THINKING BUSINESS
a blog by Chris Barrow

Smoke and Mirrors – more valuation madness

Two conversations in the space of one hour.

Conversation 1 – former client

Caller: “Chris, we grossed £1.2m last year fully private in our market town and we have been approached by a new micro-corporate who have offered £2.04m for the goodwill and they will let us keep the property. Do you think this is a good deal?”

CB: – If it’s true – it’s the best offer for a private practice I have seen in 23 years, so congratulations – take the money and run. However, let’s look a little closer:

  1. have they offered you the cash up front?

  2. No – they have offered £1.2m cash and the rest over a period of years yet to be agreed – they have said that they will not buy 100% of the equity but will partially buy and then we sell the rest in stages

  3. do you know who they are?

  4. not really, they are a new business and apparently have some financial backing

  5. do you know the terms of the equity release scheme?

  6. no, they have told us that they want to come in and discuss the terms

CB: – here’s what I think – if you get the £2.04m they are offering on attractive terms, I will dance naked around your town centre for charity.

Comment:

So here is my first private practice up for sale at 170% of gross, with 58% cash up front and the rest subject to earn out terms and conditions yet to be agreed.

This sounds to me like “let’s make a crazy offer to get their attention – get them around the table and then thrash out a deal when we are there”.

Conversation 2 – complimentary call with a new contact who left a message on my web site

Caller: “Chris I’m a long-serving associate, married with a family, working in a mainly NHS practice (although I do private sales). I’ve been reading various blogs about practice valuations, the future of the NHS contract and reducing remuneration for associates – I don’t have much cash but do you think I should go and get bank finance and buy my own practice – and, if so, should I buy NHS, mixed or private?”

CB: This is precisely the time for you to stay a million miles away from buying your own practice and here is why:

  1. goodwill valuations across all sectors of dentistry have reached epically stupid levels – 400% of gross for NHS contracts and (as of an hour ago) 170% of gross for private contract (maybe) – you don’t buy in at the top

  2. it’s OK to pay stupid prices for goodwill if you are spending other people’s money i.e. shareholders, investors and pension fund holders. The reality is that if they screw up they just erase the losses, have a boozy lunch in Marylebone and carry on. If you have put your own house, your personal guarantee and your family on the line then you are a mouse in an arena of hyenas and vultures – you will be eaten

  3. remuneration for young associates is on a downward spiral – we are seeing £32-35,000 a year flat-rate salaries and the £5.00 UDA. For the older and more experienced associate (especially those who specialise), income levels will be more robust – I predict an average of 42% over the medium term

  4. the prognosis for interest rates is upwards, so it’s not a good time to be borrowing

  5. most of the micro-corporates are financed by family money and you have told me that there isn’t any in your case

Comment

There’s madness in the market.

Be very careful who you sell to.

Be very careful what and how you buy.

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