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a blog by Chris Barrow

Practice valuations rising – good or bad news?

I took a phone call earlier this week from a friend who owns 5 practices scattered around some of the major cities in the UK. He told me he was thinking of buying 3 NHS practices in a remote area of England – and did I know anything about the areas (so remote that I didn’t). Curiosity led me to ask “why on earth are you looking there when you don’t even know where it is on the map, let alone what NHS market conditions are like?” The answer was revealing: “I’m looking to buy practices close to my existing locations but prices here are up to 140% of gross – compared to 100% of gross in remote areas – I may as well buy cheaper.” Quite apart from the business risk involved in that conclusion (he will need some very good area and local managers), this was the first confirmation I have heard of NHS values heading upwards. A far cry from 1998, when one of my clients sold his NHS practice to a new corporate called IDH – for 35% of gross. So I have to pause and ask myself why this is happening? Common sense dictates that valuations go up when the supply/demand curve moves into either scarcity of supply and/or increased demand. The independent valuers seem to be saying that they have a record number of practices for sale – and I suggest that as being indicative of an increasing community of long-suffering smaller practice owners who have just “had enough” of ownership – we all know the reasons why. Normally that would drive valuations down – so why are they going up? It has to be driven by demand – which begs the question “demand from where?” The answer to THAT question can be deduced by reading my emails for a few weeks – and counting the number of times I have read: “Chris – I have been approached by IDH, who tell me that they are interested in buying my practice – they have been round to take a look and are offering X on Y terms – what do you think?” That seems to be a weekly event at the moment and the hunger that IDH are demonstrating is palpable. In NHS dentistry, they are joined by an ever-increasing group of micro-corporates (like my friend at the start of this post) who are busy chasing market share in the hope that they can either build 5/15/25 locations and create a stable and risk-spread source of profit – or flog it to IDH! All of this activity in the NHS sector is very interesting to see, when combined with the proposed changes in the “NHS system” and the inexorable modernisation of the profession by the GDC (direct access – tick, regulation of implantology – watch this space – revalidation of all DCP’s – coming soon). I have a concern about the knock-on effect in the private sector. The challenge is that private practice owners will develop an expectation of value that is similar to that of the NHS owner – but there are important differences between them:

  1. “guarantee” of contract versus uncertainty of marketing and new patient numbers, as well as permanency of clinicians

  2. intense downward pressure on NHS associate remuneration versus increasing expectations on pay from private associates, therapists and hygienists

  3. diversification and competition in product mix, pricing, materials and supplies, making cost control a key issue

  4. too many private dentists chasing the same markets, patients and pounds – especially internet marketing and product price wars

  5. too many dentists who have gone the “shag pile and chandeliers” route and cannot keep up with their own operating costs

  6. mature membership practices that have delivered supervised neglect for years and the owners now want to get out

  7. staff with a high expectation of pay and a willingness to change practices frequently to get more money

I could go on – the challenge is that private dentistry is just RISKIER and, therefore, any external investor is going to be very cautious on valuation, on terms of payment, on due diligence and on warranties. Valuations become rather theoretical numbers – as the terms and conditions are where the real action exists – how much up front, how much on earn out, over how many years, on what conditions? I also believe that the supply of gullible associates in their late 30’s, willing to “just pay the price” to get on the ownership ladder is drying up. Too many casualties telling their mates how buying a private practice was a bad decision and that they now own a uncontrollable monster. So I’m seeing a polarisation in valuations here between NHS (up) and private (down) – and goodness knows what confusion in mixed practice. Market forces will ultimately dictate the outcome – the free market economy will always win – but it can leave serious victims along the way. My conclusion is to be ultra-cautious when advising on purchase – and to manage expectations when advising on sale. You can certainly never accuse the business of dentistry of being boring.

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