Buying a practice? You may need more than just a valuation

Michael Hughes discusses the current dental practice valuation market.

Two recent cases have prompted me to comment that there are prospectuses issued by major sales agents in circulation that make statements that are at best disingenuous, and they certainly contain traps and pitfalls for the unaware. These generally relate to a significant overstatement of the potential profitability of a business.

Whether or not earnings before interest, taxes depreciation and amortisation (EBITDA) is used as a performance measure or whether some other form of analysis of the trading account is undertaken, the key is to separate out the true trading expenses from the non-trading expenses. The non-trading expenses generally comprise items such as depreciation, which is a financial adjustment to reflect the fact that things wear out, personal motor and travel costs, personal subscriptions and allowances, for example for use of your home as your office. In some cases items such as repairs and renewals that are actual expenditure costs that are incurred year in year out by every dental practice are being added back into calculations. Suddenly you are buying a perfect building that needs no repair and equipment, doesn’t need to be serviced and doesn’t break down!

A bit far-fetched in my view. There also seems to be a trend to forget upward adjustments where costs are likely to increase, for example where a building is being retained by the seller and the rent to be charged is either not included or not included at the level that is suggested that it will be within the prospectus. In some cases these figures can be significant.

Outlandish assumptions

A further important consideration is the prospective structure of the dental team. I have had very recent experience of a case where outlandish assumptions were made as to the prospective shift in balance between work carried out by associates and work carried out by the principal, even to the point where you had to consider whether the assumption was being made by the sales agent constituted an ethical delivery proposition. I would not disagree that an incoming purchaser is going to work extremely hard and that this is likely to boost the profitability of the business, but the question you need to ask is whether that is a viable long-term proposition.

In the headlong rush to buy and sell practices there is a strong temptation for corners to be cut. With at least one major corporate currently offloading practices it is clear that not every deal makes rational sense and it is imperative that the practice that you are purchasing works for you on every level and that you have a good understanding as to how it will work for you based on your own needs, objectives and circumstances.

The dental press is full of articles from sales agents boasting about the sale value that they are able to achieve on behalf of the vendors, however, maybe the tide is turning. Recently we have achieved six-figure reductions in the price paid against the advertised selling price, which is clearly to the benefit of the purchaser.

I firmly believe that the tide is turning and I’m hopeful that equilibrium will return with price paid matching more closely fair value of the practice.

For more information contact us on 0161 652 3304 or email [email protected].

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