How to evaluate risk when selling your dental practice

Ads Thanki – When should you start your own dental practice? – part one

Ads Thanki outlines the potential risk factors in practice valuation and how to maximise practice value before you exit.

Selling a dental practice in the UK is a significant milestone for any principal dentist. However, many have unrealistic expectations about the value of their practice and the terms of sale.

A common statement might be, ‘I want a 9x multiple on £1M EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), 80% cash at completion, and no earnout!’, or ‘I want an 8x multiple on £500k EBITDA, 100% cash at close, with a 12-month transition period.’

Where do these expectations originate? With an abundance of online information, brokers and corporate buyers touting high multiples, it’s easy for dentists to develop unrealistic valuations. However, the UK dental market operates under unique conditions, including NHS contracts, private practice models and corporate consolidators – all of which influence actual valuations.

Understanding UK dental market dynamics

In the UK, the dental sector is increasingly influenced by dental corporates, private equity (PE) firms, and brokers who promise premium multiples, leading sellers to believe they can achieve significantly higher valuations than market reality.

Dental support organisations (DSOs) and private equity-backed consolidators seek scalable practices with strong financials, but valuations are dependent on various factors, including NHS contract value, private revenue proportion, and patient retention rates.

Where to seek guidance

Determining the true value of a dental practice can be challenging.

Many accountants and solicitors without direct experience in dental mergers and acquisitions (M&A) may overestimate a practice’s worth. Selling a practice is an emotional process, making it crucial for dentists to work with specialists who understand both buyer expectations and valuation drivers.

Evolution of UK valuation methods

Historically, UK dental practice sales were straightforward: a retiring principal would transition ownership to an associate, often valuing the practice at a percentage of turnover (typically 70%-100% of gross revenue).

However, with the rise of corporate dentistry and PE investment, EBITDA has become the key valuation metric.

While strong EBITDA figures can significantly boost valuation, efficiency and profitability play a crucial role. A well-managed practice with robust financial controls commands higher multiples than one that simply generates high revenue without optimising costs.

Disadvantages of the EBITDA valuation method

While EBITDA is a widely used valuation metric, it has several limitations in dental practice sales:

Ignores cash flow variability: EBITDA does not account for fluctuations in cash flow, which is critical for assessing the true financial health of a practice
Excludes debt and financing costs: since EBITDA ignores interest and loan repayments, it may overestimate profitability, especially for practices with high levels of debt
Overlooks capital expenditures: dental practices often require ongoing investment in equipment and facilities, which EBITDA does not reflect, potentially inflating valuations
Does not account for NHS contract risks: in the UK, practices with NHS contracts face regulatory uncertainties and contract renewals that EBITDA alone does not factor in
Can be manipulated: sellers may artificially inflate EBITDA by temporarily cutting costs or deferring expenses, leading to misleading valuations
Ignores non-financial factors: EBITDA does not consider factors such as patient retention, goodwill or staff stability, which are crucial for long-term success post-sale.

Key risk factors in practice valuation

1. Provider risk

Transition planning is crucial. Will the principal stay on for a period post-sale?
How dependent is the practice on the principal dentist?
Is it easy to recruit associates in the area?
Corporate buyers often require the seller to stay on for three to five years post-sale to maintain continuity.

2. NHS versus private revenue mix

NHS contracts provide stability but can limit flexibility in valuation due to fixed contract values
Private practices with strong fee-for-service (FFS) models can attract higher multiples but may face buyer concerns over patient retention and goodwill
Mixed practices often offer the best of both worlds, appealing to a wider range of buyers.

3. Location and demographics

Practices in high-demand areas (London, major cities, affluent suburbs) command premium valuations
Rural practices may struggle to attract corporate buyers due to recruitment challenges
Population growth, competition and local economic conditions impact desirability.

4. Financial health and market conditions

Lenders and investors scrutinise financial stability, growth potential and operational efficiency
Interest rates, economic climate, and regulatory changes (eg NHS contract reforms) influence buyer demand
The type of buyer (individual, corporate, PE-backed group) affects valuation approach and deal structure.

Maximising practice value before exit

To achieve the best possible outcome when selling a dental practice, preparation is key:

Improve profitability: optimise operations, control costs, and enhance revenue streams
Plan early: Ideally, start preparing at least 3-5 years before a sale to improve key valuation metrics
Seek expert advice: work with experienced dental M&A specialists, brokers, and accountants to navigate the process
Understand deal structures: offers may include deferred payments, earnouts, or equity retention; the highest offer isn’t always the best deal.

With numerous buyers in the UK dental market, finding the right match is crucial. An experienced M&A advisor can help position a practice for maximum value, ensuring a smooth transition for both the seller and their patients.

Selling a dental practice is more than just a financial transaction; it’s the culmination of years of hard work and dedication, and careful planning ensures a successful and rewarding exit.