ASK DEAN: What factors affect the multiples which determine the value of a dental practice?
What factors affect the multiples which determine the value of a dental practice?
When it comes to the valuation of a dental practice it’s no longer about using the traditional method of percentage of turnover. Today, most practice valuations are carried out using the EBITDA method - Earnings Before Interest Tax Depreciation and Amortisation - a metric used to more accurately evaluate a company’s ongoing operating performance. Once the EBITDA figure has been calculated, it is then multiplied by a number that is determined by the business, the market and the economic climate to eventually result in an accurate practice value.
Those currently looking to purchase a dental practice fall into two distinct categories - the individual owner/occupier and the group/corporate multi-site owner. Individual practices are currently valued using a multiple of EBITDA or a multiple of the net adjusted profit. For larger groups of three or more practices, a higher valuation multiple of EBITDA is used. Generally, the lower the perceived risk and the more sustainable the profit is, the higher the profit multiplier for groups can be.
Calculating the value of a practice is not a straightforward process and a number of variables and considerations need to be taken into account. With so much at stake, it’s worth looking at the various considerations that impact the multiples used in the valuation procedure.
Location and demographics
Practice location is one of the most significant factors when it comes to obtaining accurate valuations. London remains a ‘hotspot’, where demand for practices often exceeds supply and competition for those practices that do come to market is intense. Valuation multiples can also be higher in other popular areas such as the Home Counties and the Midlands.
Urban areas - major cities and towns - versus rural and remote locations all affect UDA rates, salaries, rental costs, general overheads, the number of patients and crucially, the recruitment of the dental team. It goes without saying that a practice in a poor location, unable to attract and retain key members of staff, finds it extremely challenging to either fulfil NHS contracts or drive private revenue and therefore we would expect to attract lower multiples for such a sale. That being said, for the right principal, this type of business can offer extremely good value for money. For NHS and mixed practices UDA values vary across the country.
The property itself
It’s important also to look at the commercial property itself, whether it is freehold or leasehold, as well as the number of surgeries and the demographics of the surrounding area. Awareness of average earnings and the disposable income of the local population and any future commercial and residential developments nearby gives prospective buyers a realistic idea of the future potential of the practice. By looking at local figures of sale and lease prices for properties, along with the average value per square foot for the area, it is possible to analyse the average value for the bricks and mortar of the practice.
Consideration also needs to be given to the costs of the business, including staff, establishment costs, and the clinical costs which can usually be a practice’s highest expense. One way to reduce costs and therefore increase the EBITDA, is to think how best to run most efficiently. For example, implementing automated systems and processes to handle certain aspects of the business can have a positive impact on the productivity and profitability of the business.
Help is at hand
Every dental practice is unique, so when it comes to the complexities of selling or buying a practice it makes sense to enlist the help of a team of dedicated dental practice brokers to achieve the right valuation and manage the practice transition. MediEstates, the UK’s largest specialist dental practice broker, is marketing over 140 dental practices at any one time and our specialist dental property experts are here to help deliver a smooth transfer and successful deal.
Posted by: Dean Barker on 08 Nov 2018