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The End Game – what to think about when selling a practice

The End Game – what to think about when selling a practice

The factors that affect practice value

Selling a practice that you’ve spent years building up is a massive decision to make. You might think all that hard work deserves a good price. But what do potential purchasers look for?

Occupancy

The first area is occupancy (the proportion of time that each surgery is in use). Depending on their business strategy purchasers will either look for good occupancy rates, or potential to improve occupancy rates.  Either way, they’ll want to understand what the rate is, how it’s measured and why it is what it is.

Physicality

If there is limited opportunity for growth through improved occupancy, a buyer’s next route to growing the business would be expansion. They will look at how the available building layout could be altered or extended to provide more space.

Demographics

Purchasers will have an idea of what services they want to off. If they only offer private treatment, an important factor affecting practice value is the demographics of the practice catchment area. If they position themselves as providing premium treatments and only the best service levels, every practice they take on needs to have a patient-list to support this.

So, for example, mixed private/NHS practices don’t fit with Portman’s brand positioning. But equally, Private Only practices don’t seem to fit with the business models of the big beasts of acquisition, {my}dentist or BUPA.

Reporting and IT Strategy

One area of particular interest to us is, of course, IT strategy. Some purchasers won’t have a fixed idea about practice management systems. Providing the system can offer the back-end reporting, they may not care what system is in place. However, some will want to standardise on Pearl, R4 or Exact – or whatever else they might prefer. This can have an impact on valuation should there be a need for a large amount of conversion work. If the system can offer the necessary reporting there’s no need to disrupt the practice by changing their software.

This is one of the reasons for expanding the reporting functions on Pearl Dental Software. “There are a number of mid-sized chains developing,” explains Ben Baker of BHA Software. “By providing excellent back-end management information we make it possible to avoid disruption if one of our clients sells a practice to a chain. Clients can stay with Pearl and provide all the necessary reports to Head Office in an easily imported format.

“Equally if they do have to move to a different system, our database is designed to make it easy to translate to the format needed by any of our main competitors. We even have a translation tool kit, which means that the price of a practice running Pearl should never be adversely affected. For some of our competitors, this is a significant issue – you can easily become locked-into their software which might cause a purchaser to mark down values.”

Pearl is designed to also make it easier to import data from other systems – a factor worth thinking about if you plan to build your own chain.

Other factors

Max Bazzucchini - Samera Business Advisors

Max Bazzucchini – formerly of Samera Business Advisors (now with Pluto Partners)

Max Bazzucchini is Head of Practice Sales at Samera Business Advisors. He is also a former head of M&A for ADP Dental and worked for IDH and IMH Groups. He believes that there are several issues affecting practice value that need to be considered during the sales process itself. “Selling a dental practice to a corporate can be challenging and emotional,” he says. “But it can also be rewarding when you do it right as they can provide a platform to take the business to the next level, an important factor if principals are willing to stay on post-completion. Dental Corporates have evolved during the years and the successful Corporates are more clinically lead, putting more emphasis on clinicians.”

Max and Samera Business Advisors have been involved in many practice sales, both to corporates and other independent practitioners. Understandably he recommends working with a specialist in the field. His advice; “I would avoid approaching the sale by yourself as the purchaser will have bought many more practices than you have sold. Likewise, pick a solicitor with experience in this kind of transaction.”

Generally larger practices and groups will frequently adopt a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) as the basis for their valuation, while smaller (predominantly smaller NHS) practices usually look for a percentage of the gross income. Typically, based on an associate led dental valuation, individual practices can be purchased at an average of 6.4 x EBITDA. But that value will change based on the factors we’ve noted above.

Max explains; “It is worth noting that we make no assumptions related to staff costs and associates costs, and we suggest that if any changes have to take place, this will have to be done ahead of completion as the seller’s responsibility.”

In principle, the initial valuation is determined by factors below;

  • Last three years accounts
  • Most recent NHS Pay & Activity Statement
  • Private turnover and type of dentistry
  • Last 12 months actual 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 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,” explains Max. “The deferred consideration 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 also affects final price.

“We also look at the potential in the business and driving factors such as location and demographics, how long the business has been established for, space for more surgeries in the building or outside. We look at the percentage of chair utilization and spare chairs usage and any upward trend in the income stream.”

So, if all this sounds complicated, remember that you can hire an advisor to help you sell as well as to buy. When selling your practice, you want an agent to represent your best interests. Choose someone who has done it before, with a good reputation and an extensive network. Make sure that have complete knowledge and understanding of the dental practice sales process, and the strength and confidence to negotiate deals and terms.”

Think strategically

Another point is to remember what you’re selling. “You need a clear exit plan,” says Max. “Make it clear that you want to leave or stay in the business. Be aware of how this might affect the valuation a corporate [chain] puts on the practice. We advise all principals to obtain a free valuation report of their practice with us, important if they are thinking of selling imminently or in the next 3-5 years.”

Keeping your team on-board is also important. Informing them at the right time and in the right way will stop people panicking getting stressed, or even worse getting a new job. If you’re selling a going concern that includes the contracts of your staff, it would be good for all concerned if they were still part of the business when the transaction is completed.

In conclusion

“The world of dentistry is constantly changing,” says Ben Baker. “BHA has been involved for the last 20 years and we have built Pearl Dental Software to be responsive to changes in clinical practice. The latest version of Pearl reflects the most recent developments in the business side of dentistry as well. We’ve seen spurious reports of how some business software will change the value of your business; a variation of + or – 15% is often quoted. Maintaining practice value is all about flexibility. Pearl has the flexibility needed to cope with the way your business develops, whether that’s acquiring additional practices, changing ownership or just steady as she goes.”

 

For more information about the features of Pearl Dental Software click here.

Ben Baker
Ben Baker
ben.baker@bhasoftware.com