Practice valuations – is NHS goodwill declining?

Practice valuations – is NHS goodwill declining?

In a recent Practice Plan webinar, sales and marketing director, Nigel Jones, was joined by head of dental at UNW, Mike Blenkharn, and specialist dental accountant, Alan Suggett, to discuss the state of the practice sales market. Here are some of the observations they made.

I’d like to talk about what’s happening to NHS valuations. In England where you’ve got a cap on your contract value, you have an inability to pass on any additional costs caused by the sky-high cost-of-living to patients. That must make the squeezing of EBITDA on practice values in general much more acute in an NHS practice compared to practices that could potentially compensate to a degree.

I was with a practice only a few weeks ago that is really struggling. They’re struggling to recruit an NHS associate. They are contemplating going private, but one of the things that’s holding them back from making the move is a perception that their practice will be worth less if they go private compared to as they are with the NHS.

So, what is happening to NHS values? What is the relativity when it comes to NHS versus private practice?

MB: I’m going to be very careful how I answer this, because I sat as a panel member in the Practice Plan Dental Business Theatre at the Dentistry Show in May last year, and I categorically said NHS practice values would fall. And then in the first NASDAL goodwill survey I was responsible for, NHS practice values had increased.

Generally, the way NHS dentists have had to deal with Covid-19 and lockdown and the recovery of the business, and the uncertainty of what’s happening with the NHS contract, I think the values continue to be depressed.

Whereas private practices have seen a slight increase in goodwill values in the most recent quarter. So, from looking at the NASDAL goodwill surveys combined, I think we are at a position where private practices have overtaken NHS practices in respect of goodwill value as a percentage of turnover. And I imagine that’s going to continue. Now, the only caveat to that is what’s going to happen if we do end up in a sustained economic recession.

There are two schools of thought here in the feedback I’ve received from private practices. In one, we’re not going to be affected. Our patient demographic is people of a retired age and they’re not affected as much by the cost of living increases. We’re not seeing a drop in our waiting list. Our books are still full. So, brilliant, fantastic. That’s what you want to hear from a client.

The other, mainly private, clients are seeing a slight drop in interest in treatments and the waiting list, which maybe was at three months at the peak is now dropping back down to two months. I think that’s naturally going to feed through into the financial performance and will then impact the goodwill values. However, I still think private practices are going to maintain a good strong goodwill value and NHS practices are probably going to stagnate behind them.

AS: Nigel, I think the point your client was making is that they were nervous about changing from being an NHS practice to a private practice simply because the multiplier, the percentage of turnover, the mathematical way of working out goodwill, would penalise them in some way. If we assume that continues to be the case to some degree, I think it’ll be more than compensated for by the increase in profits.

When we talk about NHS practices there is a whole spectrum. There are those on £23 a UDA and those on £36 a UDA, basically for doing the same treatments, and they are averaged. And so, you’re getting an average of a whole bunch of different things. I think the contracts that are likely to be handed back more frequently, are the lower UDA ones.

So, what you have then is a population that’s biased towards the higher end of remaining. Naturally the average would go up even if nothing changes, simply by virtue of the fact that the lower value ones are being handed back. So, we’ve got to be really careful how we analyse all of this. And I say that as the person that looked after the NASDAL survey for many years. I used to have this line: ‘be very careful with averages because, if your head is in the oven and your feet are in the fridge, on average you’re at the right temperature.’ But what use is that?

Yes, I remember reading an article where you’d put that in, Alan. But I also remember reading various goodwill surveys when you were involved in them where you appeared, slightly mystified at how NHS goodwill values were holding up.

AS: Yes. And I was mystified why, initially, most of the corporates were only interested in NHS practices. Now, of course they were only interested in the £30 UDA ones, which is perhaps the answer to my own question.

But the other interesting NASDAL survey is the one annually on dental profit loss accounts. With the exception of the first year of Covid-19, the 2020 year which was a blip, there’s been a steady decline in NHS profits per principal since about 2009. A steady decline.

So, why would anybody want to invest in an NHS practice given that graph is coming down? Particularly, with the attitude of the government to NHS dentistry now. Is there going to be a huge boost to NHS profits because of the fact that the system is on its knees? I very much doubt it.

I wanted to talk about the recession. Within the Practice Plan group of companies, we have Medenta, which is the patient finance side of things, and they’ve just had a record month with mostly funding straighter, whiter teeth.

Now, you could interpret that as being a sign that people are finding things tighter so they’re turning to finance more often. But most of the feedback we are getting is, that although the waiting list might be shortening, there’s still a waiting list. So, they’re still able to drive up a lot of business on the cosmetic dentistry front. However, that might be an area that’s probably most vulnerable as we head into the recession, if the financial crash of 2008 is any indicator.

Another point I’d like to make, is that we’re not seeing any evidence whatsoever of an increase in cancellations from plans. It was completely flat right the way through last year. Now, of course it could be different as this year goes on, but we didn’t see an increase in cancellations after the 2008 crash. We might have seen a slight drop-off at the time in the number of people committing to a new direct debit, but they weren’t giving up existing direct debits.

MB: I agree with you, Nigel. I think private practices are still doing extremely well, but the acid test is when we do the March 2023 accounts. A March year end is the most common one the vast majority of our clients have.

Now the most recent accounts we see generally are the March 2022 or April/May 2022 accounts, which predates a lot of the impact of the increased cost-of-living. So, I think we will be better able to judge when we see the March 2023 accounts.

Thank you both. Let’s see how things pan out.

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