Buying dental property – how to find the right fit

Any dentist considering a purchase in the dental property market just now could be forgiven for being apprehensive, especially as there appear to be multiple buyers all chasing the same number of practices.

However, despite the reality of trying to secure the best practices at a reasonable price in the midst of a fast-moving sellers’ market, buyers should still act wisely and take the advice of experts in the field to ensure they find practices that are a good fit for them.
 

Current market

According to the latest Business Outlook Report¹ from specialist business property adviser Christie & Co, a shortage of good quality, larger dental practices led to competitive bidding and many sales agreed above the asking price last year.

Indeed, between 2017 and 2021, the company saw an 11% increase in the number of offers received and a 22% increase on unique offers received on dental businesses, indicating a growing number of entrants to the market.

In addition, the average number of viewings per practice rose by 7.2% in 2020 compared with 2019, and a further 9.3% from 2020 to 2021.

Dental Elite, which specialises in dental practice sales and valuations as well as finance and recruitment, concurs that the market is healthy.

In its most recent mid-year goodwill report, the company said its report painted ‘a very positive picture’ of the current market.

Martyn Bradshaw, Director for Sales and Valuations at PFM Dental, says: ‘The dental practice market is very active and we're seeing a higher level of buyers than sellers. It’s very much a sellers’ market.

‘There's some good practices coming to market and we are obviously on catch up a little with people who didn’t put their practice on the market during the Covid period lockdown. As such, there's a lot more practices coming to market now but I'd still say it's very much a case of numerous buyers per practice.’

Priya Kotecha, Partner at MacKotecha & Co agrees, saying: ‘The market seems as hot as ever! Every year, I think maybe this is the year it will cool down, but this still does not seem to have happened. I wonder if it will soon though what with interest rates increasing.

‘From my own experience of my clients, I feel like more of them are taking the decision to sell early and this seems to be prompted largely by difficulties with the NHS contract and also struggles to find associates and even nurses. There is also the added pressure of inflation. This too may have an impact on the state of the market.’

Abi Greenhough, Managing Director of Lily Head Dental Practice Sales, believes the market remains buoyant, explaining: ‘Investors and body corporates’ appetites continue to accelerate. This has translated into a 6% increase in deal prices with investor buyers along with more attractive terms for vendors.

‘Interest rate increases have not diminished first time buyer appetite. We have observed more caution from buyers considering NHS practices in regions where it is traditionally harder to recruit, indicating further regional variation in practices values.’
 

Good advice

Any associate dentists considering buying their own practice will have numerous issues to consider such as experience, finances, the legal process, and securing good professional advisers.

Greenhough says: ‘My advice would be to talk to practice owners about their experience of ownership. I encourage buyers to visualise what their life will look like as a practice owner and what their objectives are.

‘I recommend buyers engage experts, so they buy the right practice and they are set up for success. Having a team of advisors supports a credible offer, which for the buyer means a greater chance of acceptance.’

Her colleague Martin How, Managing Director of Lily Head Finance, says: ‘We find that buyers are more discriminating – they are therefore seeking our help with a deep-dive into the historic financials but also working with us to forecast potential performance under their management to ensure the required returns can be achieved.

‘I’d say be clear in your mind as to why you want to be a practice owner, assemble a strong team of professional advisers including legal, accounting and corporate finance specialists with a track record in dental practice acquisition, get comfortable with the numbers and be prepared to demonstrate deal stamina in the months leading up to completion.

‘Reflect on the practice where you are working, its challenges and opportunities and how it is managed by your current Principal – draw on the experience to assess how comfortable you will be running a business of that size.

‘Also, remember that lenders will make a judgement call based on your work experience to date that you will be able to take management responsibility for the business they are funding and drive it forward over 10-15 years.’

Kotecha believes dentists have to be bold in their choices, saying: ‘Don’t wait for the perfect practice. Like men, this does not exist! And don’t focus too much on past performance (though that is important too) because at the end of the day, you are buying future potential.

‘Also make sure you have your accountant do a reality check for you on the practice and your aspirations for it and the finances side of things. The right practice for you could even be one that is currently making losses. It is so specific and personal.’
 

Finding the right fit

When it comes to finding the right practice for a dentist who is on the look-out for a place, there are a myriad of aspects to consider and questions they should ask themselves, say the experts.

Kotecha suggests dentists consider questions such as:

• can you see yourself working in the practice?
• has turnover been falling every year without any (credible) explanation why?
• does the principal have other practices nearby?
• does the practice have scope to grow?
• what would you bring to the practice that may grow turnover?

Bradshaw says: ‘Understanding the practice that they are buying is really vital, whether it would work under a principal-led or associate-led approach and making sure that the practice would financially work how the buyer intends to work in the practice.

‘It’s finding that right match and not every practice suits every person. There could be a practice in your area, but that might not financially suit you as much as another one.

‘My advice would be for their accountants to produce forecasts of how that practice will work under their ownership. What the principal’s accounts show isn’t what those accounts will look like under their ownership because they might be generating different gross and they might have a different structure which will impact on their financial forecast. Anybody looking at a practice really wants to be looking at the forecast for them.’
 

Finances

No potential practice purchase will happen without the finances in place and although this might seem intimidating, banks are still happy to lend.

How explains: ‘I feel the current balance of enquiries between first time buyers and established operators has tipped towards the latter – entrepreneurial operators who have seen their business perform strongly post-Covid are bringing forward a range of proposals including follow-on acquisitions, property extensions and improvements, relocation projects and purchase of minority partners/shareholders.

‘The level of acquisition activity appears to have recovered to pre-Covid levels and bank appetite to finance dental practice purchases is still very strong.’

Bradshaw adds: ‘We have seen that most practices are pretty much back to normal and we’ve actually seen increases in private income. Most practices have maintained their turnover, if not increased it. The finance is there for buyers and the banks are still lending happily.

‘Buyers should be comforted that a practice can work very well, it's just finding the one that suits them and ensuring they get it right. It’s an expensive process when buying a practice so if you get it wrong, it could be costly.’

Greenhough adds: ‘Covid restrictions required owners to manage income and expenditure closely. We have noted owners have better financial control than pre-Covid. I recommend taking this to the next level by working with their accountants to produce management accounts, forecasts, and budgets. Better financial control and predicting protects the business, especially in the context of 9% inflation.’
 

Time to buy/sell?

Any decision to buy or sell a practice is under the influence of good timing as well as luck, to an extent, but now is a good time to be involved, according to Greenhough, who says: ‘In many cases practice owners have achieved record trading following the Covid pandemic, which when backed up by management information demonstrating turnover sustainability is resulting in increased goodwill values for sellers.

‘We saw a great deal of fresh buyer interest during the height of Covid, which continues to hold.’

Bradshaw adds: ‘It's a very good time to sell because the values in the market are high and haven’t really changed since pre-Covid. I think buying is always a good opportunity for somebody in the right practice because they can make a practice their own and grow it further.’

Kotecha has mixed views about now being the ideal time for buyers to go ahead with their plan to become a practice owner, saying: ‘I am not sure there is ever a good or a bad time to sell as it usually boils down to the right time to sell for other reasons.

‘Often when someone thinks of selling their practice it is prompted by reasons unrelated to the practice or it is because they are wanting to retire, the practice is not profitable or they feel they have realised the practice’s full potential.

‘In terms of buying – prices are high so from that viewpoint, maybe it is not a good time to buy. But then if prices are not going down and continue going up, maybe it is. A number of buyers are high grossing associates who may feel that a way to protect and grow their income is by buying a practice.

‘Sometimes a dentist just comes to a time in his or her life when it is the right time to buy for them. Unless you are a corporate, dental practices are less of a commodity and more of a way of life.’

 

¹Christie & Co. Business Outlook 2022 (January 2022) https://www.christie.com/news-resources/business-outlook/2022/