Group buyers are driving practice values in the dental sector
Scott Gidman looks at why group buyers are able to offer higher multiples of EBITDA when purchasing dental practices
The market for buying and selling dental practices continues to evolve and the pattern of ownership, especially of group practices and mini-corporates, looks very different from even two or three years ago.
A highly competitive corporate market sees dentistry as a desirable investment opportunity, attracting private equity groups and driving goodwill values higher. Historically, large corporates bought practices at an astonishing rate, in part to create a group they knew could be sold at a profit in the future. However, in recent years this has changed markedly as corporates and group practices are now increasingly viewing dentistry as a long-term investment opportunity, resulting in an influx of new purchasers in the dental market.
One valuation won’t do
Those looking to purchase a dental practice in today’s market fall into two distinct categories – the individual dentist and the group/corporate buyer. This in turn means every practice on the market, large or small, NHS or private, needs to be valued in a distinct way, depending on the operational model of the prospective purchaser.
It is evident that different group buyers often have different acquisition criteria and therefore not any one practice opportunity will fit all
One valuation should be geared towards a potential owner occupier, where the principal dentist is assumed to be able to generate the majority of income at no cost to the business. An alternative valuation model aimed at the group/corporate buyer must also be considered where profit is generally lower, because the principal dentist must be replaced by associates and/or hygienists. The multiple of EBITDA (earnings before interest, tax, depreciation and amortisation) used for this type of modelling is likely to be higher when compared to the owner/ occupier model.
Aspiring owner/occupiers looking to buy a practice are generally reliant on bank funding, so the multiples that can be achieved are often governed by the banks’ lending criteria. With group purchasers who are supported by private equity and shareholders, there are no such constraints. Ultimately this allows them to invest using higher multiples of EBITDA.
What’s attracting the group buyer?
Mediestates is constantly analysing the dental market and capturing valuable information about what group buyers are looking to acquire. It is evident that different group buyers often have different acquisition criteria and therefore not any one practice opportunity will fit all. For example, a large NHS practice of three or more surgeries, which hasn’t yet achieved any private potential will be highly desirable to some of our group buyers. This type of practice has the potential to increase its private treatments, bringing immediate and additional revenue into the business, which in effect dilutes the multiple that has been paid for the practice in the first instance. By contrast, corporate interest in private practices has grown significantly over recent years mainly due to long-term uncertainty surrounding the impending NHS contract reform.
The location of the practice also has great significance for this type of buyer, especially in terms of staff recruitment. This is not only confined to the larger dental organisations but increasingly ‘midmarket’ buyers – mini-corporates and dentists looking to acquire more practices in strategic locations.
What is driving growth in the mid-market sector?
Following the influx of private equity investors into the sector, the market is becoming increasingly competitive resulting in higher multiples of EBITDA being achieved for dental practices. This growth is expected to continue into the foreseeable future given the healthy and significant return on investment versus other investment opportunities.
A highly competitive corporate market sees dentistry as a desirable investment opportunity, attracting private equity groups and driving goodwill values higher.
Whatever type of dental practice you are looking to buy or sell, Mediestates, one of the UK’s largest specialist dental practice brokers, can help. At any one time we are marketing over 130 dental practices and our specialist dental property experts can help you to find the perfect practice for your specific requirements.