Paul Graham explores the current dental practice sales market and lists the questions sellers should now ask before selling their practice.
The dentistry sector has one of the most complex and strict regulatory frameworks. This means that buying or selling a dental practice can sometimes feel like a labyrinth of hurdles.
However, with the right advisers and support, it doesn’t need to be that way.
Current buyer demand
Established corporate buyers, typically with private equity (PE) backing, are trying to fulfil their ambitious buy and build targets. However, they face stiff competition from independently-owned dental groups, which are trying to grow to platform size to eventually become suitable for future PE backing themselves. This buyer profile is dominating the higher end of the market at present.
One of the fascinating aspects of the market at the moment is seeing the number of new entrants looking to build groups. For sellers of larger dental practices, the choice of buyer has never been so varied.
We are also seeing a reinvigorated appetite from independents and first-time buyers purchasing their own practices. This is not a new trend by any means. However it’s a surge in activity the pandemic is emphasising. Associates are seeking income security through practice ownership, often well supported by major high-street banks.
Put simply, there are more buyers for practices than ever before.
Sale terms
There are sometimes reasons why it suits a practice owner’s purpose not to go to the market. Loyalty to a long-standing associate is a common one.
However, ask yourself if you know the true value of your dental practice. With merger and acquisition (M&A) activity at an all-time high, where demand exceeds supply, the best way to maximise the outcome is to have a competitive sale process. You can still include your associate in that process, too.
Whilst offer value is an important component in any practice sale, the terms attached are sometimes more vital to a seller.
We’re often asked, especially by private dentists, whether it is necessary to ‘tie-in’ for a period after completion. The general answer is yes, as the transition of patient relationships is a very sensitive area for a buyer and also the lending bank.
It also often suits the outgoing principal’s circumstances to continue working. And this is often on the income you generate working as a principal. The more it is, the higher the risk for a buyer and the longer you are likely to tie-in for.
An opportunity to negotiate
For a certain type of seller though – typically those who are enthusiastic about remaining involved clinically and working with a buyer to continue the growth of a practice – buyers are potentially willing to offer further incentives. These can include an equity participation where, as a seller, you retain a financial stake in the business. We have also negotiated alternative upside through the future revenue growth of the business and/or its profits.
The evolution of the traditional ‘deferred consideration’ is driven by competition between buyers. But also the changing view that, if a seller and a buyer’s interests are aligned, a business is more likely to flourish and both parties should share in the upside.
I’ve outlined examples of this below.
Deal structures
Most should now be aware of the ‘vanilla’ corporate deal. This is often for practice owners who remain clinically active in their practice and are considered ‘high grossers’ (usually with earnings in excess of £350,000 per annum). Corporate buyers will see them as a vital asset to the practice.
A typical deal structure would consist of deferring a percentage of the sale price, payable over several years and linked to the performance of the practice or retained principal. Buyers will claw back any underperformance on a £1 for £1 basis.
This type of deal is established in the transactional market. But it is less exciting and financially rewarding for some sellers, compared to deals that can, when successfully negotiated, include:
- Upside incentives for growing EBITDA and turnover
- Equity participation
- Compounded interest received on deferred consideration.
These types of structures are less common but can uncover when taking the correct steps and professional advice.
Questions you should consider as a seller
- Associate led versus high grossing dentist – how will this impact the deal I receive?
- I know any underperformance in target income will penalise me, but what if I overperform?
- Can I receive 100% of the offer value upon completion?
- My practice is predominantly NHS. Should I defer any of my offer value?
- I want to tie-in and grow the practice under new ownership. How long is a normal tie-in period for and how much of the offer value will the buyer defer?
- Am I getting the best possible deal by approaching a buyer directly, or by using a sales agent that takes a fee from the buyer?
Don’t leave the sale of your practice to chance
Negotiating the post completion terms in a dental sale is a highly sensitive and specialist area. Experience has taught us that the devil is in the detail.
As practices report some of their best ever trading months, now is an exciting time to maximise the best possible sale outcome.
More than ever before, it is vital that sellers seek trusted and professional advice when considering a sale of their practice. Sellers dealing directly with a buyer are highly likely to receive unfavourable and unrealistic conditions attached to a mediocre offer. Even worse for those who ‘sell their practice for free’. The sales agent then takes a fee from the buyer!
With the right information and expert advice, you can therefore be confident that the best deal will be attained.
To find out more about the dental market, or for a confidential chat about your business sale, contact paul.graham@christie.com.
