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Dental FocusCurrent trends and activity in the dental sector
MARKET OVERVIEW
Welcome to the latest edition of our Dental Focus. The market for dental practice sales remains strong with demand across the board from a variety of independent and corporate purchasers. The suspension of {my}Dentist acquisition strategy has done little to soften the market. In fact, if anything, smaller groups have taken advantage of the opportunity to accelerate their expansion plans.
Recruitment is emerging as a real challenge for practice owners of all sizes with a dearth of quality dentists, particularly in the more remote regions of the UK. It’s still too soon to accurately predict what impact Brexit will have on the sector but logic suggests that any reduction in the number of quality dentists will lead to higher pay scales and potentially depress margins.
Our agency and valuation teams have had a very busy 2017 to date with over 224 dental practices formally valued or sold worth some £225,906,000. With a highly specialist team across the UK, we are well placed to help you, whether your interest is buying, selling or lending to the sector.
A FORMAL MARKETING PROCESS ADDS VALUE TO PRACTICE SALES – A CASE STUDY
A second opinion can pay dividendsWe often hear of principals being approached with off market offers. While these may seem to be a tempting option for an exiting owner, it is not always the best way to ensure that the full market value of a practice is reached.
Quality practices are in high demand from a range of buyer typesWe recently completed on the sale of a landmark 10 surgery practice in the South East. The project started with an initial enquiry from one of the owner-partners who admitted that he had received an offer from a corporate and was just looking for a ‘sense check’ that the offer was fair value. While it appeared to be, no other parties had been introduced and there was no way therefore that anybody could say whether or not it was ‘market value’.
Only a formal process guarantees that price has been maximised. We were instructed to offer the practice to an agreed list of qualified buyers. A number of them were keen to acquire and this led to us setting a closing date for offers.
The outcome?Terms were agreed with a multiple practice owner who was unknown to the vendors previously and at a price at least 10% higher than the offer that had been made. We managed the sale process closely and completion took place no more than eight weeks after terms had been agreed.
“ANY PRINCIPAL CONSIDERING SELLING SHOULD TAKE PROFESSIONAL ADVICE TO ENSURE THE RIGHT BUYER IS INTRODUCED AT THE RIGHT PRICE!”
SOLD
Simon HughesManaging Director Medical
PRACTICE SALES | VALUATION | FINANCE | CONSULTANCY | INSURANCE | INVESTMENT | DEVELOPMENT
Nile Street Dental Practice, Central London
• Potential to grow private revenue
• Multiple offers received & sold in excess of original guide price
Marsh Lane Dental, Middlesex
• Two surgery fully private practice
• Strong interest across a range of buyers
West Road Dental Practice, Rutland
Prominent NHS Practice, Warwickshire
• Purpose built dental dental practice
• Designated on site laboratory
Stonemount Dental Surgery, Manchester
• Two surgery NHS practice
• Achieved c. 170% of contract value
Portobello Dental Clinic, Edinburgh
• Two surgery mixed practice
• Multiple bids received at closing date
Private Practice, Central London
• Specialist private clinic
• Fully refurbished consultation and surgeries
Orchard House Dental Practice, Kent
• Five surgery practice
• Sold to first time buyer
Staffa Lodge, Ipswich
• Substantial eight surgery mixed practice
• Sold to expanding regional group, Smile Clinic
• Total income £340,554
• Sold to a local multi operator
A SNAPSHOT OF RECENT TRANSACTIONAL AND VALUATION ACTIVITY ACROSS THE REGIONS
2017 is proving to be another busy year for dental practice sales. Demand is strong for all types of practices across the UK from a variety of independent and corporate buyers. Below is just a selection of our successful sales and valuation projects undertaken so far in 2017
VALUED
VALUED
Surrey
A two chair private practice purchased by a first time buyer. Christie Finance arranged funding for 100% loan to value and 83% of the goodwill to purchase the freehold. The previous principal will stay on post sale to ensure no loss of goodwill.
Scotland
A mixed NHS and private practice situated in Edinburgh Town Centre with 12 years remaining on the lease. Christie Finance helped a first time buyer with specialist funding agreed for 90% of the propertypurchase price.
Worcestershire
A single chair private practice with only six months remaining on the lease. No room for expansion, the client, a first time buyer sourced a freehold property half a mile away that could house four surgeries. Finance agreed for 100% of the goodwill and 100% of the value of the property post-conversion.
CONFIDENTIAL CONFIDENTIAL
Freehold included? A Chartered Surveyor with many years experience of valuing dental practices for banks, Jonathan Barnett considers the importance of understanding the property element of a dental transaction which is often overlooked.
If you are selling and own the freehold of the building which houses your dental practice you need to know what to take into account when deciding whether to sell or lease your property. It’s very easy to focus exclusively on the goodwill value being offered – after all, this is where the majority of the value lies.
However, for freehold owners, there is added value to be gleaned through careful negotiation
of lease terms from which an ‘investment’ is created which can itself be sold on the open market with the tenant in situ.
When a freeholder sells a dental practice, or indeed any business, and creates a new lease in favour of an incoming tenant, he becomes a landlord. The rent that he then receives can itself be sold as an investment at any point in the future. This value is determined by a number of factors including:
- The ‘covenant’ – the financial worth of the tenancy itself
- The length of lease; typically at least 15 years- Rent- Rent review frequency- Repair and other liabilities within the lease
Many property sectors have defined a clear formula for accurately calculating rent. Not so in the dental sector, unfortunately, where the majority of property is either converted from residential property or more institutional settings such as shopping centres.
As such, dental rents tend to be fairly arbitrary and arrived at through negotiation, although they should be benchmarked against residential values, allowing of course for the cost of converting back to this use.
Alternatively, office rents can be taken as the comparable rents, plus a premium for D1 (medical) use.
Unlike many other property sectors, buyers of dental practices tend not to want to acquire the freehold property when acquiring a practice. Why is this? Very simply it is because capital can much more efficiently be invested in goodwill than tied up in a property where value will generally only increase in line with an increase in rent.
Whether buying or selling a practice, knowing what to do with the freehold can prove as complicated as the practice transaction itself. It is therefore imperative to seek advice from accredited valuers who will be able to advise on your specific situation.
FOCUS ON PROPERTY
Open lending market The lending market for dental purchases has changed dramatically since the banking crisis. There is still a strong appetite to provide finance for the purchase of both the freehold and the goodwill of a dental practice, but the traditional lenders are being a little more cautious than they once were, recognising and reflecting the changing landscape of the dental sector itself. This has, however, opened the door for
niche lenders to come into the market and offer an alternative to buyers who have a strong business case.
The medical team at Christie Finance can secure up to 100% finance against the property itself, and up to 85% against the goodwill of the business – occasionally more depending on the circumstances.
Jonathan Barnett
MRICS
Director
David Ward
Christie Finance
Director
5CURRENT TRENDS IN THE DENTAL SECTOR
At Christie & Co we value or sell well over 350 dental practices each year. This activity gives us a unique insight into the market to assess average sale prices on different practice types.
The tables below illustrate the average movement in prices since the beginning of 2013 expressed as multiples of turnover and EBITDA. It’s interesting to see that both types of practice (NHS/mixed and private) have shown steady increases in multiples and more recently highlighting that private practice multiples are catching up with NHS/mixed, reflecting the resurgence of this segment of the market.
of practices owned by corporates multiple practice owners in the UK
A sector ripe for consolidation
Breakdown of the corporate dental market by practice
MyDentist 44%
BUPA 28%
Bhandal 7%
Southern 5%
Rodericks 5%
Portman 4%
Genix 2%
Other corporates 5%
Average sale price - multiple of EBITDA
Private NHS
YP
8
6
4
2
0Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2
2013 2013 2014 2014 2015 2015 2016 2016 2017
Months from deal agreed to completion Dental transaction times – a key challenge for those involved in practice sales The timeline of dental transactions is one of the real challenges to buying or investing in the sector. Matters such as CQC registration, due diligence and the transfer of an NHS contract can severely delay the purchase process.
We monitor transaction times carefully, the adjacent chart shows the average time it takes for different practice types to transact, from the time an offer is accepted to exchange of contracts. Not surprisingly, private practices (particularly share sales) are the quickest as there is no NHS contract to transfer. NHS (asset sales) on average take the longest time to transact due to the complexities of the NHS process, but many other factors can influence the timing of a sale not least:
- When both parties are full time dentists - less ‘day’ time for the project
- Solicitors - a specialist can ensure that transaction times are kept tight
- Due diligence - the level of information required to satisfy a buyer
- Property; leasehold creation or assignment
- Financing a purchase
Compared to many others, the dental sector is highly fragmented with a relatively small percentage of practices owned by corporate owners. This makes it highly attractive to expanding multiple practice owners and other types of buyers such as investors, who are able to rapidly acquire practices to consolidate the industry. Until very recently only Oasis (now owned by BUPA) and {my}Dentist have been significantly backed by Private Equity. However, the recent acquisition of Southern Dental by Jacob’s Holding and of Genesis by August Equity signal the entry into the dental sector of a new breed of purchaser.
Average sale price - multiple of turnover
Private NHS
Q1 2013
Q3 2013
Q1 2014
Q3 2014
Q1 2015
Q3 2015
Q1 2016
Q3 2016
Q1 2017
X annualincome
21.5
10.5
0
Historically dental practices have been valued on a ‘pence in the pound’ approach but as the market becomes more sophisticated this is being replaced by multiples of profit or EBITDA. This is the number upon which Banks base their decision to lend as it points to the ability of the business to service debt.
OverOnly
Months from Deal Agreed to CompletionMonths from Deal Agreed to Completion
6%
19%
31%
16%
7%
12%
6%
1% 1%
Up to 2 months
2 - 4 months
4 - 6 months
6 - 8 months
8 - 10 months
10 - 12 months
12 - 14 months
14 - 16 months
16 - 18 months
NHS
Mixed
Private
WITH 14 SPECIALIST DENTAL BROKERS AND VALUERS ACROSS THE UK WE HAVE THE MARKET COVERED LOCALLY, REGIONALLY AND NATIONALLY
christie.com
CONTACT US Chris Vowles FRICS - Midlands & Anglia
Head of Valuation - Medical
T: +44 121 452 3703
M: +44 7791 183 966
Paul Graham - Scotland
Associate Director
T: +44 131 524 3416
M: +44 7739 876 621
Jonathan Watson - North
Associate Director
T: +44 161 833 6935
M: +44 7713 061 582
Carl Steer - Midlands & Anglia
Director
T: +44 121 452 3722
M: +44 7917 475 229
Steve Darbon - London & Home Counties
Business Agent - Medical
T: +44 20 7227 0705
M: +44 7702 809 564
Simon Hughes - London & Home Counties
Managing Director Medical
T: +44 20 7227 0749
M: +44 7768 646 983
Jonathan Barnett MRICS - South West
Director
T: +44 117 946 8522
M: +44 7764 241 282
Bethany Hall MRICS - South
Senior Valuer
T: +44 1962 833 806
M: +44 7703 715 540
Rachel Seward MRICS - South West
Associate Director
T: +44 117 946 8511
M: +44 7720 948 972
Hayley Taylor MRICS - Midlands and Anglia
Valuer
T: +44 121 227 4269
M: +44 7590 488 480
Joe Swiers MRICS - North
Senior Valuer
T: +44 113 389 2725
M: +44 7791 979 345
Kasia Glaz MRICS - South West
Valuer
T: +44 117 946 8507
M: +44 7590 494 748
Oliver Snowden - South & South West
Associate Director
T: +44 117 946 8528
M: +44 7711 767 094
David Ward - Christie Finance
Director
T: +44 121 452 3717
M: +44 7815 803 262
Craig Lygate MRICS - Scotland
Director
T: +44 141 352 7314
M: +44 7717 335 438
