THINKING BUSINESS
a blog by Chris Barrow

To sell or not to sell – an accountant’s view on my recent newsletter article.

My recent newsletter article on why you might NOT want to sell your practice to a corporate (preferring to extract profits over a longer period from a manager-managed business) was one of those that touches a nerve and generates and above-average response.

You can read that article HERE.

We published the day I left for Australia and my jet-lagged night-time vigils at hotel room desks have allowed me to respond to emails and social media messages from a variety of commentators.

One of the most interesting was from an old friend, dental accountant Alan Suggett, who is always ready to critique my thoughts in a constructive and helpful way.

With his consent, I reproduce here his comments on my article, intended to put the record straight on some facts that I may have misinterpreted and also add his considerable experience from advising clients in the sector.

Alan adds to the debate here in a very interesting way.

Hi Chris I’ve set out points below where I either disagree with you, or have additional comments:
  1. 2008 banking collapse – the numbers of those able to finance an independent purchase dwindled – I don’t think that this was the case, in fact probably the opposite occurred. The main dental lenders (at that time RBS and Lloyds) were looking for “safe” sectors, and dental was one of those. My recollection was that independent buyers borrowing ability flourished rather than dwindled.

  2. EBITDA and percentage of fees goodwill values – There are fundamental problems with EBITDA valuations in the dental sector due to the impact of principals carrying out clinical work, but the P&L not reflecting the “associate equivalent” pay for their work. The large corporates get round this as they can adjust the EBITDA accurately. Sales agents/valuers fudge the calculation (cynically by working backwards from the market value and applying an “Owner operator” adjustment – which just happens to be the balancing amount to make the maths work!).

  3. Real profit generation – 25%, 15% ? – NASDAL stats show that the average profit per principal is of the order of £131k pa (ignoring the associate equivalent pay mentioned above). The average practice gross fees per principal is approx. £439k, representing an average net profit before tax of approx. 30%. However, when the associate equivalent pay for the principal(s) is deducted that net profit falls to approx. £30k, approx. 7% of gross, about half your benchmark amount.

  4. The Entrepreneur-Out Plan – For private practices I agree with your logic (other than the average amount of net profit expectation in the last 5 years). For NHS practices (or those with a reasonably sized NHS contract) a significant negative factor clouding the issue is the possibility/probability of a drastic reduction in NHS goodwill values (reformed contract uncertainty/possible time limitation of GDS contracts/general downward movement in NHS profits etc etc). For NHS practices it might not be a few years of extra profit followed by a sale at todays value or more, the goodwill value could reduce significantly – this has been a major factor in NHS practice owners wishing to sell on or before retirement. I mention the above as I want to be as helpful as possible – I agree with your overall thoughts and think the way you’ve presented it not only makes an interesting read, but explains the history very well. My aim (as a business friend) is to help you present something which cannot be sniped at by knockers who might imply that if he’s got this bit wrong isn’t the whole piece unreliable. All the best Alan UNW E: alansuggett@unw.co.uk T: 0191 243 6009 M: 07860 246718

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