Since the introduction of the new National Health Service dental contract in 2006 the market for dental practices has been extremely buoyant, with almost any premises featuring a dental chair attracting interest from potential purchasers. The natural consequence has been valuations with little or no genuine relation to the size, type, structure or profitability of the business.
In recent months a number of factors have coincided to encourage a more realistic approach, including a more stringent lending environment, with lenders often demanding a cash contribution or outside security as well as being persuaded by a sound business plan, the requirements of HTM 01-05, and the implications of Care Quality Commission registration for the provision of private dentistry.In spite of this evident tightening in the market, figures from the last quarter of 2010 and into 2011 suggest the demand for practices which benefit from existing NHS contracts remains strong, although the medium term future for NHS practices is clouded by some uncertainty as changes are about to be piloted in the structure of new NHS dental contracts. While the impact of abolishing the PCTs in favour of a central commissioning authority cannot yet be measured, prospective purchasers appear to remain confident that an NHS contract will at least furnish a stable and sufficient income stream to allow practices to remain profitable.
In the case of the transfer of private practices, where in recent years there has been a tendency to inflate the value of goodwill in overall assessments, realistic valuations are now critical for a successful sale. Purchasers are very aware of the stricter criteria being imposed by lenders, and are less concerned with possible future earnings than current profitability backed by proven, progressive past performance.
It is important the business is able to generate sufficient income to cover its existing costs, and to service any debt incurred to finance its acquisition or to ensure compliance with the latest legislation. A final, personal, element in the equation is of course the need for the business, whether NHS or private, to support the desired lifestyle of the purchaser, although in the present economic climate perhaps a hint of pragmatism should intrude here also.
The current pressure on discretionary spending has inevitably influenced the growth prospects for private practices, with those offering specialist or cosmetic services the most adversely affected as patients either defer treatment or seek less expensive alternatives. However, private practices offering core family dentistry are proving relatively resilient in defiance of the economic downturn.
One perhaps accidental result of the changes to the NHS contract in 2006 was effectively to cap the earning potential of many associates, an effect now carried over into the private sector as more patients tighten their purse strings. At the same time increasing costs, combined with an expanding labour pool, have persuaded many principals to offer less generous percentages; now more associates are seeking to further their careers or improve their incomes through the purchase of their own practices, and while this should not be overstated it is undoubtedly having a positive effect on the market.
The complexity of the present situation underlines the importance of the role of the professional agent in matching purchasers to practices, and in the presentation of business prospects to prospective lenders.