Activity returns to the dental practice sales market
It’s been a year of challenges, new experiences and innovation across the dental industry. While the pandemic wrought havoc on UK dental practices in early 2020 and disrupted the entire population much until spring of 2021, we are all now very much focused on the light at the end of the tunnel. As social restrictions continue to ease according to the Government’s roadmap, at time of writing, life looks set to resume some real normality. In dentistry, business has already picked up, with many practitioners reporting an increased appetite for services – especially cosmetic solutions – among patients, which will help greatly in their financial recovery.
With regards to the practice sales and acquisitions market, similar trends have occurred over the past 12-18 months. A significant dip in activity was an unsurprising consequence of the first full lockdown and widespread practice closures, as well as the very gradual return to normal that followed. Growing public confidence in general has been mirrored by the return of practice acquisitions, and it is encouraging to see both individuals and groups get back in the buying game.
A buyer’s market
In fact, the market right now is especially acquisitive, with some fantastic deals available for finance from various different lenders. These include cheap debt options with 20% contribution levels, as well as still fairly cheap debt at 10% contribution levels. The current dental market landscape is ideal for private equity, attracting new investment and fuelling consolidation amongst the dental groups that they fund.
While Dental Elite’s Annual Goodwill Report for the end of financial year 2021 offers some useful insights into the market, it is important to remember that a smaller number of sales were completed than in a typical year. Just over 55% of buyers were independent, with the next largest group being tier 2 consolidators – groups with 10+ sites.
When looking at the data according to region, those in London and the South-East continue to attract the highest average percentage of gross fees at 164.56%. Orthodontic practices in the South-West demonstrated the highest average completion price of all types of businesses across the UK – though caution should be taken given the likelihood of skew in the data due to the pool size. Overall, there was a significant fall of approximately 10 percentiles with regards to prices achieved when expressed as a percentage of turnover. There are various potential reasons for this, including that dental practices have simply become less profitable since the 2019 Goodwill Survey, a fact that is especially applicable for NHS practices. This could also be a key driving force in the consolidation we have seen in the market, as well as the appetite for mixed and private practices.
To focus on average sale values, these were above £1 million for the first time recorded in this annual analysis. The average adjusted EBITDA multiple has risen from 7.21x in 2019 to 8.36x, while the ANP multiple decreased slightly from 3.53x to 3.42x during this time.
Interestingly, the majority of practice acquisitions are by those buying their first, second or third practices, or who are groups of 10+ practices. There were very few transactions by those with 4-10 practices. Why is this? It may be that owners in this range were finding it more difficult to secure competitive lending, or they might be looking to consolidate their estates, rather than expand.
The numbers also indicate that in a number of cases, some smaller groups seem to be offering more competitive terms than the largest corporates. The average EBITDA multiple paid by tier 1 buyers – the big five groups – was 7.14x (averaged at 7.10x), while tier 2 buyers – 10+ practices – offered 7.70x for practices in the most popular locations (averaged at 6.53x). This could be due to a difference in strategy – smaller groups tend to be more open to paying slightly above the original multiple where they are confident that organic growth can be readily achieved. Larger groups don’t commonly take this approach.
Finally, current evidence suggests that location continues to be an ever-more important factor in business value. The price gap between practices sold in the North, North-West, Midlands, London and the South-East, compared to those sold in Scotland, the South-West and Wales, is growing. With the continued resourcing challenges in the latter regions, this is unlikely to change drastically any time soon.
The latest Annual Goodwill Report provides evidence that the dental practice sales market is bouncing back after the disruption caused by COVID-19, despite the smaller pool size from which to obtain data. To access the full report, please visit the Dental Elite website https://www.dentalelite.co.uk/goodwill-guide/ to request your free copy.