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SPONSORED: Exhausted? Fed up? Can you afford to retire early?

17/05/2021
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Over the last few years, and in the recent decade in particular, I have witnessed the age at which dentists sell their practices prior to retirement come down, with the majority of my clients now selling between the ages of 50 and 55. While the increasing burden of administration and compliance has been a factor and more recently the stress of running the practice through the pandemic, most often their decisions are based on financial matters.

There are significant factors making retiring dentists sell their practices earlier than they would have anticipated and Covid-19 does not need to delay this.

Peak values

Firstly, owners realise the values of practices are at a record high. I have seen a sharp rise in values since the introduction of the new NHS contracts in 2006, although over the last number of years the values appear to have stabilised at their peak.  The positive news is that there has not been any negative impact on goodwill because of Covid-19 and values look to stay strong.

NHS contracts

Secondly, there are now more whispers over a new form of NHS contracts, which is now starting to look more likely.  Whilst most would believe this would most likely mimic the current pilot schemes in some form with an element of capitation, should practice principals with higher than average UDA worry?

If there was some harmonisation of UDA/activity value this could impact on the practice value.  Where a practice receives £30 per UDA, for example, and pays £11 to an associate, a reduction of, say, £5 per UDA would impact directly on the profitability of a practice with 20,000 UDAs (20,000 x £5 = £100k).  Because valuations of practices are calculated on a multiple of profitability, a 7.5 times profit multiple could reduce the value of the example practice by £750,000.

While there is still uncertainty about any change in NHS contracts and what it would look like going forward, when an announcement is made, and if it does confirm a lower value or higher cost to perform, this would start impacting on the values and sale prices of practices immediately.  A seller also has to consider that the average timescale for an NHS practice sale is between six to 12 months.  Therefore, waiting for a change could be too late.

Hassle factor

Dentists seeking retirement often tell me their reasons for wishing to sell are to reduce or eliminate the hours of administrative work required or the staffing issues – recruiting, sickness cover and more recently the stress of Covid-19 and all that it brings in the ways in which the practice has changed and increase in NHS targets.  

A number of dentists who sell their practice may wish to remain in the practice as an associate – to carry on the clinical aspects of dentistry, which they still enjoy. While this is not often a requirement from buyers, I have dealt with a number of dental practice sales in which the principal wanted or needed to stay on and this was part of the sales brief. As we are in such a buoyant market, the vendor certainly has more choices than ever.

Retirement income

Many of my clients are ‘cashing in’ on the high value of their practices and therefore eliminating the risk that these values may go down in the future. However, should they still need an income, they often agree to remain at the practice as an associate.

This does not necessarily mean a fixed ‘tie in’ with ‘financial retentions’ (money held back from the sale proceeds) but secures a position for them to continue working until they are ready to retire.

While as a principal you’ll understand that your income will likely fall after the transition to associate within your former practice, the loss is often not as much as you think. For example, if a principal had earnings of £150k that reduced by £40k to £110k, the net loss of income would actually be around £24k per annum once tax liabilities are accounted for.

This net loss could be mitigated in other ways. The sale of practice proceeds may be used to clear any outstanding business loan, mortgage or other loans. This will reduce the amount of net income required. Other expenses, such as surgery insurance, practice expenses (locum cover), life cover and income protection, are often also reduced.

Practice sale proceeds could be invested to generate a regular income to add to the associate earnings. Contributions to pensions could be stopped – although it would be vital to seek expert independent advice before doing so.

The above options would usefully form part of a personal financial review with an independent financial adviser. My independent financial advisor (IFA) colleagues say their clients are often pleasantly surprised by the outcomes from such reviews.

Summary

The practice sales market has been very active over the last decade and, while there are no signs of this slowing down, should there be a reduction in UDA values or negative impact on a new contract in the future, this could have a dramatic impact on the values of NHS practices, especially ones receiving an above average UDA value.

Therefore, many principals are seeking to cash-in the value of their practice because, if sale prices do go down, it could mean them working for another 10 years to make up the difference.  If early retirement seems attractive, you should seek professional advice on the likely value of your practice and your potential income in retirement.

Martyn Bradshaw is a Director of PFM Dental and heads up the sales and valuations department.  Established in 1990, PFM Dental is a leading professional service provider for the dental profession providing; sales and valuations, wealth management, financial advice, legal services and accountancy.

17/05/2021

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