Valuations of dental practices

Martyn Bradshaw explains the current market and what affects the values of practices

12 February, 2019 / professional-focus

Over the last decade there has been significant growth in the dental practice market and increase in the values being paid.

The demand

In 2006 there was a change to the Dentists Act, which allowed dental practices to trade as limited companies. This allows a corporate to retain profits (cash) in the business and therefore plan when and how to extract personal income. People looking to buy multiple practices can also use the retained profit to then fund the purchase of further practices reinforced by the significant increase in the number of smaller corporates. These smaller corporates are also competing in the market place with the larger more established practices besides the dentist who wants to buy and work in their own practice.

I estimate we are still selling about 70 per cent of practices to owner occupiers. However, each year this number is reducing, and most of the larger practices are being sought by corporates.

Who should you sell to?

This very much depends on your personal circumstances. The main things that may influence this are as follows:

Profitability will have the biggest impact on the types of buyers your practice will be suitable for (and what each type of buyer will be willing to pay). When valuing, we assess the practice under both associate and principal-led models. Valuations are now based on multiples of profitability and do not have any direct correlation with turnover. Once the profitability has been calculated for the two financial models, a multiple is applied to each. The reason for the multiple is that it is a return on investment for the buyer. As the profitability of an associate-led practice is generally lower than a principal-led one, a higher income multiple is used. Each model needs to be considered to see which will give the highest realistic value.

If, for example, the associate-led model gave a value of £500,000 yet the principal-led model gave a value of £400,000, then
all types of buyers would generally be happy to pay the higher £500,000 for the practice. However, if working the other way whereby the principal-led model gave a higher value, a body corporate would generally not be able to match the offer of a private buyer as they would not be able to achieve the return (income multiple) under the associate-led model.

The complexity of calculating these financial models should not be underestimated, as there will be a number of adjustments – removing all personal expenditure, items that are on/off or will not continue under the new owner and items that are ignored for the purpose of the valuation. As the profit is then multiplied, getting this wrong can easily cost thousands of pounds in values. I urge anyone seeking to sell to at least get an independent valuation (companies such as PFM Dental will provide standalone valuations even if you do not wish to use them as an agency).

Whether you wish to stay within the practice post-sale can influence the selling decision. Some of the larger corporates may request a retention (money held back from the sales proceeds) to ensure that you stay at the practice for, say, three years. There may also be targets that the outgoing principal has to commit to and achieve – which the repayment of the retention
will be based on. Those looking for a clean break may have better outcomes from private buyers, who are looking to come
in and replace the outgoing principal.

Maximising the value

As with selling a house, where you may be advised to give the place a lick of paint, there are ways to enhance the practice before marketing it. Unlike the example of the house, the main priority should be focused on the financial side of the business. An analysis of how the practice is working compared with other practices may identify some quick fixes. One of the main items that we come across is where practices employ hygienists. How are patients referred by hygienists, what pay incentive do they receive and is any charge made to the associate for the use of the hygienist? In a recent sale, we identified a cost saving of more than £40,000 by charging the associates for using the hygienists (they covered the hourly rate of the hygienist, while still receiving the fee income) and, as we were working on a multiple of five for that practice, this meant an increase in value of £200,000. The change to charging associates for using the hygienists was done within weeks (the relevant notice period was given) and we were still able to market the practice during the notice period. You do not need to worry that such changes will delay your sale.


The market is strong with a good number of buyers. This does not mean the sale of your practice demands less attention. To ensure you maximise the value, get the best terms and best choice of buyers to choose from, you should use a reputable dental practice sales agency.

Martyn Bradshaw is a director of PFM Dental and head of sales and valuations. Martyn undertakes dental practice valuations, sales and consultancy work advising internal buy-ins and buy-outs and structures. Go to: www.pfmdental.

Tags: 2019 / Practices / Professional Focus / valuations

Categories: Magazine / Professional Focus

Comments are closed here.

Scottish Dental magazine