What's driving up goodwill values
Dean Barker explains some of the reasons why the UK private sector is experiencing exceptional growth in goodwill values and how this is affecting practice valuations when the time comes to sell
We are currently witnessing a marked change in buyer behaviour with dentists showing an increasing desire to invest into the private market.
During the 2015 to 2017 period, according to Mediestates’ own data analysis, around 22% of buyers were interested in purchasing a private practice, and in the first nine months of 2018, this figure rose to an astonishing 52%.
What is driving this appetite?
The reasons for this rapid growth are varied. However, it is certainly linked to the uncertainty associated with ongoing NHS contract reform.
While private practice income remains steady, the ongoing deliberation around the transition of NHS contracts is leaving many dentists worried that the process will ultimately bring about a reduction in UDA rates. If this should happen there will be a consequential reduction in practice profitability, a risk that many practice owners are unwilling to take.
Concerns around the unpredictability of Brexit are also playing a key role in the direction the practice market is taking.
No one can accurately forecast what Brexit will bring, yet we can be sure that the knock-on effects will be felt for a very long time.
We are already seeing EU dental professionals working in the NHS planning to return to their home countries after Brexit. Even fewer are now coming to the UK looking for work, which could mean potential problems for recruitment and contract fulfilment. On a more positive note, the growth in the private sector is also linked to favourable lending by the banks in two notable areas:
- 100% lending is available in special circumstances – for the purchase of an established and profitable business by a buyer who already owns one or more practices with a proven financial track record
- The private element of NHS practices improves ‘lendability’ by demonstrating a practice’s potential for growth.
Mediestates is increasingly seeing large NHS practices looking to diversify into the private, specialist or cosmetic sector. This facilitates the building of private revenue, which supports the transition into a mixed practice.
Increasing private treatment in this way brings immediate and significant additional income into the business, which ultimately nullifies the multiple that has been paid for the practice in the first instance. This in turn increases the market value of the practice without the new owner having to pay for the private goodwill.
There has been a significant shift towards investment in the private sector over the past five years, with corporates and large group practices engaging heavily in this area. While some of the larger corporates are looking to buy only large private practices, or practices with at least 40% private income, some of the smaller groups are increasingly interested in buying solely NHS practices with a view to building the private element of the business from scratch, resulting in a big increase in private goodwill in the coming years.
Onwards and upwards
A competitive corporate market sees dentistry as a desirable long-term investment opportunity, an attitude that is driving goodwill values even higher.
We will see continued growth throughout this year and on into the foreseeable future
Mediestates’ constant analysis of the dental market has shown a strong 20% growth in private practice goodwill between 2014 and 2017, and following a buoyant first six months of 2018, it is expected that we will see continued growth throughout this year and on into the foreseeable future.