Within the last decade there has been a change in the way dental practices are valued. The ‘multiple of profit’ basis determines the likely return of capital from a purchaser’s investment. Reviewing how the practice works can allow us to determine ways to enhance the profitability and increase sale price accordingly.
The best-known indicator of company performance, and hence the value of a business, both within and without dentistry, is EBITDA (earnings before interest, tax, depreciation and amortisation). For a practice that is not a limited company we add back loan interest and depreciation, which is included within the profit and loss accounts. However, there are also a number of further adjustments which need to be made to ensure you make the most of this valuation method. This includes taking account of ‘tax reducers’ that exist within your accounts. For example: motor expenses, a spouse’s salary and any other expenses that would not be continued by your purchaser.
Another significant differential is the need to add an associate cost as replacement for the principal dentist’s income. Thus, if a principal were generating around £200,000 in gross fees, an approximate extra cost would need to be added of around £90,000. This gives a revised EBITDA, which we then multiply to determine the value – the multiples reflecting how long in years a purchaser is prepared to wait for his or her capital investment to be repaid from the practice earnings. Typically, for a private practice this multiple will be between 4.5 and 5.0 and for an NHS Practice around 5.5.
Working out the value using this method assumes that all income is being generated by associates and therefore demonstrates that the practice is suitable for Body Corporates, dentists looking to buy multiple practices and owner-occupiers. I will cover buyer types in a later article.
Adding £55,000 and more to the value
Planning your sale well in advance is increasingly advisable now that EBITDA is a well-established business performance measure. To demonstrate this, consider the effect on the practice value where we enhance EBITDA figure by only £10,000. Using the multiple of 5.5 the value is immediately raised by £55,000. PFM Dental will not only value your practice but also advise how to improve the profit/EBITDA to ensure that you maximise the sale proceeds. There are some simple alterations to expenditure that we can share with you to achieve this.
In a recent instruction we worked with a £700,000 turnover practice and re-arranged the way in which the associates were paid, specifically relating to referrals to hygienists. This saved the practice £60,000 in expenses, added £60,000 to the EBITDA and made a staggering £300,000 difference in the sale price. This is not an unusual scenario.
There is another way
Realistically, we do not expect the EBITDA calculation method to work for every practice. For most NHS practices with a turnover of less than £500,000 and private practices with a turnover of less than £650,000 we find that the EBITDA model will actually demonstrate a lower value than other methods. The process for using the alternative ‘adjusted net earnings’ is similar to EBITDA as explained above. However, it is assumed that an owner-occupier generates fees, i.e. we are not adding an associate cost for all income generated. In that case, as the profitability is greater for the same turnover, we use a smaller income multiple, generally between 2 and 3. If this valuation method creates a higher value then it demonstrates that the practice is more suitable for an owner-occupier, rather than a corporate.
These can be more complicated to value with the cash/debt position and you need to ensure that your advisor is adequately placed to deal with this.
Who is your buyer?
Remember that buyers are also considering the valuation method when assessing a practice to purchase. There is a significant amount of information to consider with a practice valuation and it is important for anyone looking to sell, regardless of the purchaser, to have a professional valuation. This should involve much more than a brief assessment of your practice value and should definitely cover the all-important question: Who is your buyer? with the appropriate valuation method applied accordingly. For more information on selling your practice, including selling for free, go to: http://pfmdental.co.uk/sections/view/8/selling-your-practice
Martyn Bradshaw is an experienced valuer and sales agent and a director of PFM Dental Chartered Financial Planners. He will deliver a free mini-lecture 'What is my practice worth?' at BDIA Dental Showcase in Theatre 2 at 3pm on Friday 23 October.
Tel: 0845 241 4480. Email: firstname.lastname@example.org