Getting the best deal
Deferred consideration is becoming increasingly common in dental transactions, particularly when independent practices sell to corporates. Buyers are seeking to mitigate some of the risk of an acquisition by ensuring that the vendor assumes some responsibility for the practice’s performance post-sale. However, the structure of the deal can be just as, if not more important, than the ultimate purchase price.
Deferred consideration refers to when an element of the purchase price is retained and only released in the event that the business performance is maintained at an agreed level post-completion. Deals can be linked to a practice or individual turnover target, or the business’ post-sale EBITDA (earnings before interest, tax, depreciation and amortisation). In certain cases, it may even be agreed that the vendor works three days a week for a year once the sale process is complete.
What to do
In a perfect world, vendors of large private practices or those with short-term orthodontic contracts would acquire the full purchase price upon completion, however a deal without deferred consideration may be unattainable. If you are presented with a number of offers, how do you decide whether a deal of £2.4m to be paid entirely at completion is better than accepting £2.5m with £450,000 to be paid over the three years following completion based on the practice’s performance?
Aside from the obvious financial computations there are a number of additional factors that must be taken into account, such as what the deferred consideration is linked to. Vendors are strongly advised to accept a deferred element that is associated with their own individual turnover as opposed to the practice’s combined turnover or EBITDA, as once the practice is sold they will have little control over the associates’ retention and performance and also the cost structure of the business.
For principal dentists who are in the bracket of ‘high grossers’ (gross earnings in excess of £300,000 per annum) buyers will see them as an essential asset to the practice and are likely to push for a deferred consideration deal.
Whether you fall into this category or not, it is important to consider if you want to remain working in the business for a further three years post-sale. If so, you’ll need to agree protocols to be followed in the event that you fall ill or underperform. For example, if someone is covering your appointment book, ensure you can influence who this person will be and that you don’t forfeit consideration.
Some dental corporates impose strict tapering clauses, whereby for every £1 in turnover lost, £1 of the consideration is removed. But, bear in mind that the corporate will not have lost £1 in profit as they would probably have paid you 45p in the £1 to deliver the treatment. Similarly, if the same thing happened three years running you would have been penalised £3 for every £1 lost and at the moment they are not paying that much for practices in the first place.
Similarly, if the income falls below an agreed level the tapering can be stopped altogether and none of the consideration is paid, so it is important to contemplate the likelihood of this occurring and how close to the target this ‘collar’ is.
In addition, the present net values or the time value of money should be taken into account. Due to unearned returns, you will not have the money to invest and with regards to inflation, £20,000 in your bank account is worth more than someone paying you £20,000 in at a later date. The discount factor applied to the income over this time period varies according to opinion, but 7% is a typical yield on current property. For this reason, it can be better to take the purchase price upfront in some situations as the amount cannot be modified post-sale, whereas remuneration has the potential to change with as little as three months notice.
For practices that are predominantly NHS, deferred consideration is rarely used and although some corporates may try to offer a 70/30 deal, vendors should strongly consider not accepting this, as it is quite uncompetitive in today’s market. Gaining the necessary advice from a team of experts who are currently working in the market is essential.
The second largest specialist practice sales agency in the country, Dental Elite, employs a team of highly skilled practice valuers and finance experts who have nearly a century of combined experience across all sectors of the dental industry. They can advise you on all aspects of selling your practice and help you to negotiate the correct deal for you and your practice.
Unfortunately selling your practice is not a simple procedure and many aspects need to be explored when negotiating deferred consideration. With the right information and expert advice, however, you can be confident that the best deal will be attained.
Luke Moore is one of the founders and directors of Dental Elite and has overseen well in excess of 750 practice sales and valuations. With over 11 years working in the dental industry, Luke has extensive knowledge in both dental practice transfers and recruitment and understands the complexities of NHS and private practices.