Paul Graham reviews 2020 and considers what is to come next year.
An unexpected shock to the start of the new decade, the pandemic outbreak has forced many businesses to close, leading to an unprecedented disruption of commerce in most industry sectors. While some businesses are struggling, some are thriving, particularly those related to healthcare. However, the dental market hasn’t gone unscathed – far from it. The spread of Covid-19 and the actions to contain it have had a dramatic impact on dental businesses throughout the UK, especially during the first phase of lockdown when doors were closed.
During the peak of lockdown, Christie & Co reported a significant slowdown of buyer activity and viewings, and practice visits stopped. For banks, the pandemic changed everything. Credit teams were fully deployed supporting existing customers and processing CBILS loans, which meant new lending became secondary. As a result, deal transactions were largely put on hold until a degree of certainty returned.
Nevertheless, it was encouraging to see that very few pipeline deals were dropping off – it seems most buyers took the view that their long term plans to acquire a practice remained, but time was needed to assess the potential impact on the target business.
Recovery
The dental arena has proven resilient during previous economic downturns, and it was always unlikely for the market to sit still for long.
The journey to recovery and reinvention was a significant focus, and a lot of progress has been made since the reopening of practices in June. The sector has turned massive challenges into meaningful change – it is evident that Covid-19 has placed a heightened emphasis on oral health and, despite lockdown 2.0, practices remain open this time round.
Today’s independent practice owners and CEOs of corporate dental groups continue to navigate the impacts of the Covid-19 pandemic. Many are already being assertive in order to emerge from the pandemic stronger. These leaders are facing the crisis with a spirit of reinvention – accelerating transformation, establishing variable cost structures, and implementing effective operations as a result of the recommended SOPs shared among the profession.
Within months of reopening, Christie & Co tracked various independent and corporate operators, all of whom were reporting a strong return of revenue, at least proportional to the number of patients they could see given fallow time restrictions.
What distinguishes them, in a word, is agility. From a common purpose, to rapid decision making, to empowered local teams, these companies and independent practices found ways to respond quickly to Covid-19.
From an operational perspective, the crisis environment has proven effective in changing certain habits and practices, many of which are likely to continue after the pandemic. These practices are becoming agile and ‘future proofed’. We’ve seen some of them coming to the market for sale already, with incumbent principals offering a continuation of their commitment post-sale and premium offers received which are comparable to those at the peak of 2019, linked to income recovery.
However, we also recognise that certain practices will not have the motivation or financial stamina to adapt, and a new class of the ‘get me out at whatever price’ seller will emerge.
Appetite
The market for dental practice sales continues to recover, with demand for practices across all price ranges having been much stronger in recent weeks. Whilst the volume of transactions is still lower than it was in the first quarter, we are now beginning to see dental sales complete in larger numbers across the UK.
We expect this reinvigorated appetite to continue as independent buyers secure their position in the profession by purchasing their own practice – a trend that dominates the market to the tune of approximately 80 per cent of transactions. For corporate buyers with ambitious buy and build targets, we expect them to now make up for lost time during the height of lockdown.
A recent analysis of Christie & Co’s activity highlights that we agreed £96m of new dental practice sales since June. This data was carved up further to pinpoint what value was being agreed to which buyer group.
For practices with values of £1m or less, we found the following:
- 80 per cent agreed to independents and first-time buyers
- 20 per cent agreed to corporates and groups
For practices with values of £1m plus:
- 33 per cent agreed to independents and first-time buyers
- 67 per cent agreed to corporates and groups
This buyer appetite from both corporates and independent associates has created increased competition in the dental market, bringing it to a level higher than has been seen in a long time.
Values
This is where the role of an experienced and specialist dental agent becomes incredibly important. More than ever before, it is prudent for sellers to seek professional advice when considering a sale of their practice. Even before Covid-19, it was far too often that sellers dealt directly with a buyer and received unfavourable and unrealistic conditions, attached to a mediocre offer.
Accurate pricing is essential in the current market. Premium prices for quality businesses are still achievable and bank valuers will use the latest set of accounts prior to lockdown to assess the current value. As the time since most practices re-opened progresses, buyers are able to assess how quickly turnover is recovering. Valuers will also look at how quickly private revenue is recovering and will make an allowance for the impact of fallow time and other temporary Covid-19 measures affecting the practice.
Outlook
The essential question: What is the right way to think about 2021 and beyond? Between new opportunities and enhanced operations, the market is likely to find itself in a stronger position as we progress into 2021. Many investors still take a long-term perspective; they are looking ahead to the end of the pandemic.
Many banks are now beginning to push on with pre-Covid-19 deals, particularly where recent announcements have provided clarity on key issues such as NHS abatement, return of routine dentistry, reduction of fallow time and, of course, the encouraging news of a vaccine being imminently rolled out. Credit remains cheap and buyers are keen to invest in a sector seen as resilient.
The simple fact of the matter is that there are more buyers than sellers of dental practices that exist – ‘demand’ is a formula which always holds merit in the successful performance of a sector.