The Probe- Feb 20- Dental Elite- Article- The Value Of A Prototype Practice
The value of a prototype practice
Among the many on-going conversations surrounding dentistry right now is the topic of NHS contract reform. The process was initially introduced as a way of improving access to affordable oral health care and promoting prevention. Those who have participated in the process with pilots and now the prototype systems have had mixed experiences. However, for any principals currently operating the prototypes and thinking of selling, there are several benefits to be had.
The system
As you will likely know, there are more than 100 practices testing the prototype, which utilises a combination of capitation and non-capitated activity as part of its renumeration system. One of the latest developments enables practices to exchange units of non-capitated activity for additional patients, designed to help improve ‘access’ – a key buzzword in the dental politics scene.
On the whole, feedback seems to be positive as the programme evolves, though there are still a few creases that need ironing out. Many practices find the possibility of delivering fewer ‘UDAs’ (or the equivalent of) while maintaining the same size or even growing their patient base complements the provision of private services. With a lower activity target there is more opportunity and time to provide patients with a wider choice of treatments and grow the private revenue of the business.
For example, a dentist we came across in the North of England was previously operating with an NHS contract that valued UDAs at around £22 – for him, this made the contract totally unprofitable. On the new prototype system, the cost of delivering the contract is considerably lower, making it a viable option for businesses. The remuneration model he adopted was similar to that of a salaried dentist, incentivising and providing the opportunity for professionals to offer more private work where they want to. The NHS output is easier to manage with a lower level of activity. This frees up the dentist’s time to provide more white fillings or crowns for patients seeking such treatment – before, they would have had to concentrate on delivering UDAs to hit the NHS contract target.
In addition, meeting patients’ expectations by offering treatments beyond essential NHS services will enhance patient satisfaction. The resulting word-of-mouth promotion can help to bring more patients into the practice, whether on a NHS or private basis, and the circle is complete.
Impact on practice value
The ability to provide more private services and increase revenue also boosts profits and, consequently, the value of the practice. The lower cost of delivery in these examples further improves the numbers and benefits any principals who consider selling.
For example, the costs of delivering private dentistry involve only materials, lab bills and paying the dentists. Say a practice increases its private revenue by £50k. That would give a 33.8p increase per £1 in EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) for the average dental practice beyond the fixed cost base. When you do the maths, that equates to £16,900 in addition to EBITDA. Using the average EBITDA multiple from our recent goodwill survey of 7.60 , this provides an increase of £128,440 in the valuation of the practice.
This is clearly a significant rise in value, demonstrating a potential benefit of the latest prototype system for practices. It also shows what might be possible for individuals and businesses when they are less pressurised by the NHS contract. They have more time to promote preventive measures and to offer greater treatment choice with the potential for more private work.
A desirable trait
As a result of the potential we are currently seeing in prototype practices, they are becoming desirable businesses for many buyers. Particularly for those who are more politically aware, we have seen a growth in appetite for prototype practices among individual buyers and groups. Many are willing to pay a premium to acquire these businesses.
Further fuelling demand is a general sense that the prototypes are here to stay, which is hugely positive from an acquisitions point of view. If the current system or something similar is to become the reality for all, those practices already set up to operate the programme will be one step ahead. Think back to 2006 – practices that piloted the PDS system had fantastic UDA values of up to £28/29, while those not involved with the pilots didn’t receive the same benefits. This makes practices with the prototype very attractive business perspectives as they are likely to do very well from any unilateral contract variation.
For anyone thinking about buying a prototype practice, it’s crucial to make sure that your bank manager understands the new contract. If they don’t, they might calculate their valuation based on the old contract and this could make it very difficult to secure finances. By working with experts who know how to liaise with the banks, such as the team at Dental Elite, you can avoid this and many other possible complications.
Only time will tell
The current prototype system seems promising in terms of what NHS dentistry might look like for practice owners in the years to come. For many, it offers new opportunities to both deliver better patient care and maximise on business potential. Only time will tell how closely the final new contract resembles the existing programme.