To answer this question, we used our market insights to look at purchasing criteria trends for larger dental groups. It is helpful to understand the history of corporate mergers and acquisitions within the dental market, how they have developed, and what this means for you.
A brief history of corporate acquisitions
The Dental Act changes in 2006 allowed for more corporate investment in the dental space. This was a highly competitive environment, and an EBITDA land grab followed. Purchasers were backed by private equity, who at that time took a short-term approach to acquisition – churning out buys and buy-and-builds over 3 years. However, this changed after some notable casualties due to the NHS recruitment crisis. Private equity firms faced being unable to sell businesses that couldn’t meet targets.
Apprehension around problems like this have resulted in corporates prioritising sustainability. They are now locking in responsibility and accountability through deferred consideration. Their margins are such that many will likely look to buy at no more than 7.5x and will lock in an exit EBITDA multiple of 12x. With head office costs, slippage and investment costs totalling at least 2x, this will leave them with 2.5x, which they will want to leverage and develop as much as possible.
Where does this leave you?
A very talented, high-grossing associate will have been a great asset to the success of your practice, but to a corporate this presents a risk. Associates could leave after a significant change like a merger or acquisition, taking EBITDA with them. In areas where recruitment is a challenge this is a significant challenge. Not only can you not achieve the profits that gave you positive EBITDA calculations, your healthy marketing budget and any specialisms promised but not achievable, could become a liability overnight.
Risks posed to a corporate by your successful associate, or certain specialisms will prompt them to offer a lower EBITDA multiple. You may well be better off holding on to the practice for 2 years, pocketing the profits, then selling to a tier 4 buyer (4-10 practices) with a lower exit deal, but without all the stringent deal terms.
While on paper, deals can look fantastic, the reality is more complex. Within your deferred consideration will be pressure to ensure business continuity, and that the 2.5x margin can be met and softened. You can receive significant bonuses from some corporates if you do so. However, before selling, you should be very confident you can bring in those additional funds so you don’t lose out.
The average 30% deferred consideration plus any bonus comes out of your hard work over that time. The corporate doesn’t borrow to secure this money for you, so their initial 70% outlay is their only investment. If you do want to sell to a corporate, finding a trustworthy buyer recommended by others, who is open to ideas to decrease risk, will create a far greater chance of a successful transition.
Who is actually buying?
Tier 1 groups often own hundreds of practices, and represent only 4% of the activity Dental Elite acted on last year. 70% of the sales in our goodwill report were to independents buying their first, second or third practice. Over the last year, we have also seen a rise in tier 4 buyers. The mid-market section represents about 24-26% of sales.
Dental Elite is a team of specialist dental experts with all the skills and knowledge needed to closely support all clients – whatever their goals within the dental market. Arm yourself with the knowledge you need to make your sale smooth, successful, and profitable with Dental Elite.
Before taking your business to market, a detailed understanding of your options, informed by expert advice will save you from taking unnecessary risks. Instead of chasing a corporate that calculated your practice is too good for them, you may decide to pursue a deal that leaves you far better off overall.
For more information on Dental Elite visit www.dentalelite.co.uk, email info@dentalelite.co.uk or call 01788 545 900