuations have now risen to a conservative 150% of turnover, a 3 -fold increase in a space of 10 years, yielding a return of 300% for any buyers back in 2008.
|Investment in a Dental Practice||Investment into a FTSE 100 Tracker|
|Initial Investment in 2008||£100,000||£100,000|
|Today’s Value in 2018||£300,000||£127,000|
Contrast this with an investment in the FTSE100 index, a £100,000 investment would be worth around only £127,000.Therefore, today, that same £200,000 turnover practice (£100,000 investment) would now be worth approximately £300,000.
This shows clearly why the demand for dental practices has grown exponentially. Whilst a 27% return is nothing to be sniffed at, a 300% return is off the scale. Who wouldn’t want a 300% return on their investment?
Since 2008, the Dental practice market has clearly outperformed the FTSE100 by a factor of almost 6 times.
Today, the competition to buy quality practices is significant. Its not just aspirational dentists wanting to get on the ownership ladder, but also existing practice owners wanting to get that next practice, but also new investors attracted by the projected returns through entering the market. We are seeing “new money” enter the Dental market like we have never seen before.
The sale of Oasis to BUPA in 2016, at a significant multiple above the normal market value, has only accelerated the interest in the market from outsiders.
The Arbitrage Opportunity
Whilst experienced investors are entering the market, we are also seeing that many of them lack the essential knowledge of dentistry to make it a long-term viable business.
Some have it right, but others have been blinded by the notion it’s easy to make good a strong return on an investment in the dental market. However, the reality is very different.
All sizes of investors of all shapes and sizes are hoping they can buy low and sell high, banking on the potential arbitrage as values keep rising.
Emerging groups are buying practices at a multiple of between 5-6x EBITDA, with the aspiration in a few years to sell at an EBITDA multiple of around 10x or even higher.
Dental Practice values remain resilient as demand currently outstrips supply in the major urban areas across the UK. At the time of writing we expect strong demand for practices for the foreseeable future.
Historically, valuations of dental practices were based on a % of turnover. However, as the market has become increasingly sophisticated with new investors in the market, we are seeing that profits are the main driver of valuations, not turnover.
The two main methods of valuation are:
1. Turnover based %
This approach is based around a % of turnover. For example a private practice may be valued at 150% of turnover. So a £100,000 turnover practice would be valued at £150,000.
2. EBITDA and EBITDA Multiples
EBITDA stands for Earnings before interest, taxes, depreciation, and amortization.
It is a commonly used accounting acronym used to determine the true operating profit from a business.
Individual buyers, multiple site owners and private equity investors frequently use the EBITDA methodology to determine the ability of a purchaser to service the debt level. Banks and lenders also determine EBITDA to ensure the business is generating sufficient profit to service any borrowings.
It is worth considering that EBITDA does not take into consideration any capital expenditure (the funds needed for capital investments) such as the need to add a surgery.
In addition, EBITDA margin is defined as EBITDA divided by turnover and is expressed in % terms.
How to establish the Dental Practice EBITDA
To establish the EBITDA level during a valuation process, we remove costs such as depreciation and all other costs that an incoming buyer and new practice owner will not continue to sustain post completion. This is done on a line by line basis and will differ for every practice.
EBITDA Multiples in the UK Dental Market
Once the EBITDA figure has been established, a multiple is applied to determine a value for the dental practice. The EBITDA multiple in the UK Dental Market has been rising over the last few years
Current Dental Market EBITDA Multiples
Individual practices are currently being valued at a national average of x 6.4 EBITDA, based on a Dental Associate led dental valuation,
In certain areas valuations can be higher, these areas include London , the South east and the Midlands .
For larger groups (usually over 10 practices in size) a higher valuation multiple can usually be obtained as many buyers like the opportunity to buy an existing platform, rather than having to acquire one practice at a time, which can be costlier and time consuming.
In addition, Dental groups with an EBITDA in excess of £1m, can also have higher multiples applied to their EBITDA, again as a result of larger dental groups wanting to buy scale quickly.
Increasingly, we are seeing more and more sales attract an element of deferred consideration.
Buyers are wishing to protect their investment by delaying part of the consideration to the seller.
Currently, we are seeing this deferred consideration for purchasing a dental practice payable over a 3-5 year period. The deferred consideration is usually tied to certain targets being met or turnover being maintained. As a way of minimizing the risk on the investment, and maximizing acquired goodwill protection, this approach is increasingly becoming common amongst private and specialist practices. This is less relevant to NHS or associate led practices.
Our View of the Dental Market & Lending Criteria
Samera Practice Sales view of the dental market
In the UK, we estimate there are currently 3,900 active dental buyers in the U.K. market for only about 500 practices for sale each year , excluding larger Group mergers and acquisitions. We are seeing new investors enter the Dental market each year as many perceive it as a very attractive sector for the following reasons:
- Evergreen NHS contracts with high recurring revenue and quality of earnings offering positive cashflow
- An ageing UK population who require dental services
- Generally good retention of patients to upsell further services
The market is highly fragmented, with only around 15% of the approximate 12,000 dental practices owned by Dental Body corporates. This presents organic growth opportunities and multiple exit options, and the shortage of groups with 20 or more practices in the market often allows a strategic price premium on exit (see Oasis, Rodericks and Southern recent investment) as well as multiple exit options with trade and private equity.
Samera Commercial Finance view of lending criteria
Lenders are very keen to lend to the sector, with the comfort of the evergreen GDS contracts providing guaranteed income (paying in advance and providing positive cashflow) which is a positive factor for banks. Banks have a healthy appetite to lend to the Dental Sector and often lend between 70-95% of the goodwill price and up to 100% of a freehold value.
Valuing your Dental Practice for Free
To obtain an up to date valuation of your practice there is certain information we require. This includes:
- Last three years accounts
- Most recent NHS Pay & Activity Statement
- Private turnover and type
- Actual last 12 months income from Management account
- Clinicians – role, days worked, pay rate, start date, income generated
- Support team – position, days/hours worked, pay rate and start date
- Details of the freehold value or lease terms
As dental practice valuers, we analyze the intangible asset and scrutinize the personal goodwill compared to the commercial goodwill of the business, which can drive not only the price but also the terms of the deal and the length of time that a buyer would request a seller to stay in the business post completion, to minimize their risk of investment.
As dental valuers we look at potential in the business and driving factors such as location, how long the business has been established for, space for more surgeries in the building, the percentage of chair utilization and any upward trend in the income stream.
Generally larger practices and groups will adopt a multiple of EBITDA dental valuation methodology analyzing valuation reports line by line with sellers and valuers and discussing potential for sustainable costs and savings.
Smaller practices are usually selling for a percentage of turnover, predominantly smaller NHS practices.
To obtain your free dental practice valuation, please contact us using the form below: