After such a turbulent year, both the dental profession and the general population is slowly starting to resume some normality. This should eventually see the return of full UDAs in England, where NHS dental contracts will likely soon be required to complete in their entirety by providers. Aside from the challenges that the pandemic continues to inflict upon us all, this poses more interesting questions.
For example, is the ratio of NHS and private dentistry the same in mixed practices as it was pre-COVID? If not, how has it changed? What impact would this change have on the goodwill of the business? Though we are yet to find the answers, we can speculate what the future has in store based on what we know so far.
The UDA story so far
Traditionally, the size of the NHS dental contract and the UDA value contracted directly correlate with its goodwill value. Dental practice valuations are largely based on multiples of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) or Adjusted Net Profit before Principal Drawings – influenced by not just revenue but also the costs of delivery e.g., average associate fees and staffing costs.
Where a practice is contracted with higher UDA values, this more often than not will lead to a higher valuation than another business of similar size and performance, but which has a lower UDA value.
As you’ll know, all UK practices were required to deliver 45% of their contracts from 1 January 2021 until 1 April 2021, at which point the target increased to 60% of their contract – with a cliff-edge drop in funding at 36% for dentistry and 56% for orthodontics. At time of writing, the profession expects to deliver an increasing proportion of their contract delivery in the coming months. The question is, will this dip in income have impacted the medium-term profitability and therefore value of businesses?
A shift on the horizon
Though our own data differed from NASDAL’s recent findings, the general trends demonstrated are interesting to consider. They found that goodwill as a percentage of fee income across all dental practices dropped by just over 10% between January and April 2021, with NHS goodwill falling from 191% to 146% during the same timeframe. The same report stated that private practice values remained steady, though only at 110% of gross fees.
Fundamentally, the overall conclusions from this data do not appear to reflect the reality of what is happening on the ground, but this is not to say the conclusions are inaccurate. They are just too simplistic to draw a valid conclusion; large private practices are indisputably the ‘crown jewels’ of the dental practice sales market at the moment and competition for these kinds of practice has never been more fierce.
Comparatively for smaller private practices that appeal more to the owner-led market the market, demand is still variable with the hangover of apprehension from the COVID pandemic. A wide difference in appetite for these practices also exists, depending on their aesthetic appeal, type of work performed and geography.
Conversely, the opposite is true for larger NHS practices where there is still a busy market of corporate acquirers seeking to purchase these kinds of practice. However, the market is slightly smaller than it was in early 2019, albeit the owner-led acquirers compete more aggressively for this stock than they did in 2019.
Impact on valuations
We have seen relatively little impact on valuations for all types of practices, with a continued appetite and a steady flow of new businesses coming to market. While banks have remained confident in the dental profession with regards to lending, consistency and sustainability of accounts are more important than ever. Many practices have recovered to almost pre-pandemic levels and buyers are very much looking for this in any business they view.
Where some businesses have increased the proportion of private dentistry they provide, this could have two potential outcomes. If they are aiming to maintain their full NHS dental contract alongside the growing private work, this would increase turnover overall and therefore have a very positive impact on the value of the business.
Where private dentistry is replacing some of the NHS contract, this might cause a slight reduction in goodwill value if the gross contribution from the private work is less than that afforded by the NHS contract – although a much higher gross income than pre-pandemic could have the opposite effect.
What is meant by a decrease in gross contribution is that if the practice is afforded £28 per UDA and pays the associate £12 per UDA, then for £28 of income the associate is effectively paid 42.85% less shared costs. Traditionally, private practice may have paid the associate 50% of private work, which means the ‘UDA replacement’ private treatment priced at £28 would effectively see a fall in the profit for the practice of £2. To maintain EBITDA and profit, the NHS replacement income would need to equal £32 rather than £28 or the associate percentage is re-configured in order to maintain the status quo.
Still got questions?
The very nature of dentistry means that practice valuations can be an intricate and complex process, so getting expert advice and support is essential. Whether the return of the UDA has taken you back to pre-pandemic operational levels or caused a shift in how you work, getting an up-to-date valuation is always useful. The team from Dental Elite would be more than happy to help, offering valuations and a free practice health check to identify any areas where you could improve the value of your business for the most successful sale.
See the original article here: Dental Industry Review