Essential Guide on Buying a Dental Practice
The Pluto Process for Buying a Dental Practice
Let’s start by looking at the key component when you’re thinking of buying or selling your 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 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 a practice 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. Nobody wants to overpay, but the real value in dentistry is the ownership of the profit stream over the years.
As a seller, how do you put a value on the years of memories you’ve made between these walls; the friends you have made; and the people you have helped? And how does a city buyer longing for a quieter life value a practice in the little picturesque town with the river running through it and great schools for his/her kids just down the road?
At Pluto Partners we have three men who know a lot about valuations - our Directors Dr Pieter Claassen, Max Bazzucchini, and Nick Rolph. Max has been involved in excess of 1,700 dental practice valuations and 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 in 2020 have more options than ever before. One possibility that is continuously growing is either selling or partnering with a dental group. 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 U.K. 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 buying a dental practice
When approaching a sale or purchase of your 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 4 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.
7 Steps For Buying A Dental Practice
The first step before buying a dental practice involves creating an effective business plan. This plan must contain all the necessary details regarding the dental practice. It should include business strategies, budget details, standard operating procedures, along with other essential information, such as business loan and insurance. A well-crafted business plan can ensure that your investment phase is not an hassle.
The location of your dental practice has a significant impact on your business. If your site is ideal for the dental practice, then you have high chances of taking your business down the path you envisioned. A wrong decision in determining the location can lead to a significant loss. Research the competition and total distances from them, the population of that specific area and daily foot fall.
Budget assessment is essential other wise, you will not be able to run the business, and without a budget plan, a well-established business can collapse. Make a budget assessment by evaluating the costs and expenses versus the expected earnings. You can realistically calculate the salary, net income and other expenses.
Before making the deal, you must negotiate the price with the buyer to avoid future complications. Make sure the buyer is a regular tax-payer and the dental practice is registered. This is a key area in which the broker helps to make sure both parties are happy. Once the price is finalised, then you can proceed with further documentation.
Space and equipment
There must be enough space for the staff to perform their duty well. In case of any upgrade in the equipment, there must be adequate space for it. You can also evaluate the cost of equipment which is required for the current dental practice. Consult your fellow dentists for suggestions and choose the equipment according to your budget.
Make it sure to obtain a lease that it is for more than 10 years. Massive investment is required to start a new dental practice. Ten or more years on the contract will be beneficial for you to cover the expenses. Obtaining a lease has a legal process which should be followed and your solicitor will assist you with the process.
An effective marketing plan that is easy for the staff to understand and implement is essential for boosting your business.There are hundreds of good books, online tutorials and business coaches that can help you at the touch of the button. The best advice we can give is keep learning and to keep sharing good information.
7 Benefits of Buying A Dental Practice
- Financial stability
- Immediate cash
- Can control patient flow
- Building equity
- Manage and grow professional staff
- You choose your location
- Retirement plans in your hands
The main points to consider before you buy a dental practice are:
- Do you have the skills and determination to own and run a practice?
- Can you ask for help when you need it?
- Can you understand the financial elements involved thoroughly?
- Can you deal with confrontation?
- Can you delegate?
Then decide what is your ideal practice and identify the key criteria;
- Location – area – lifestyle or resale retaining value?
- NHS/Mixed or Private
- Space for development or maintain existing site
- Opening Hours and staff numbers
Finally, create a checklist for your viewings and questions to ask, using advice from accountant/solicitor and your own personal views.
- Select an independent finance broker and discuss affordability, keep your personal finance position is in check
- Have two years associate accounts readily available
- Six months bank statements personal and business
- Have savings or access to parent’s savings for the deposit contribution
- Register with us and start viewing dental practices, understand the prospectus.
- Identify a specialist dental solicitor and dental accountant.
- Understand the difference between freehold and leasehold premises and the impact it has on a lenders appetite to lend.
- Identify a financial advisor/broker to understand how lenders assess how much you can borrow.
- Create a Business Plan with your vision so that you can work on developing it during the acquisition process.
Some of the factors that contribute towards a valuation:
If NHS performance YTD – UDA rate – size of contract
Number of surgeries
Associate-led or principal-led
Profitability of the practice (EBITDA) https://www.investopedia.com/terms/e/ebitda.asp
Buy a dental practice – Step by Step
Buying a dental practice is not as simple as paying the price and signing one contract. In this section, we look at what you should consider pre, during and post-sale.
When it comes to purchasing a dental practice, you have two options – an asset purchase or a share purchase.
This is 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 Protectionof Employment Regulations;
Delays in transferring the GDS Contract.
This type of transaction 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 data bases 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/
Once agreed what type of purchase you wish to enter into the fact-finding mission begins.
Due diligence is, arguably, one of the most important and comprehensive tasks of any dental purchase. As well as enquiries be ingraised on the business and assets, the property on which the dental practices its 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.
A comprehensive due diligence will allow you, as the buyer, to discover:
The profitability of the dental practice;
The employees of the business and their skills; and
Any intellectual property the companyowns(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.
Care Quality Commission
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.
You have agreed the contract, received approval from the CQC and all that awaits you now 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 you have taken on an existing Lease of the premises which the dental practice operates from, you will have to register the transfer at the HM Land Registry.
If you 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.
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 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 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.