Despite a consistently high level of interest in purchasing dental practices, 2023-24 was a quiet year in dental mergers and acquisitions (M&A). There was still the intent and the hunger to buy, but some buyers, particularly individuals, were less willing to commit to debt that would be more challenging to service, opting to watch and wait. NHS practices were particularly affected by the slowdown, caused by a combination of interest rates, UDA rates and recruitment issues.
However, there have been some promising changes, with levels of interest looking very similar to pre-covid levels. The type of practice new buyers can afford has changed due to several factors. Multiples can still reach 5x for owner-occupier sales, but only where there’s a reasonable cause for doing so. For example, location still plays a significant part.
Interest rates
The market was affected by the reality of high interest rates. In a relatively cash-rich marketplace, some buyers – predominantly corporate buyers – have used this as an excuse to negotiate more favourable prices. In some cases, interest rates were leveraged as a negotiating tool rather than authentically driving the market.
Interest rates have certainly affected which buyers have been attracted to the market throughout 2023 and 2024. Many dental associates still have the aspiration to buy, but many challenges associated with the higher cost of borrowing have changed the calculations, making it less appealing.
With base rate at 5.25 per cent over the last year, for every £1m borrowed, an extra £52,500 has been required to service the debt.
Pre-covid, a £1m practice might have generated about £600k to £700k in revenue per year. The principal would generally have expected to take home around £170k to £180k worth of earnings. However, the harsh reality is that those earnings would be significantly reduced by the difference in annual loan service costs.
The market has favoured a more business-like buyer. Many purchasers aren’t interested if they can’t grow the business. There is a ceiling price on a single-chair practice producing 9,000 Units of Dental Activity (UDA) per year. If a buyer has to commit to 10 to 15 years just servicing a contract, benefiting only from clinical profits, where is the arbitrage?
UDAs and recruitment
The challenge has not just come from interest rates. Recruitment issues have contributed to buyer caution. Profits have further been compromised for principals due to higher associate rates, with UDA rates not necessarily covering the cost. NHS practices have been the worst hit by increasingly tight margins from 2020 to 2024.
Many practices have had to increase UDA rates by up to 10-to-15-per cent or higher to attract associates, which has hugely affected margins. You can’t even guarantee a recruit with a £15 a UDA. The average of £11-to-£14 UDA for associates has changed the landscape for buyers, regardless of the 20 per cent increase on wages.
Whereas after covid, a dentist would have been better off as a practice owner, they might now be better off as an associate due to UDA rates being offered and the increased cost of debt.
Where do we go from here?
Since 2023, there has been a reassessment about what certain practices are worth. Many buyers paused and sat on the market, expecting a huge turn, but that didn’t happen. There has been a sudden change from July to September 2024, with activity and viewings returning to pre-covid levels. Buyers have more confidence in pricing, borrowing, and in the future.
First-time and second-time buyers represent about 67 per cent of the market, many of whom have been confident enough to borrow, and banks have been eager to grant loans.
The importance of a professional valuation
Multiples for sales to individuals have ranged between 1.57x to 5.56x across the UK, but this difference reflects individual variables above and beyond location that are important to note.
Location alone is not the end of the story. The higher end of the market consists mostly of mixed NHS/private practices, grossing around £600k. At the other end are mostly private or very small NHS practices averaging at around £300k-to-£350k gross, but so many other factors come into play. For example, you could be in London or Manchester with a very unsellable practice, or you could be in Ipswich with a very sellable practice.
It is important to work with a professional to look behind the data when entering the dental M&A market, as ranges and averages might be misleading without the accompanying rationale. Dental Elite has over 14 years of specialism in the dental sales market. Their approach always involves working closely with clients through every aspect of the sale, from the initial consultation, to matching clients with the right buyers and managing compliance with regulations.
The future looks bright for dental M&A, but to achieve results that genuinely work for you and your circumstances, it is important to work with an experienced specialist and get a tailored valuation.
References available on request.