Goodwill & Benchmarking Survey 2022
Featured Products Promotional FeaturesPosted by: Dental Design 9th June 2022
It’s been a tumultuous first half of the year, with many variables affecting the dental market. It’s been about six months since our interim update was published, which had demonstrated signs of improvement in the market. The full update has now confirmed that the market remains strong, although not with the same exponential increase in multiple that was predicted six months ago.
Interestingly, the average Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) multiplier has actually fallen from last year’s high of 8.36 to 7.70, which is fairly significant. However, this dip is contrasted by a rise in the average multiple of adjusted net profit paid (ANP) when modelling on a full-time single operator basis, seeing a rise of 0.39x and a rise in average price paid when expressed in turnover terms from 135.18% to 154.49%. The market for larger mixed and private practices also remains nearer 8-8.5% on average.
Findings summarised
The report highlighted that smaller dental groups have struggled to secure cheaper acquisitions, many of whom then sold their business as a result. Why is this?
In the past few months, the market has encountered intense competition. Consequently, many buyers failed to find practices at lower prices, subsequently making acquisitions nearer to 8x EBITDA (if not slightly over) as opposed to the usual 6x or 7x. Another factor may relate to recruitment which, thanks to the onset of wage inflation, has become increasingly more challenging. Buyers now have to be more tactical when it comes to acquiring a practice, such as buying where recruitment is easier, focusing on more predominantly mixed and private practices in urban areas, for instance.
Not only this, but with intended acquisition and mergers of larger dental groups, the market for bigger NHS practices has constricted over the last six months, and will continue to do so.
As larger acquirers become more particular over acquisition, the market will feel the effects, manifesting in prices long-term. In the previous year’s survey, 43% of our activity was to consolidators with more than 10 practices; however, this has fallen to a third of our activity, with an increased focus on independent acquirers. This may become more commonplace over the coming months, as larger groups start to lessen their acquisition appetite.
As alarming as this sounds, it’s more about cycles than anything else. Years ago, there was always a smaller dental group on the market looking for a change in their major shareholder. At this time, they would buy as many practices as they could to get the uplift from their ultimate purchasers, but now the margins are stricter and secondary acquirers are not naïve to integration issues, so this doesn’t happen with the same frequency.
The contrasting argument to this conclusion on multiple is that, recently, practices have become more profitable. Buyers are acquiring practices with the prediction that EBITDA will dip. This is supported by an enormous surge in the average sale value from £1,064,034 last year to £1,325,195 this year.
Which is more profitable?
Generally, larger practices are more profitable than smaller ones. We used a bar of £700,000 for the analysis, where there is a 1.2 percentile difference between smaller and larger practices, with a more obvious difference for those that are on the higher and lower end of the market. It is not unsurprising to assume that a bigger business will drive strong economies of scale, such as rent (1.3 percentiles) and staff costs (1.8 percentiles). Although, profits are offset by unavoidable fluctuations in costs, like laboratory fees and materials.
The least kind of profitable practices are small private businesses, which generate an average of 14.9% EBITDA, compared to 20.3% for larger private practices. Interestingly, in regards to practices worth £700,00 or less, the more NHS work the practice takes on, the greater it’s EBITDA ratio; this is likely a result of associate pay sitting below 40%, and variable costs being more expensive in private practices. Smaller private practices may find that this is price related, as associates paid £30 per UDA are usually paid more for a basic crown.
This provides an opportunity for the independent acquirer to develop practices and sell for bigger multiples in four to five years’ time. All it requires is entrepreneurial spirit, the right location and space.
One last thing
The changes seen in this year’s update will affect a range of buyers in different ways. Smaller dental groups were finding it challenging to acquire practices with larger groups dominating the market, although this has been calming down in recent months. Whilst there seems to be a downward pressure on some of the figures, this doesn’t spell the end for NHS practices. They are still very strong businesses, and it’s probable that NHS practices will be acquired by ambitious entrepreneurial groups in the near future.
If you’re looking to acquire a practice, but are unsure of how the current market will affect your decision, get in touch for bespoke advice, or if you’d like a full copy of this year’s Dental Elite Goodwill & Benchmarking Survey.
For more information contact Dental Elite. Visit www.dentalelite.co.uk, email info@dentalelite.co.uk or call 01788 545 900
Author:
Luke Moore is one of the Founders and Directors of Dental Elite and has overseen well in excess of 750 practice sales and valuations. With over 19 years working in the dental industry, Luke has extensive knowledge in both dental practice transfers and recruitment and understands the complexities of NHS and Private practices.
