The Pluto Process for Selling a Dental Practice
Let’s start by looking at the key component when thinking of selling your dental practice and that is – the value. As you may know by now, written appraisal reports come with a disclaimer that there is no universal standard methodology for valuing dental practices.
There are also an array of false beliefs and strong opinions on the matter. The aim of any valuation is to provide a value that is as objective as possible in an environment of uncertainty. Therefore, a valuation number is just a series of educated ‘assumptions’ calculated from imperfect information. To reach the total value,you need to consider the future value of the business. Given that the future,by definition, is uncertain – the whole process can never be an exact science. Yet as brokers it is our job to get the best possible market value for both interested parties.
You will hear dentists make statements along the lines of – “my dental practice is worth one and a half times my net income” or another frequent one “the total should be based on a % of my last three year’s collections.” The problem is that neither of these cover the full spectrum and will result in an unfair market value. The value of any business is based on its cash flow, the risk of the investment and the return on investment for the buyer.
At Pluto Partners we use income-based valuation methods, either discounted cash flows or capitalised earnings to accurately establish a fair EBITDA value, taking into account both the tangible and intangible assets of apractice before applying a rate of return to the earnings stream. Net asset valuation methods can be used as a reference point.
A dental practice owner looking to sell can give a list of a hundred reasons why they believe that their dental practice is worth one value, but this is matched with a hundred and one reasons from the buyer to why the total is too steep. We must remember that this is a very significant financial decision for the seller and offer patience and understanding.
At Pluto Partners we have three men who know a lot about valuations – our Director’s Dr Pieter Claassen, Max Bazzucchini and Nick Rolph. Max has been involved in excess of 1,700 dental practice valuation sand the sale of over 200! Pieter has experienced the valuation process many times, owning a regional group. Nick acquired more than 130 dental practices for ADP Dental. They help to shape Pluto’s process in tackling the world of valuations with a fair balance.
U.K. Dental Market
Dentists considering selling their dental practice now have more options than ever before. One possibility that is continuously growing is either selling or partnering with a dental group or another dentist. We want to explore the option in a bit more detail.
In July 2005, the Dentists Act 1984 was amended, creating the opportunity for dental corporates to become a permanent part of the UK’s dental landscape. Since the amendment act was passed, membership of the Association of Dental Groups has risen to 19. The UK dental market is highly fragmented with c.15% of practices in the UK owned by corporate dental bodies, c.20% by multiple sites owners (2-19) and the rest, c.65% of the market, owned by independents.
Despite recent consolidation in the market, the sector remains ripe for further consolidation activity and we expect dental groups to increase their share to more than 20% of the market by 2023,with the mid-market share to increase to over 35%.
At Pluto our Directors have worked closely with some of the biggest dental groups in the UK. You might be reading this and thinking, why do I need a dental business advisor when selling to a corporate? The answer is you work with us to help you to look after your best interests because dental corporates, like any business, have to look after their best interests.
We like the analogy of a sailor (the dentist) in his ship (the practice) facing stormy sea’s late at night, trying to make it back to the harbour. We act as a lighthouse showing the path home. We make the process of buying or selling a dental practice plan sailing.
Tax Considerations when Selling a Dental Practice
When approaching a sale or purchase of your dental practice it is important to consider the tax side of things early so you are prepared and take any necessary action when needed.
Most sales will fall into the category of either an Asset Sale where the practice is owned by an individual or partners, or a Share Sale where the practice is owned by a limited company. This can play out in the four different scenarios below;
- An Individual/partnership – undertakes an Asset Sale
- An Individual(s) – undertakes a Share Sale
- A Company – undertakes an Asset Sale
- A Company – undertakes a Share Sale
There are key differences that will impact how the deal is structured and how the legal contracts are put together.
For the seller in scenarios one and two, it is possible for the gain made to qualify for entrepreneurs relief where by a tax rate of 10% would apply. The government have recently proposed changes to the criteria which need to be met for this to apply, which came into force in April 2019. The two key changes are:
- An extension of the qualifying holding period from one year to two years (introduced for disposals on or after 6 April 2019); and
- A tightening of the rules governing the share rights an individual must benefit from before they qualify (introduced with immediate effect) requiring the claimant to have a five percent interest in both the distributable profits and the net assets of the company.
In scenario three, a company will not qualify for entrepreneur’s relief. Further money the proceeds from sale will be trapped in the company and needed to be extracted as a dividend incurring further taxes.
For the buyer one area that often is not given enough consideration is the completion accounts on a share sale. If an associate is buying the shares then any assets and liabilities in the company will need to be settled pretty soon after completion. This both adds an extra layer of work for all parties but also needs consideration in advance of agreeing the deal structure and the target cash and any directors loan accounts.
The settling of the “completion accounts” will mean either the seller or the buyer will need to come up with the difference in cash which will have tax implications for both which need to be considered.
Selling Your Dental Practice at Maximum Value
Prepare to Sell
A well-prepared data and sales information brochure will not only contain current and historic company information but also forecasts and financial modelling around potential synergies and growth.
It will ensure optimum positioning of the business and as all information is prepared in advance, it will also accelerate the entire process. From the data an experienced selling advisor will produce a business summary marketing the acquisition opportunity without divulging your identity and a carefully crafted Information Memorandum to drive value by highlighting unique opportunities and potential synergies in your business to potential dental practice buyers.
The Importance of Creating a Competitive Environment
In order to exceed the estimated business value,it is essential to secure the right buyers which will create competitive bids and significantly increase sale price.
Intelligent, be spoke research should be conducted to identify potential purchasers using a combination of global intelligence tools and a database of active financial and trade buyers. It is essential to think outside the box and look at synergistic buyers as well as those within the dental sector.
Through synergies and economies of scale available, the business will be worth differing amounts to different buyers.
The optimal purchaser is one who has a “we want, we need” motivation who drives their own shareholder value via an acquisition. Carefully position synergies to several, interested parties utilising financial modelling and future visioning to demonstrate the strategic and financial benefits of the acquisition to drive competitive interest in the business inviting offers to enable the market to drive the price.
Negotiate, Agree and Structure an Exceptional Deal
Agreeing on an exceptional deal requires significant experience and expertise. This takes understanding of the other side’s motivators, and the ability to “walk in their shoes”. Win the big points and lose the small ones to secure optimum terms. This is best achieved in an anon-adversarial environment, where listening creates understanding, but with very clear presentation of the alternatives and key selling points. Timing and effective delivery of negotiation strategy are critical to create a win/win situation.
Today, there are increasingly complex deal structures in sales, with earn outs and deferred payments. Considering how best to protect these positions is also critical, and expert advice from the start will be crucial in this respect. There is also a trend in partial exits or elevator deals which enables owners to both capitalise on their exit but also keep in the business game. It also helps the buyer take the company to the next level but on a de-risked basis which should also result in owning shares with a greater value in the future.
The Importance of a Dental Sales Advisor to Project Manage the Deal to Completion
Once a transaction is agreed and Heads of Terms (HOTs) document is drafted, this will help to summarise the deal to avoid later misunderstandings, and again an expert dental sales advisor is invaluable here.
The improved data-pack produced early on in the process will have given transparency which will accelerate the offer agreed to completion phase. Nonetheless, careful project management is required to manage the project to completion, orchestrating all the parties, and creating a timetable.
Deal fatigue or worse failure can result if a poor dialogue or slow information occurs once terms are agreed. The parties need to continue to listen and aim at a win/win transaction with your dental sales advisor acting as the middle man and orchestrating all parties.
Selecting Your Advisory Team
Undertaking your dental practice sale is one of the most important financial decisions you will ever make and expert help will enable you to achieve maximum value and optimum deal structure.
Ensure you appoint an expert dental practice sales advisor based on track record, ability to create highly strategic transactions at maximum value, experience, research resources, international approach and technical deal structure knowledge.
It is important to make sure fees are linked to success deliverables; avoid high non-performance based time fees. The right dental advisor will engage with your objectives right from the start and will take the time to truly understand your business to ensure you achieve your goals.The process is complex and requires significant understanding and care. The dedicated dental advisor will manage the steps enabling you to maintain focus on your business.
Selection Checklist for your dental sales advisory team
– Do the dental sales advisors have a genuine and proven track record in the market place?
– Do they provide references from their sold, current and off-market clients? (If they can’t provide then best avoid them).
– Will it be the same consultant throughout to ensure a trusted relationship and a true understanding of your business?
– Does the consultant and organisation have the technical expertise to sell your business at maximum value?
– Is their research approach thorough to maximise your market?
– What is the average number of projects per consultant and are they are able to invest sufficient time on your sale?
– Are they giving best advice and suggesting a variety of options to achieve your goals?
– Are they respected in the dental industry?
Achieving a successful dental sale is a pinnacle point in any business owner’s journey. It is the most effective route to time and financial wealth as well as the beginning of new ventures.
Accomplishing a successful sale is an intricate process; the earlier preparation starts, the higher the rewards will be.
Appoint a professional dental advisor with a proven track record and ensure that your business value is aligned with your personal and business objectives. If it is not, make sure you fully understand the alternative options to achieving your goals and the implications of these. Once you start preparing for sale, it is central that your dental practice or group and the process are designed to maximise exit value.
Deal Agreed – Step by Step
Selling a dental practice is not as simple asagreeing the price and signing one contract. In this section, we look at what to consider pre, during and post-sale.
When it comes to selling a dental practice,you have two options – an asset purchase or a share purchase.
- Asset Purchase – a transaction where the seller will only sell the goodwill, fixtures and fitting, equipment and stock at valuation. “Goodwill” is the established reputation of the business as a quantified asset. This type of transaction allows you to forgo the liabilities of the seller’s company as these will be retained by the seller.
While asset purchases are most common, they do have their drawbacks which include: Potential loss of suppliers and other commercial agreements, Awareness of Transfer of Undertakings Protection of Employment Regulations, and delays in transferring the GDS Contract.
- Share Purchase – a transaction which includes the purchase of the whole legal entity of the business. This means that as well as taking on the usual assets of an asset purchase, you will also take on any liabilities of the company.
The advantages of a share purchase include: You own everything that the target company owns the title to, you will be able to dismiss employees and alter their contracts, and a seamless transfer of databases and customer lists.
Share sales are usually in favour of sellers of the company due to the following reasons:
A more comprehensive and time-consuming due diligence is required, including any Property the company owns;
You may not discover the full extent of the company’s liabilities until further into the transaction where withdrawing will result in loss of deposits; and
Stamp duty tax on shares will become payable on completion of the transfer.
Asset or share is also explained here: http://ukbusinessbrokers.com/asset-sale-vs-share-sale-whats-better-deal/
Due diligence is, arguably, one of the most important and comprehensive tasks of any dental sales. As well as enquiries being raised on the business and assets, the property on which the dental practice sits will also be subject to enquiries.
It is for the seller to be as transparent as possible during this process as the alternative could lead to delays and pitfalls in trying to complete the purchase.
Comprehensive due diligence will allow the buyer to discover:
- The profitability of the dental practice;
- The employees of the business and their skills; and
- Any intellectual property the company owns (trademarks, copyrights, etc.)
The real fun (for the lawyers anyway) begins, the negotiation of the contract. If you have entered into an asset purchase the document will be known as the Asset Purchase Agreement and for a share sale the Share Purchase Agreement. For the purposes of this article we will refer to the document as “The Agreement.”
The Agreement can be made up of various other agreements that allow a successful transfer of the NHS contract as well as outlining the price, rights and obligations of each party.
Transferring the GDS contract in respect of a dental practice is a bit more complex than ordinary contract transfers. In order for a GDS contract to be transferred the purchaser and seller must enter into a Partnership Agreement. This document will bind the seller and buyer as partners of the existing dental practice with the seller then being removed from the contract on completion.
Once you have agreed the contract and received approval from the CQC, all that awaits you is signing The Agreements.
Contracts should be signed in front of your solicitors as from the moment the document is signed and dated, you are liable for all the obligations set out in all agreements.
If the buyer has taken on an existing Lease of the premises which the dental practice operates from, they will have to register the transfer at the HM Land Registry.
If they have been provided a loan to assist with the purchase, the lender may require registering a legal charge against the property at the Land Registry or the company at Companies House.
Now it is the time to talk to a wealth planner to discuss how to best maximise the return you have made in the sale of your dental practice.
Schedule a call or visit.
Our Senior Team
Dr. Pieter Claassen
A registered dentist himself, Pieter has once been the dental practice owner trying to figure out what EBITDA means! Pieter has seen both sides of the Dental Sector – clinical and business. Having been part of a corporate dental chain, owning a regional group and still looking to grow, Pieter is here as a support service for those looking to buy or sell a dental practice and is always happy to chat.
With over 40 years of experience under his belt ranging across industries, Nick found his passion in healthcare. Nick has held a multiple Operational and Development roles and has repeated experiences of successful exit events, including working for ADP Holding’s, the U.K.’s largest NHS Dental Group at the time.
Max is a certified ACCA business valuer with over a decade of experience within the dental sector. He began his career as a successful sales manager within the healthcare sector and later joining the ADP group in 2008 as Head of Mergers & Acquisitions. He actively helped the group to achieve acquisitions of 132 dental practices, including negotiations and deal completions of single sites and groups.