Just over eighteen months has passed since the Goodwill Update for the Financial Year End 2020 was issued. Data for FYE March 2020 was not released, as at the point of scheduled release the UK was under full lockdown with no end date in sight, dental practices had closed in the main and it was not known what the future held for dental practice goodwill, so the relevance of the data was also questionable.
Since then and at the time of writing, England are due to go to Step 3 of the roadmap for exiting lockdown with leisure facilities already open in Scotland, and Wales waiting for guidance on the opening of indoor hospitality.
The data in this report should be caveated to an extent in that the data pool is smaller than in previous years as although acquisition activity has returned positively, there were not any significant volume of completions until September. Even then, the pace of completions has been slower than in previous years until early 2021 as banks and acquirers alike sought additional reassurance that dental practices’ income levels had both returned and were being sustained at an agreed level.
To summarise where we are at present the market is incredibly acquisitive with some incredible deals for finance available across a number of lenders with options ranging from incredibly cheap debt with c20% contribution levels, to still cheap debt on as little as 10% contribution and sometimes even lower depending on individual circumstance. Coupled with this we are in a market that in the current economic climate is loved by private equity who are fuelling continued consolidation amongst the larger dental groups that they fund.
It is interesting that as demonstrated by the table below, acquisitions are either being made by those who are buying their 1st, 2nd or 3rd practice or by groups who already have 10 practices in group with little activity amongst those with 4-10 practices in their estate. There are a few hypotheses as to why this could be the case with potentially those owners in the mid-range struggling to secure competitive lending having already exhausted their current debt capacity, or in light of recent events are potentially consolidating their current estate. It will be interesting to see whether these figures move slightly over the course of the next year as they are not that dissimilar to the results in 2018/19.
The other interesting indicator is it would seem that on average the slightly smaller groups are offering more competitive terms than some of the biggest groups with the average EBITDA multiple paid by Tier 1 Buyer (the big 5 groups) equating to 7.14x whereas the Tier 2 result (10+ Practices) is 7.70x for practices in the most popular areas. In part this could be a difference in strategy with the smaller groups placing more onus on the ‘watering down’ of the multiple by making acquisitions where they feel they can pay slightly more on the original multiple but organic growth can be readily achieved, whereas often the bigger groups will not make such assumptions.
In comparison to the 2020 figures, we have not posted a comparison as there is little to compare and in some respects too little data to confidently draw conclusions although by way of headlines the average multiple of adjusted net profit (valuation basis for owner operator-led sales) paid has fallen slightly from 2020 to 2021 by 0.15x.This is quite modest although likely skewed by a number of transactions which completed in the Autumn at a slightly less price than was agreed pre-pandemic. There was also an increase in the adjusted EBITDA multiple (valuation basis for associate-led acquirers) which seems to have increased again with deals now being agreed at EBITDA multiples between 8 and 9x dependent on income composition and geography.
Additionally, it’s increasingly evident that geography is playing an increasing role in business worth with practices in the North (which includes Leeds & Newcastle), the North-West, Midlands, London & South-East reporting an ever-widening gap between practices across Scotland, the South-West and Wales where resourcing is notoriously tougher. The Central region varies with strong results in areas of Essex but less demand in counties such as Norfolk.
Overall, since the 2019 survey the average sale value breaks a £1million for the first time, up £93,667. Average Adj EBITDA multiple is up from 7.21x to 8.36x with the ANP multiple down slightly from 3.53 to 3.42x; a fall of roughly £17,500 when put into the context of just these transactions.
However, there is a significant fall of circa 10 percentiles in respect of prices achieved when expressed as a percentage of turnover; there could be a number of reasons why but is perhaps symptomatic of dental practices being less profitable than they were two years ago? Something which is certainly true for NHS practices. A likely reason why the consolidators have been focusing on mixed and private businesses.
At the time of writing, things look fairly positive in respect of the pandemic and the initial indicators are that the economic recovery may out pace some of the more pessimistic predictions. The challenges for dental practices will be maintaining revenue once there is more competition for disposable income as the population are afforded more freedoms, and in the medium term the matter of recruitment, as dentists once again become more of a challenge to resource as UDA targets return to normal and the challenges of Brexit only seek to exaggerate this. With this in mind I expect that we may see mixed and private practice valuations diverge away from NHS valuations once more with the former multiples achieving significant growth amongst the independent market who currently seem to prefer NHS practices as demonstrated by the table to the left.
Disclaimer: This report should not be used as a basis for valuation computation. By the nature of using averages figures outside the normal range can significantly skew the outcomes. The best way to get an up-to-date valuation is to organise a free and non-committal valuation with our team.
Over the last few years, and in the
As the dental market emerges from a prolonged