Jonathan Watson discusses current deal structures when selling a dental practice and remaining on post-sale.
As we head out of the pandemic, there is significant demand for all types of dental practices across the market.
Still, there remains a relatively small number of practices available for sale and not enough supply to satisfy the demand.
This imbalance has made for extremely favourable conditions for those looking to sell their dental practice.
When handled correctly, these conditions can get you the best outcome for your sale.
Don’t deal direct
Too often, we see a seller receiving a direct approach from an operator or an associate in their practice. This can result in a mediocre offer with onerous post-sale terms.
It can be tempting to accept the first offer presented to you. However, it’s important to explore all options with a reputable agent.
An agent can quickly complete the deal and assist with any commercial issues that arise throughout the process.
At a time when a couple of the high street challenger banks have pulled back from the market, it’s wiser than ever to understand the buyer’s funding position before accepting a hasty proposal.
While dentistry remains a ‘green light’ sector for many lenders, it’s crucial to ensure buyers are well-backed or have assistance from an experienced mortgage broker who can arrange funds promptly.
There are more buyers for practices than ever before. Many operators are making up for lost time after a challenging few years, and new market entrants are coming in with aggressive equity-backed acquisition programmes.
This means that deal structures are extremely varied.
Thus, it’s important to seek assistance from specialist advisers who can help unravel the offer terms and negotiate a more favourable position for the seller.
Current deal structures
Deal structures can fluctuate dramatically, from paying 100% of the proceeds on completion, particularly with NHS practices and smaller owner-operated private clinics, to deferring a significant portion of the offer due to the reliance on the principal.
Most purchasers will defer proceeds in cash, but some operators will offer loan notes or shares in the acquiring company. The latter can be extremely lucrative, but it heavily depends on the individual’s personal circumstances and financial planning.
Where a clinician has significant personal goodwill, the proceeds are often deferred for longer (three to five years). This provides a gradual transition and alleviates the risk of patient drop-off.
The type of dentistry also plays a role, with general dentistry being easier to recruit and replicate. On the contrary, specialist treatments typically carry a higher risk, depending on the profile of the purchaser.
Remaining on post-sale after selling a dental practice
People, especially private dentists, often ask whether it’s necessary to ‘tie-in’ as an associate for a period after completion.
The general answer is yes. The transfer of patient relationships is a sensitive area for a buyer and its lending bank or institution.
It also often suits the outgoing principal’s circumstances to continue working, and this is usually on the income that they generated working as a principal.
Typically, the greater the principal’s personal income, the higher the buyer’s risk and the longer they’re likely to tie-in for.
When the principal is remaining post-sale as a clinician, it’s important to agree remuneration terms at the outset of the deal.
This includes negotiating the rate of pay for NHS, plan, and private treatments, the working days and hours, lab contribution and other adjustments, such as hygiene referrals and bonuses.
It’s also important to study the offer letter and subsequent sale agreement details, which often include a competition clause.
This will restrict the outgoing principal in acquiring or working in businesses within close proximity of their practice after completion.
This can vary in both the mile radius agreed and the period of time it applies for post-sale.
Maintaining or growing revenue
Typically, the principal gets a turnover target in line with their practice revenue. They must achieve this target each year of the tie-in for the deferred proceeds to be paid out.
This is sometimes adjusted in line with annual inflation or consumer price index, where there will be gradual organic growth.
Funds are usually clawed back annually against performance, with the mechanism varying depending on the purchaser and the deal achieved.
This might be, for example, deducting 50p from the deferred consideration for every £1 of revenue recorded below the turnover target.
While deals usually focus on maintaining revenue, there is currently a real surge by patients towards private and cosmetic treatments.
For this reason, inserting a growth clause will reward the seller for growing revenue over the coming years.
This is important to consider when the practice is still growing or there’s a specific patient demand with opportunity for a particular income stream.
Operators should take advice to understand the terms and implications of a proposal and negotiate a satisfactory offer level and post-sale conditions.
Approaching the open market gives sellers peace of mind. Only then do they know that they’ve explored all options and are receiving the best possible terms for their practice.