Demand for practices remains good
Martyn Bradshaw, of leading sales agency PFM Dental, on how increased borrowing costs have impacted dental practice values and how this will affect demand for practices in 2024
For 13 years before March 2022, the Bank of England base rate had been no higher than 0.75%. Since March 2022 we have seen significant rises, with a current rate of 5.25% (as of January 2024) which now looks to have stabilised. However, when talking about the Bank of England base rate it is important to note that, before the banking crisis of 2008, the base rate was also around 5% and the previous 40-year average was 7.2%. As such the current rate is probably trending back to ‘normal’, rather than being high.
Around 2006 the way in which practices were valued changed from using a percentage of turnover to a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation). As such, a multiple of an adjusted profit figure is used. For the purposes of the EBITDA calculation ‘interest’, i.e. bank borrowing is ignored. Historically, low borrowing rates over the past 15 years have in reality driven demand and values higher without affecting the buyer’s affordability (take home profit after tax and finance). As such the EBITDA multiple used had crept up from a circa 5x multiple to a 7.5x multiple under an ‘associate-led’ model.
Examining the affordability of practices (profit less tax, less loan interest) there is no doubt that the previous multiples cannot unfortunately be sustained, based on the increased cost of borrowing. This is the same for corporations and individuals. However, it is important to also confirm that we have only seen a softening of the multiples with a reduction in the region of 0.5x and there is still strong demand for practices.
Demand for dental practices remains at a good level, and those looking to sell their practice should not worry
As the financial viability of practices tightens, vendors must show their practice in the best light, while ensuring that the buyer is confident with the figures presented. As a professional agency, we will demonstrate the current income and costs whilst removing personal costs. This is vital to ensuring the highest valuation. Such costs may include indemnity insurance, personal GDC registrations and other personal items.
We are highly competent in reviewing the EBITDA of the practice and calculating this under an ‘associate-led’ and ‘principal-led’ model. The calculation of the actual EBITDA of the practice is likely to have the biggest impact on any valuation.
Especially in today’s market, a buyer and their professional advisers need to be confident with the figures that have been put to them, something that an experienced and trusted sales agency can do with ease with a comprehensive brochure of the practice for sale. This ensures that a buyer can put in their best offers, knowing that they can proceed with confidence.
In summary, there is no doubt that the increase in borrowing has impacted the values of practices, due to the calculation of affordability. However, this is only a small reduction in the multiple being used, and not any significant drop. The calculation of the EBITDA is as important as the multiple being used to ensure that the value of the practice is maximised. Demand for dental practices remains at a good level, and those looking to sell their practice should not worry.
PFM Dental is a leading professional adviser to dentists for sales and valuations of dental practices, financial advice and accountancy services.