Practice Vendors Better Together?

As you may have seen in the Dental Press over the last few weeks, during the course of the month of August aided by Dental Elite, a group of six individual dental practice owners in the North-East successfully completed on the sale of their seven dental practices to a small corporate from the South of England. The grouping of the practices together allowed the group to secure a value c15-20% more than their individual valuations and for one practice a price of £300,000 more than a heavily negotiated offer from a well-known dental corporate.

However, delving deeper into the case in hand, I feel it important to recognise that this doesn’t necessarily work for every practice we value as some practices may not benefit from being involved in a cluster sale and may even be de-valued as a result. To explain; when we value a practice we put each practice through seven different valuation models to equate a valuation. The reason we do this is that different practices may be worth more to some than to others. For example some group buyers do not consider your spend on Lab Fees; they equate that irrespective of what the practice is spending at the moment and the practice’s gross UDA rate, the net spend on Lab Fees will be 3.5%. Other lesser known purchasers may seek to make offers based on the assumption that they can re-align the cost of sales to the latest NASDAL statistics. This isn’t just true for big practices, often the smallest of practices can benefit from clustering up or even a merger which are much more common in dental now.

Thus, each different valuation model will compute different figures based on the type of buyer to whom the practice most suits and the assumptions they are prepared to make. When ‘clustering up’ a group of practices all of the practices need to report valuations from similar models or as a cluster, the group simply doesn’t work because the practice is worth more to a different type of buyer even after consideration of a premium to be procured by negotiating as one. This consortium was no different and a decision was made fairly early on in the negotiations (before any buyers were approached) that there was one practice which didn’t quite fit the valuation synergy.

Similarly, this is often the case for multiple practice owners when they come to sell. It is frequently assumed that they will get the best value by selling all their businesses as one but in most cases this isn’t correct, especially where there is a hub site and a satellite site which is much smaller. We have recently acted on the sale of three practices in the South-East but took the decision to separate the smaller single-handed practice from the group and dispose of separately because the value was much stronger (42% different!) if this practice were sold separately to the other two.

In turn when you own multiple practices I would strongly suggest you apply a commercial brain to the trading structure of the business. It seems easier to put all of the NHS contracts in one Limited Company and account for all of the locations as one, but in practice when you come to sell the businesses you may find that NHS England blocks a de-merger or in a best case scenario a statutory de-merger takes a year to complete to avoid heavy tax penalties.

It also de-values a business in general terms if it is difficult to put your finger on the exact numbers for a business because they are rolled into other business interests.

Returning to the recent example in the North-East, the sale of the cluster was a little more protracted than a typical sale which was to be expected with over 15 stakeholders involved in the sale but the actual process didn’t take longer than the average transaction timescale in dentistry nowadays as the Vendors were all keen not to be the one letting the side down. The group itself was heavily contested by two main contenders, neither of whom were groups with a presence already in the area. The negotiation process also allowed those with greater private turnover to be free from the burdens of private income targets and deferred consideration. They were also in the enviable position of being able to choose the offer from the bidder they felt most reflected their clinical ambitions and who they and their teams would enjoy working with most in the forthcoming years.  Given that both of the big corporates walked away from this deal I also feel it only serves to prove that just because you own a bigger practice, it doesn’t mean the ‘best’ purchaser for the practice is one of the big boys”

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