Just a few years ago, we were talking about how the goal of owning a practice seemed less desirable due to rising costs and increasing legislation.
Then, along came the pandemic to completely change the landscape. After the first lockdown, it became apparent that the dental property market was not headed for a slump or even a stagnation.
In fact, the market was buoyant with more associates, perhaps keen to have more control over their destiny, looking to buy their first practice.
But how do things stand now and what might the future hold? At this year’s Dentistry Show we asked Mike Blenkham, Chartered Accountant with UNW LLP, and Lis Hughes, Managing Director of Frank Taylor and Associates, to share their expert opinions.
Below are some of their golden nuggets on practice ownership, but if you want more detail, keep reading for deeper insights.
- Now is a good time to buy a practice – goodwill values remain strong and lenders are still confident in the market. Mixed practices in particular remain a good option with higher goodwill than private or NHS.
- Buyers are getting younger and less interested in the NHS – the trend for those buying a practice is that they’re doing so at a younger age, are more interested in private dentistry and are looking for more flexible working.
- Increasing number of owners building their practice portfolio – more people are buying second and third practices. Many are also doing so as a business strategy with an exit route already planned, e.g. to build a mini-corporate and then sell.
- Squat practices are proving attractive – despite the higher financial risk of buying a squat rather than an existing business, there has been an increase in enquiries in this area.
- Considerations for those thinking of moving towards private – it is worth considering how you will replace your NHS income and any changes you need to make to offer an experience private fee payers will value. Capitation schemes have proved financially resilient; only one percent of patients cancelled their Direct Debit during lockdown.
For more in-depth detail on the above points, keep reading…
It’s still a good time to buy a practice
Despite uncertainties around the cost of living crisis and the fallout from the war in Ukraine, the practice buying boom that happened after the pandemic hasn’t significantly dropped off.
Mike described it as ‘full steam ahead. Lenders are still really keen to support, and practice profits are higher than ever’. Goodwill values are still strong and private practice values have sustained the growth they saw in the immediate aftermath of the outbreak of COVID-19.
NHS goodwill values have remained steady, and although the uncertainty around the NHS contract is causing some issues, lenders still have confidence in NHS practices.
Mike said, “We are seeing a shift to private practice purchases, and they’re certainly more desirable. The ideal practice I would probably look to buy is a mixed practice.
“The recent goodwill value for a mixed practice is about 190% of turnover, compared to about 155% for private practices and about 140% for NHS. There’s an argument that mixed practices are lower risk, because you have two different income streams and regardless of what happens with the NHS, you’ve got the option to build the private side of a practice.”
The changing priorities of associate buyers
Associates’ desire to become practice owners that emerged during the first lockdown has shown no sign of dissipating. And with more opportunity to do private dentistry over the past 18 months, many are seeing that as the direction of their future.
Lis said, “What we’ve seen over the past 18 months is an increased appetite from young associates wanting to go into private dentistry. We do a lot of seminars for young associates, and it’s very unusual for them to talk about wanting to go into NHS dentistry. I think it’s a big concern for the future as to who is going to be doing NHS dentistry.”
There is also a trend for associates wanting to buy a practice at a younger age than previously (and a similar trend when it comes to practice sales, with the average age of a seller now 52).
Associates are also looking for more flexibility and a career that is not necessarily solely clinical.
Lis said, “We have many young associates whose ambition is not to be clinical in three or four-years’ time. We also do a lot of work with newly qualified associates and it’s not unusual for them to say, even at that point, ‘I don’t want to work five days a week, I only want to work two or three days a week because I want a quality of life’. We already know there’s a shortage of associates, so you do wonder what impact that’s going to have on the community.”
An increase in dentists building a practice portfolio
Dentists owning multiple practices is becoming more common as increasing numbers of people look to build a portfolio. Mike described how many people are treating it as a business venture from the start, with a clear goal and an exit strategy already in mind.
For those who are already on the practice ownership ladder and looking to buy another, it’s important to think about what the financial impact may be. Moving from owning one practice to two doesn’t necessarily result in twice as many profits.
As Mike said, “If your first practice has an £800,000 turnover and a £500,000 profit with you working there full-time, you might think ‘fantastic, I’ll buy another practice with an £800,000 turnover and I’ll double my profit to £1 million’. But it’s not necessarily the case because that second practice is going to be associate-led. So, you need to do the number crunching and work out if it will repay any loans you’ve taken out, etc.”
Another consideration is that financing a second practice can potentially be more difficult than it was for the first as you tend to need more equity in the business to attract a lender. It can also potentially be more complex but there are other benefits too e.g. setting up a group structure can have tax advantages when it comes to selling a practice.
Mike also advised that moving from owning one practice to owning two, can be more difficult than going from two to three practices, from a management point of view.
He said, “When you buy your second practice, you’re splitting your time between two and that’s when problems can occur. When you’re buying your third practice, those problems have probably been resolved and you’ve got measures in place to deal with it.”
More people looking to set up squats
Setting up a squat practice has its benefits, such as a low entry fee as you’re not paying the goodwill value for an established, profitable business. However, there are still initial costs such as buying the building and financing the equipment, and there’s still high financial risk due to the nature of it being a squat.
However, it would seem more and more dentists are interested in taking on the challenge of building their own squat practice.
Mike told us, “Before COVID-19, we would usually receive a couple of enquiries a year about squats. In the past few months, we’ve had around a dozen.
“Building a squat tends to work well when you have a couple of dentists collaborating on an idea and you’re offering different services such as periodontics, implants and facial aesthetics, which other private practices may not be delivering.”
Considerations for NHS owners thinking of moving towards private
Mixed practices remain attractive to buyers and, as noted above, their goodwill values are higher than both fully private and NHS practices.
If you are an NHS practice owner and thinking of introducing private dentistry as well, it’s important to make sure you take the necessary steps before handing your contract back. Patients paying private fees expect a different experience to what they’d receive on the NHS so it may be that you need to update or refurbish areas of the building or consider offering services such as facial aesthetics.
From a financial perspective, it’s also worthwhile thinking about how you’re going to replace your regular NHS income.
Mike said, “During lockdown we found that private practices with membership plans were very resilient. On average only one per cent of patients cancelled their direct debit during what was a very difficult time.”
Lis predicted that there will be continued demand for mixed practices and agreed with Mike about the strength of membership plans in private practices during the lockdown.
She said, “When we went back into practices in June 2020, those that had capitation schemes hadn’t lost any patients.
“A lot of our clients were taking on new patients and insisting that they went straight onto a membership plan, which they hadn’t done before.”
If you’re considering introducing more private dentistry into your practice and want to talk about whether it’s the right move for you, contact: 01691 684120 or book your conversation with the NHS to private conversion experts.