Probe Sept 18 Dental Elite Article Luke Moore
Dental Elite on the latest goodwill results
Here, Luke Moore considers Dental Elite’s latest goodwill findings for financial year 2018.
Back in September when our mid-year goodwill results were released, we noted some interesting changes in regard to buying behaviours and interest for certain aspects of the market. Having monitored these evolving trends over the rest of the financial year, there is still considerable interest from private equity buyers who feel that there is money to be made in acquiring practices in a currently fragmented market by grouping them and selling them on.
Oasis and Southern Dental especially have been busy, with both having achieved multiples in the teens. If they can acquire practices in significant numbers, then their goal may well be achieved – watch this space! There has also been a considerable movement in the lower consolidator market as a result of a number of smaller mass operators, including Midland Smile Centres in the West Midlands, having cashed in their chips in the last year.
What is interesting about the Empire Builders – in other words the buyers acquiring 3-20 practices – is that they are quickly establishing themselves as the largest group of acquirers for the NHS and mixed practices that are heavily NHS focused. The most likely reason for this is that they see NHS as a safer investment, but they are also no doubt focused on EBITDA multiples (earnings before interest, taxes, depreciation and amortisation), as we’ve found that most tend to have one eye on an exit strategy to a larger operator.
As there are a number of newer players coming to the fore in this sector in addition to the established names, this is unlikely to change over the coming financial year. What we will be anticipating instead is the possibility of increasing competition between these buyers. Often these groups tend to operate within their own geographical preferences, but we have noticed significant crossover in purchasing territories – particularly around Yorkshire and the North West.
It is worth noting, however, that it’s not all about the consolidators – which some might disagree with, but we feel the statistics speak for themselves. We sold 10 practices last year to the most well known corporates, and the average multiple they paid for practices was the lowest out of all the groups of purchasers we represent, sitting at an average of 6.25x. Naturally, there were variables, as private practices had an average of 7.18x. This suggests that where the retail banks are struggling to finance some of the bigger private practice acquisitions, the corporates are competing against each other in this space, perhaps leading to a higher multiple. Interestingly, the average deal value from a corporate sale was £2.22m – over double the typical deal of £1.075m in this year’s goodwill survey. However, as they represent less than 10% of the practices sold by Dental Elite and for 90% of owners a big name corporate will not be the best deal, we recommend that vendors explore all the options.
On a more general note, the Multiple of Adjusted Net Profit (or in layman’s terms, the profit figure which allows for a full-time principal) rose to 3.79x up from 3.27x last year, but there have been more defined regional differences. London and the South East, for instance, achieved over 4x, while the South West only reached 3.06x – a difference of over 25%. Similarly, Percentage of Gross Fees is up from 149.78% of turnover last year to 159.96%. This demonstrates that there was significant competition in the market 9-12 months ago (we say that because that’s on average how long it takes for market data to feed through into the comparable data).
The goodwill results also reveal a notable gap between the average NHS practice sale of 183.88% of turnover with 7.2x EBITDA, and typical private practice, which was 118.79% of turnover, though interestingly at an average of 8.37x EBITDA. Though it must be pointed out that the main reason for this is the difference in practice appraisal, as usually a private deal is much smaller at £822,069 compared to NHS practices in which the average deal value is £1,040,402.
Looking ahead, we expect to see a number of new buyers entering the market, especially as banks are still keen to lend money into the dental sector. Furthermore, we believe that some of the smaller operators will continue to flip to bigger operators over the next few years, though will likely be replaced by others who are establishing their field. For the full report, or for help with buying or selling a practice, contact Dental Elite.