The arrival of Denplan into the acquisitions market represents a significant change in the landscape for practice purchase and, on closer examination, raises some interesting questions.
Dentistry Magazine carried the story in their online version on Friday 27th March and I, for one, was caught unawares.
So why would a dental insurance company, owned by an even bigger health insurance company, invest over a year in researching the acquisitions market and then decide to jump in and focus their efforts as follows…
“ideally suited to those looking to retire in the short to medium term from a one or two-handed practice.”
I spent Saturday morning on a long training run and thought about the story.
In my experience, the one or two-handed practice (with a hygienist) will be grossing around £500,000 and, if well run, will generate a pre-tax profit for the owner of up to 35% – perhaps on average 30% – so we can imagine EBITDA of £150,000.
The Principal will be grossing £275,000, the associate £180,000 and a part-time hygienist (maybe 2 days a week) might be grossing another £45,000. The numbers will be a little more confusing when one takes into account Denplan Care monthly premiums, as the income will be divided between all three – but the net result the same.
So it will be interesting to see what multiple of profits formula Denplan apply to that.
In the current corporate land grab for NHS and private practice I’m hearing of NHS practices selling for up to 185% of gross (totally bonkers), whilst mixed are selling at up to 120% of gross and the larger purely private at 100%.
Having said that, the same corporates are cautious around purely private and I’m seeing the lower grossing practices (as in my example above) selling at 85% of gross (inclusive of an earn out).
That would indicate a goodwill valuation of £425,000 and a multiple of not much more than 3 times EBITDA. In an earn out, the Principal would probably only see 70% of the valuation as cash up front – the rest speculating on future performance – so a guaranteed cheque at outset for perhaps £300,000 and a 5-year earn out for the balance on a 45% associate contract less 50-55% of lab fees.
Given that there will no “earn out” in the Denplan method, the attraction of 50% of 3 times EBITDA as cash up front – £225,000 – would be obvious.
Raise that to 50% of 4 times EBITDA – £300,000 – and still retaining half the ownership – and Denplan is a winning deal, especially if the current owner negotiates a good associate contract for themselves as well as profit share (surely they would have to do that?).
Sounds to me like a very attractive proposition when one considers that the larger corporates actually have little appetite for practices of this size and many such prospective sales attract speculative offers from independent predators looking for a distress purchase.
The independent valuers will, of course, disagree with my figures above, preferring to value the small practice at a much higher figure – but I respectfully suggest that the supply of gullible youngsters with family money willing to pay inflated prices for ailing practices hiding supervised neglect is drying up.
The possibility is raised that, when the existing owner finally does decide to go (“in the short to medium term”), then his or her shares will be sold to an associate who wants to step into the shoes of the 50% owner.
Valuation will have to be on the same basis but I wonder if the lack of a controlling interest will be reflected in discounted acquisition price?
Will the idea of buying into a practice owned 50% by Denplan attract those with the entrepreneurial spirit or will it seem like a safe bet for the more risk averse, who will then have put in the same hours, multi-task and make tough decisions like the rest of us?
Are there enough stakeholder associates around to create that market for disposal, or will Denplan find themselves having to stump up the remaining cash when the part-owner announces “I’ve had enough”?
Anything that promises continuity of care and standards has to be welcome. The prospect of Denplan as a part-owner in a practice can be a sure sign that rules will be followed and few corners cut.
I’ll be interested to discover where the buck stops as far as clinical governance is concerned, as the reputation of the brand will be in important factor in the regulatory process and the CPD of clinicians and DCP’s.
How does that split vote work on a day-to-day basis? Do Denplan have a veto if they see the owner doing something that they don’t agree with? Do they have to agree to any innovation, investment or recruitment? Will there be regular Board meetings in what will, I assume, have to be an incorporated practice?
I imagine a complete free hand when it comes to clinical decisions on materials and lab but what about branding, marketing, the patient journey, treatment co-ordination, HR and the choice of external suppliers for training, consultancy and coaching?
Typically, when a practice of this size calls me in I often find myself pointing out that:
• the brand looks tired
• the website needs an overhaul
• there is no digital marketing taking place
• the numbers of new patients is too low
• the marketing spend is too low
• the fee-earners are too busy running the maintenance book to grow private treatment sales
• the receptionist/practice manager/nurse/associate/hygienist is old-school and doesn’t like change
• the interior needs a refurbishment
• the equipment is out of date
• the owner has no spare time
There are no funds available to facilitate change and they have insufficient time, money and people to “get things done”
So, Denplan, I hope you are ready with some answers to those problems.
I know that organisations do things to either build profits or keep the profits they already have, so I’m not so naive as to think that this is about a helping hand for the struggling owners of lifestyle businesses faced with increasing complexity and competition. Altruism in business has its limits.
I hope that Denplan put more effort into the idea than other healthcare providers who seem to have paid lip service without a great deal of visible action after the press releases.
Perhaps the most comfort comes from the fact that the idea isn’t born out of Private Equity managers looking for a 4-year turnaround or stock market investors chasing dividends.
If Denplan end up owning half of 50 practices that gross £500,000 then their sound will be lost in the noise.
If 200, then they will be a force in the market to be considered.
Either way, they will buy themselves a seat at the Association of Dental Groups.
Ultimately very good news for the smaller Denplan independent and I’ll be interested to see how they solve the problems facing the small practice in a rapidly evolving market.