Resurgent dental property market adapting after recent turbulent years

The economic turbulence of recent years over interest rates and cost of living was felt universally but despite this, the dental practice sales market has survived surprisingly well with demand as well as confidence and enthusiasm, returning.

So say dental property experts and brokers who admit that the market was buffeted by various factors such as rising interest rates, high inflation, the Covid-19 pandemic and dentist recruitment issues but is still in a strong position with decent multiples – the multiplication factor applied to a practice’s EBITDA (earnings before interest, taxes, depreciation and amortization) to calculate the value of a practice.

In the most recent Goodwill Report 2024¹ from practice sales agent Dental Elite, the company says: “The gradual rate rise across 2022 and 2023 did impact the market, and we did see a drop in multiples. However, funding is still readily available, and buyers are still looking to acquire.

“With the drop in inflation and rates stalling, the prospect of cheaper lending is heading in the right path, paving the way for new investors and existing acquirers.”

The report, published in May, says: “There is an increased confidence regarding borrowing money, injecting optimism into the market and facilitating transactions and investments.”

In addition, a significant reduction in inflation from 6.7% in October of last year to 2.3% in April of this year is likely to have helped strengthen buyers’ confidence and the report adds: “While the Bank of England base rate has remained stagnant at 5.25%, the prospect of a gradual reduction offers hope for buyers, especially those on variable rates.”

Current market

Property experts are united in their view of the present dental property market and consider it to be healthy.

Lis Hughes, Director at Frank Taylor & Associates, specialists in dental practice valuations, sales and purchases, says: “Last year was quite challenging, but the first quarter of this year has been positive. The ambition to buy practices and the need to sell practices has never gone away, but last year what we saw was more caution from buyers because interest rates were going up which was unusual, the cost of living, and the cost of employing people.

“We were still getting offers but they were taking longer to translate into actual legal transactions because people were concerned. The first quarter of this year has proved to be more positive with people adjusting to the rates of interest and thinking they do want to buy a business.

“There are more buyers than sellers in the market. At this moment, we've got just over 5,000 people registered looking to buy and because we communicate with everyone by e-mail and text, we know we have a very accurate database.”

Martyn Bradshaw, Director of PFM Dental, concurs, saying: “The practice sales landscape is progressing from where it has been. With the increase in interest rates, the demand for purchases did slow down initially but is recovering nicely. At present, we are finding that there is a higher level of interest from owner occupiers than corporates.

“There are still more buyers than sellers but there's a lot more activity from owner occupiers than corporates. Typically, pre-Covid around 60% of our sales were to corporates and now we are approximately 60% sales to owner occupiers. This is not necessarily driven by more owner occupiers, but just that corporates are not buying at the frequency that they previously were.”

Clients are still selling practices, Lis adds, saying: “If someone wants to buy a business, the banks will only lend to a certain level to ensure serviceability of the loan, and I think every agent across the UK last year had to look at maybe adjusting the multiples slightly, but it's not moved away from being the buoyant market that it's been. There was a slight readjustment because of the interest rate because we have to look at affordability.”

Popularity

Certain types of practice are more attractive to buyers such as those which are modern, well maintained, offer room for expansion and have embraced digital dentistry.

Alison Bates, Business Development Team Manager at Henry Schien Dental Practice Sales (formerly MediEstates), explains: “Practice valuations are based on profitability, so those practices that have maintained healthy profits despite the rising costs of associates, staff and establishment will benefit most and will sell for the highest prices.

“Private practices are now the most popular choice for buyers. Historically, it was NHS practices and now private practices are more popular, However, practices with NHS contracts will still sell but a buyer needs to be sure that that contract is sustainable and that they have got a team of clinicians that can deliver that contract.”

Interest rate deterrent

During the higher than usual interest rates of the past 18 months, associates interested in taking on a loan to buy a practice could be forgiven for thinking twice and delaying a purchase, but their confidence is returning, argue the experts.

Alison says: “There are some buyers who may not want to purchase a practice just now because of the current Bank of England interest rate. But if you are a business savvy buyer, you may realise it is a good time to buy because the prices of practices are a little bit lower than they were historically. Although you are going to pay more on your loan, you are getting a better deal and there is slightly less competition. It’s still a good time to buy.”

Martyn says buyers’ hesitation and nervousness has settled down, adding: “Initially when the interest rates rose, there was a bit of a slow-down in the market because of the interest rates rising and the uncertainties that that brought.

“I think now because we have had a stable rate, albeit that it’s higher, the level of interest has risen again. We’ve gone through the short term pain of people worrying about the rates, but I don’t think we are seeing a necessary slowdown because of interest rates.”

Lis adds: “Last year we saw people being cautious about borrowing, worrying about whether they could afford to pay it back and would they make enough money to make it worth their while, whereas this year, we see most people saying ‘everything has settled down on cost of living and staffing’.

“We have more confidence now. Last year we didn't not sell practices, it just took longer for people to make the financial decision.”

Bank lending

One area that seems to have remained unaffected by the recent troubled economic climate has been lending from banks which have continued to lend to associates who want to buy dental practices.

Dentistry is considered as a good sector which is a secure and viable investment opportunity, say the experts such as Martyn who explains: “Banks are still very active.  They haven't really changed their stance, with their margins above base rate still being very competitive, so there’s very much an appetite for the banks to lend.”

Letting out rooms

One money-making option that some practices are embracing is the letting out of rooms within practices, whether that is to dental specialists or entirely different professionals such as physiotherapists or chiropractors.

Lis says: “It's niche where young associates who are making a name for themselves and don’t want to be attached to a practice may well be looking to rent space and go into a practice one or two days a week and take their patient base with them. They are far more peripatetic.

“For a practice owner, the money they'll get renting a room is far less than the money they would get from generating the income from having dentistry take place in the room that belongs to them. It’s not that attractive. 

“However, we sometimes might come across a practice that has a chiropodist who rents a room or a physiotherapist. You are wasting an opportunity to increase your annual turnover but also increase your general goodwill value.” 

Independent buyers

The larger dental groups reduced their buying activity during the past few years during economic uncertainties, says the property experts.

There has also been a slight reduction in the number of practices sold to independent buyers, as the Goodwill Report 2024 acknowledged there was a fall in the percentage of practices sold to independent buyers in the 2023-2024 fiscal year – down to 65.23% from 69% the previous year.

Nevertheless, the demand to own a practice for the first time remained strong as shown by completions data, said Dental Elite.

Alison says: “It’s a mix of both. Around 60-65% of practices are still owned by independent dentists and 35% are owned by small groups or the larger corporates. Over the last 18 months, corporates have become pickier over the types of practices they purchase, and this has opened the market to independent dentists again.”

Predictions

The future for dental practice sales is promising, argue the experts, who predict it will continue to have a steady but positive development. 

“I think what we saw last year was people just taking a breath and getting a balance back,” says Lis. “The banks consider it such a safe area. They must lend ‘x’ amount of money to make money, so where else would you do it apart from in a very safe sector such as dentistry?”

Alison adds: “There will be more practices coming to market over the next 12 months, as those sellers who have been holding off come closer to retirement age. With the predictions for inflation and the Bank of England interest rate to come down in the summer, this will also give both buyers and sellers more confidence in the market.”

Tips for buyers:

• Try to gain business knowledge/understanding. Running and managing a practice requires a very different skill set to being a clinician
• Speak to financial advisers or brokers who are often a part of dental property agents’ offering. These advisers will help you ensure you are financially viable, in a position to be able to buy, advise you about cash flow and business loans, and speak to banks or your behalf to secure a loan
• Assess a practice that you are interested in to ensure that it works well
• Take your time to understand the practices on offer
• Look into the profitability of the business of a practice and what the opportunities are for that to grow, post-sale.

Tips for sellers:

• Get a valuation on your practice early, perhaps a couple of years before you are looking to sell. This will help you set realistic expectations about the practice value. The legal process alone of selling a practice can take six to nine months to complete
• Speak to dental property brokers about how to grow or optimise the practice’s value before you sell it
• Talk to a financial broker about who the buyer of your practice is likely to be and what the sale structure will look like
• If you are selling to a corporate, a practice principal or owner will have to tie-in to the practice post-sale for at least a couple of years (even if they are non-clinical) so you may want to start the process sooner than you first thought so it fits with your planned retirement date.

 

^1.    Dental Elite. Goodwill Report 2024 (May 2024) https://dentalelite.co.uk/goodwill-report-2024/