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Dentists Who Invest

Podcast Episode

Full Transcript

Dr James: 

What is up everyone? Welcome back to the Dent soon invest podcast, and this is a podcast that we’ve been meaning to do for a while on the journey of the individual, the associate, most commonly the journey of the individual, the associate who wants to buy their own practice. What do they need to watch out for, what should they consider and what are the inevitable pitfalls which we need to overcome in order to be successful? And who better to answer that question than practice broker Martin Bradshaw? Martin, how are you? I’m very good yourself. I’m wonderful. Martin, whereabouts in the world? Are you speaking?

Martyn: 

to us from. I’m currently in New York, so I head offices in New York, although a combination wide, but the majority of my time spent here it’s sunny York, beautiful.

Dr James: 

Well, york is pretty picturesque and scenic actually, right, it’s a beautiful town.

Martyn: 

It’s nice to get around almost a minute, but it’s nice to come.

Dr James: 

There’s worse places to be based. Absolutely lovely. Okay, good stuff. Well, let’s get straight down to business. So the point of this podcast is the journey of the dentist who is wishing to undertake practice ownership, and the reason that we chose the journey as our model or as the theme of this podcast is because it’s very nice, it’s very poetic and it kind of conjures up this imagery of the romanticized entrepreneur and the struggles and strife and all the things that they go through in order to achieve success. Plus, it’s chronological, which makes sense to us. So let’s put ourselves in the shoes of the associate who’s maybe just come out of university for a few years and has now got this cash pot building up, and they begin to think to themselves hmm, I’ve got this cash. It’s gathering dust to a degree in the bank account, which is a very dental problem to have, by the way, because we’re very fortunate, and most other professions they don’t even have that dilemma, so to speak. But as dentists, through doing what we do and being having some level of aptitude at it, we tend to accumulate some cash in our bank accounts, which is great, and that cash ideally would have a home in order that it might work for us, and one of the ways we can do this, one of the most common ways, is that we buy our own dental practice. So let’s put ourselves in those shoes off that individual, as I say. They’ve got that cash building up. They’re beginning to put the feelers out for dental practice. What do those people need to know? Martin?

Martyn: 

I think it’s funny because I think a lot of people actually fall accidentally into buying practices and whether it be seeing as the thing to do at the time that their friends are all doing the same. And I think it’s really important to view it like any financial investment that you need to be ready for it, you need to have a plan and you just need to make sure that you’re buying the right thing for you. So typically, our purchases would be maybe 28 plus, so obviously, a fair few years of experience, which is required in reality. And that’s that’s for the bank’s purpose as well. So, typically, banks once want to lend to somebody just out of VT, so they’re going to want to see somebody who, clinically, is experienced, as well as some level of business experience and, as you say, to some degree also having the financial backup, and that doesn’t necessarily mean that they’ve got 20, 50,000 pound in cash. It is just showing some level of stability. So what? What really happens is practice. Sorry, associate, considers how I want to buy a practice now. So so what? What do they look for? Well, first of all, they need to really look at the type of practice that they want to purchase. I do. They want to buy a principal led or an associate led practice. And this is this is key really for for what we talk to with, with buyers and determining exactly what their future plans are. And it may be a hard question when you’re talking to somebody who’s 28, 30, who is thinking I want to purchase a practice, then thinking about their life for the next 20, 30, 40 years, because in reality most people will buy a practice once, or certainly the people who don’t purchase multiple practices will buy a practice and generally keep it until retirement. So it’s a long investment, there’s no doubt about it. So we like to we like to have a discussion about exactly what somebody wants out of a practice. Do they want a practice that they can go working and do they then want support of other dentists I, two, three associates or do they actually want something that’s a bit more flexibility? That might be an associate led practice I it might have four associates and that that person purchasing can take over from one of those associates, but typically it doesn’t need a principal in it. It is quite a difficult concept, I would say, to get your head around, and the way in which I try to explain it is a 200,000 pound turnover practice has one dentist, they have fixed overheads of 100,000 and they have their profits of the remain 100. Now if you imagined me as a non dentist then owning that practice and I suddenly have to pay an associate 100,000 pound in addition to the 100,000 over heads, there’s no profit in it. So for me as an associate led practice, it doesn’t. It doesn’t make sense. You then look at something like an a million pound turnover practice, maybe fixed overheads of 300,000. I’ve got associate these lab material or 500. Then there’s a profit, regardless of whether I’m a dentist or not, of 200,000 and therefore we class as an associate led. So he can be, he can be run by somebody who isn’t working in the practice. Obviously the dentist go can go in and work in there and then reduce the associate costs and generate more profit. We give some more flexibility and I think that’s virtually key to determining the right type of practice that somebody wants to purchase.

Dr James: 

Awesome, so that would be one of the most common pitfalls. What are the other things that we should look out for on top of that? Maybe if there was like a top three? I feel that would be hugely beneficial for anybody who’s teetering on the brink of making that decision.

Martyn: 

I think once you’ve determined the type of practice that they want to look for and, as I said, that to me is certainly key the second thing is really looking at projections for that individual. So what somebody might have an idea as to how that practice would work for them might be totally different to a second person and a third person. So how they’re going into the practice and are going to replicate what the principal is doing, are they actually going to do less and therefore need more associate costs, or are they actually going to build in some specialism and suddenly the practice is going to be significantly higher gross fees than it was previous? So every single person will actually have a different level of projections based on that practice. So what we typically like to see is somebody really looking at those details, and it’s also something that we do with clients. So it’s not saying to somebody right, you need to worry about this, this is what we do, this is bread and butter for us, but it’s making people realize it’s really important and a practice that comes on to market just happens to be in the area that they’re looking, because they might not be typically right for them, because it might be somebody who is playing to our children in the next 12 months and it’s a fully principal led and it doesn’t work if they’re not working, so is that right Then secondly, let’s have a look at some projections, really determine how is that practice going to work for you, not just now, but actually what’s going to happen in five years time? What are you going to do with that practice going forward? And that again might then say actually this practice isn’t suitable. I’ve got this beautiful practice is profitable. It’s got two surgeries, there’s myself and an associate working in it. I want to bring another three or four, so associates in, I want to bring specialisms in, but there’s not the room in the building to do it. And yes, you can, you can relocate, but again, it’s just determining that. That your plan is whether that follows alongside total curiosity in my part.

Dr James: 

Okay, how many associates do you find come to you with this very pre determined plan I where they say I want to practice that has these projections, does this, does that X, y and Z is very like, I say, pre determined idea of what they want to purchase. Versus the other type of associate I suppose our, I imagine, that you might get who comes along and says, hey, I’ve got this money. I’m thinking about buying a dental practice and then need a little bit of guidance. Would most people fall into the second category or would it be more the first category?

Martyn: 

So it’s interesting. This is where I say people accidentally fall into it. I would typically say somebody looks at a practice it may be registers they decide that practice ownership is for them. They register with agents, they get details and a practice generally, look, look, local practice is probably one of the key drivers, for people will see a practice and say, okay, I found this practice, I want to buy it, but actually has had, haven’t had that consideration, and it’s only generally when we start going through what they’re doing and what they’re going to be purchased in the practice for which is part of what we do when we put together finance projections for the bank so it’s really putting a fairly simple mini business plan together for the for the banks and it then transpires that actually sometimes the practice isn’t suitable and generally I would say most people at that point have hopefully found that actually this practice isn’t isn’t going to be right for them. So it’s generally early doors. But what I would say is generally I’m seeing people have found the practice before they actually determine whether it’s suitable for them. So the bit of going the wrong way about it rather than determining, okay, I need to look at practice. This is one need from a practice. It’s actually I found this, does this suit my needs? Or going down the line. And then we’re actually asking the question is this soup? Is it future proofing for you, for you.

Dr James: 

Maybe it’s making that decision more with our hearts and our heads right.

Martyn: 

I think it’s always been a hard market because the demand has been so high for dental practices and certainly has. I mean I’ve been in PFM since 2004,. So 2006 really changed. Of the NHS contracts. Also, allowance to set up limited companies really drove a significant increase in the market and corporate activity and the limited company was the thing that brought in the corporates. So I think there has been a little element of I found something that is in my locality I must purchase. So I think that that is a factor for some people. But I mean, invariably most practices can develop, so actually has the ability to do what people want to want it to do. It’s just making sure that if it’s a three year, five year project, that you can get there, or whether it’s something. I’ve had people that, for example, have a practice, they already own a practice, and then they say, okay, I found a practice down the road, I want to purchase it and it’s a principle like practice and it’s been valued on that basis. So therefore, financially, that’s how it needs to work to generate levels of profit. And then you say, well, if you’re working in the new practice, who’s going to stick over the other one? Because invariably assuming you’re generating 200,000 gross fees as the easy maths, for you’re going to lose 100,000 in profit from your first one or your second one, because you can’t be in two places at once. And sometimes we do have people that are looking at second practices and actually that they’re on practices, that they’re principle letter rather than associate.

Dr James: 

There we go. Question NHS versus private. How many people come to and say I want an NHS practice ASAP?

Martyn: 

Does that still happen? Yeah, so I mean back. I mean again going back to 2006,. Demand for NHS obviously went through the roof. The, in essence the NHS contracts was prior I mean too young, I think but prior to 2006,. We’re on just a fee per item. So you saw patients, you put a charge in and then you got paid. 2006 came along, there was a fixed amount of funding for NHS dentistry. So what that’s created is a barrier to entry for new practices, for squat practices which we used to have. So suddenly the only way in which you could really I mean Doug you’re on the. There are some now and again you do see some funding available, but generally the only way in which you can purchase an NHS practice is to buy one, and so NHS was always generally the easier to purchase from a point of view of less risk post the new contract in 2006. I think age was irrelevant. So again, you 28 to 30 year old generally had more experience in NHS than private and was more comfortable with it. However, interestingly, we are seeing a significant increase in demand for private post COVID. So the demand for NHS and obviously the extra work required within the NHS post COVID has had an impact on NHS practices and I would say, typically, what might have been 90% NHS, 10% private demand is more like 60-40 now. So it’s really it’s still probably more NHS than it is private. Oh, okay, yeah, and again we’re talking individuals versus corporates is a different kind of a fashion and corporate you primarily would say 70% more looking for private practices than NHS, but actually you wouldn’t occupy NHS is still in high demand.

Dr James: 

There we are, because when I said that earlier, I thought you, I was expecting you to say that that’s not something that happens so much anymore, but still it’s still out there, it’s still, there’s still demand for NHS practices.

Martyn: 

And a lot of it comes down to. Again, looking at the financials to some degree and this is what we always did with corporates is you ignored. The income type was whether it be NHS or private. Turnovers, the turnover, the profits, the profits. Yes, obviously you’ve got to work within a structure and, whether that be NHS or private, but obviously people still like NHS. You tend to find that people, if they are buying an NHS practice, still have the ability to convert that practice if they want to further down the line. So so NHS is still still has good levels, levels of demand.

Dr James: 

There we are, lovely stuff. I suppose I am a little bit, but yeah, yeah there we go. Interesting Okay.

Martyn: 

So I think private private as I say certainly certainly has increased in interest and it’s certainly from what we’re seeing, because obviously we see the recruitment side when we’re talking to our clients, because obviously they what we are finding is that associates are not wanting to do as much NHS there’s no doubt about that and our clients are struggling to find NHS associates more than private associates. So there’s no doubt that that is applicable in today’s market.

Dr James: 

There we go, interesting stuff. I suppose where that surprise came from for me is because when one spends time on social media we tend to get a disproportionate perspective of just how much private density there is versus NHS. And the NHS isn’t glamourised as much, and that’s not to say that it. You know you can’t do lots of good density in the NHS, but it certainly doesn’t get as much airtime on social media.

Martyn: 

Yeah. I feel, I think you’re right. I think that the marketing side has always been a lot higher on private, as it needs to be. I mean, you used to have the old thought process you set up an NHS squat and you had the floods of people at the door. So I mean again, you’ll be too young, but it’s 20 miles down the road for me, scarborough. There were paper articles of somebody opening an NHS practice and literally a Q mile long of people looking to register. So I think you’re right that especially cosmetic elements of private dentistry has a lot more marketing and needs a lot more social presence. I mean, the lights have been visible and it’s gone through the roof post-COVID as well, and those all need good marketing.

Dr James: 

Lovely stuff, interesting. So anything else that you’d like to say to that associate who’s just about to take that leap before we move on to the next step off the journey? Anything else of relevance?

Martyn: 

I think one of the big things that I remember when I started at PFM was we used to look at making something cost neutral. And I think this is key because I think, again, there is some level of romance about purchasing a practice and suddenly believing that there’s going to be an instant increase in profitability. And the way we always used to look at it was if you’re an associate earning, let’s say, 80 to 90,000 pound, and you could purchase a practice, you could finance it and cover the tax. If you were still pulling the 80 to 90,000 pound as a practice owner, actually it was cost neutral to you. Yet you’re building an asset, you’re purchasing an asset. Over the 15 years of your loan repayments, you’re actually repaying that loan, and the way I see it is that it’s like an ISO, it’s like a pension, it’s another way to invest your money. Yes, it might not be reaping you an extra 100,000 pound a year and, to be fair, some practices do but even if it didn’t, you’re actually paying for an asset. It’s about the bit like buying a house, isn’t it, that you pay your mortgage and then, once you’ve paid your mortgage off, you’ve got the house to then sell. Yes, obviously you still need to live in a post retirement, but you don’t with the practice. So a lot of people use the sale price and when they come to retirement there’s a big part of their investment and I think that is something that people really need to consider and it’s not always the glamour of the significance boost in profitability and that can come over time. That can come over five years when you’re building the practice.

Dr James: 

So I had an accountant on fairly recently, and I believe he also broke his practice as well, and he was saying that he’s only ever known of one instance where someone’s purchased a practice and they’ve sold it on for less than they bought it for. Okay, now, that’s not to say that it always works out like that. So I just want everyone to hold their horses after hearing that. But, of course, there’s certainly a theme there, a very strong theme, and what you’re saying is you borrow, let’s, let’s pull these numbers out of there. You borrow a million. Here’s the interesting thing about inflation and how assets appreciate. Right, you borrow a million, right, and yeah, you’ve got your interest on top of that, I get right. But if the interest rates extremely low, higher than inflation, right, then actually there is, there is a profitability in there, because the difference between the inflation rate and the level of interest actually is an extra margin of profit for you, because that currency, which you’re always getting devalued, while generally most practices are, tend to tend to appreciate. So you have this tailwind effect in essence, with me.

Martyn: 

In reality, even if it stood still, you’ve actually got an asset, that you’ve cleared the loan, a million pound. Let’s say, as you say, you purchase for a million pound with a loan, maybe some elements of cash, but actually you’ve still got that asset to sell. So that million pound, even if it stood still, would then generate the million pound of which you wouldn’t if you were, if you were remaining as an assertion. But generally, yeah, I agree that in my, in my nearly coming up to 20 years, I don’t think I’ve seen, I would have to analyze it, but I can’t. I can’t think of many instances where a value would have gone down.

Dr James: 

There you go top stuff. Let’s progress the journey as promised. Let’s put ourselves now in the shoes of the individual who’s just bought a practice. So they’ve just come through that process. In fact, there was one other thing I wanted to ask. Let’s just roll back from that from two seconds. Loan to value ratios super important, right. So let’s. Let’s say so when, in the housing market, let’s say you want your buy to let, you have to have 25% of the value of the house as a deposit. Right, let’s take that logic and apply it to dental practices. What is your? I don’t even know that’s the right terminology, but what is the typical loan to value ratio? What is the capital that we have to put down versus the value of the business?

Martyn: 

so. So in reality, I mean the answer is 100% finance is possible. Oh wow really. However, typically 5 to 10 percent deposit is ideal. Now there are some also then some banks that require 20% deposit, which opens you up to more options. It unlike residential mortgages. There isn’t a Rate for your 100% and then you 95% on to values, then you 90 and then you’re 80%. Where residential, you generally see that they the more, the more deposit you’re putting down, the less loans value. I either less borrung as a percentage gets you a better interest rate. Doesn’t work like that with practice purchase. No, it’s very much on the deal. So so typically you’re probably talking in the region of two to three percent plus base For for a reasonable size practice and it doesn’t often change If you, it doesn’t change at all. To be fair, if you’ve got zero deposit, 5% deposit or 20% deposit, yes, you’ll have a different option of banks and therefore numerous different options. But in reality we went to one bank and said this clients got 5% deposit or this clients got 15% deposit, the rate possibly going to be the same. So so it’s useful to know that, because I think a lot of people do Similarize it with residential mortgages and and I think, okay, I need to have this deposit so that I can get the better interest rate, which which isn’t true. What why would say with deposits, however, is that when we look at the borrowing is based on affordability and and the way in which affordability works again very different from residential mortgages where we might be talking a full multiple on you, on you on your earnings and, nice and easy, your earnings are 150,000, you can borrow four times multiple so you can buy 600,000 pound house. The way in which dental practice purchase or work so are any commercial loan, to be fair, is that they look at the affordability of the loan. So how that works is that they will look at the projected profit. So this is again why you need to understand the personalized position of that practice for you as an owner, what your personal profit is going to be, less the finance costs, less the tax, and then Unless your personal requirements. So if you have a drawing requirements of five thousand pound a month and and there’s nothing you can do about it is carry payments and loan repayments, then that has to be built in and then there has to be a surplus and that surplus generally has to be around about 30% alone amount. So Sounds complicated. So if we put maths to it, probably the easiest thing 150,000 pound profit, I’m going to make the tax up. So let’s assume it’s a limited company corporation tax of 20%, just for ease and maths. So that bring it down to 120. Let’s assume the finance costs were 40. That brings it down to 80. If you had 40,000 pound of drawing requirements, that leaves you with a surplus of 40. I can’t remember what did I say. The loan payments were going to be, I think I said about 40,000. So that would fit because the 40,000 pound surplus is at least the third of the 40,000 pound loan repayments. If there was a surplus of only 10,000, then actually the banks would say there’s not much affordability there because it’s not hitting a percentage of the actual loan repayments. Because they need flexibility, that they need to make sure that anybody can repair the loan subject to something happening. They would also calculate it on a higher level of interest rates. So the clients are double protected to some degree that the banks will look at a higher level of interest rates and they will also look at there has to be a surplus of cash Probably why. That’s sorry.

Dr James: 

I thought you were finished.

Martyn: 

I was going to possibly why. That’s also important and this is again is key for people, preparing is significant. Loans can massively affect the affordability. So people really need to consider if they are purchasing a practice in the next couple of years, really looking at the overheads. And if somebody, if somebody in that example I gave, if somebody said I actually need 6000 pound to cut my overheads, actually that that calculation probably wouldn’t have worked.

Dr James: 

Gold dust. Thank you so much for that. That’s a really, really, really nice breakdown of how that works. I actually didn’t know that and it’s interesting that that’s a kind of counterintuitively, I believe, is the word that it doesn’t actually make any difference in terms of the interest rate necessarily as to how much deposit that you put down, which is totally different to houses, of course.

Martyn: 

Well, I forgot to mention, actually, while you’re asking about lunch, lunch values. So when, when we look at somebody’s position, if let’s assume we said 10% deposits, ideal equity is as good as cash. So if, for example, you had a 500,000 pound house with a 200,000 pound mortgage, you and I would or your audience would probably go, okay, I’ve got 300,000 equity. But it doesn’t quite work like that’s. The banks often will write down that property value by 30%. So knock 150 off, given a value of 350 is a written down value less the 200,000 pound mortgage, so there’s 150,000 pound deemed equity. Obviously there’s more equity in it than that, but that is as good as cash. So we can actually if, if the clients wish to give a second charge on the property, that’s as good as given the bank 150,000 pound in cash. So often where we look at these 100% is not necessarily because we’re not giving anything towards to the bank and they get an 100%. It’s actually that we’re using equity in other properties that allows us to actually not have to put cash in, but great from a client’s point of view because they might want to use that cash that they’ve got to their legal fees, obviously potentially standard to the person, the property, but also renovations. On the practice. They might want to put new systems in place. That’s going to cost them.

Dr James: 

With the obvious issue, potential issue being that your house is now your collateral, of course. Just to spell that out.

Martyn: 

Yeah, absolutely. I mean a second charge, obviously, people. I mean it’s like a residential mortgage the charge over a property is de-risking the lender’s position and that be a first charge with your residential and a second charge with potential with a commercial loan.

Dr James: 

Cool. Now let’s progress on to that individual who’s just bought the practice They’ve just set up. It’s their first Monday in the job. They’ve taken the reins. The reins are now firmly in their hands. They’ve taken over. What are the things that they need to know or be aware of so that they can be successful?

Martyn: 

I think take it easy. It’s probably what I might be given an idea. I’ve come across where we’ve saw practices in the past. I do remember one purchaser literally closed the practice down for a week, ripped everything out, put new chairs in reception in and don’t get me wrong it looked stunning. It did not go down well with patients and staff. I mean this person had literally come in on the Monday morning and did everything. So I think, take it easy. I don’t think there’s any requirements to do everything straight up front, bed yourself in, make sure that everybody knows you knows your plans, especially staff. I mean staff want to be comforted on the fact that everything will stay the same. People like stability but progression, and I think anybody wanting to go in and purchase a practice should see how things are going because actually, what an outside person might think is something wrong with the practice, they might actually get in there and think, actually I can see now why you’re still not right. But even if it’s not, it’s just taking the time. It’s creating a plan and making sure that you do actually do things after 12 months, after 18 months, rather than jumping in and think you’ve got to change things from day one.

Dr James: 

Words of wisdom right there. That’s awesome. Anything else you’d like to say to that avatar of that individual who’s just bought the practice, or is that the main thing?

Martyn: 

I think getting the correct advice is really important. I mean, interestingly, probably going on from and contradicting what I’ve just said. I think there is some level of somebody getting into a practice and then realizing five years, 10 years down the line they’ve actually not done anything with the practice and all those plans that they had have just got forgotten about because they’re so involved in the day to day transaction of dentistry. And so having a plan is very good and, I think, trying to stick to it. So again, I’m sort of not contradicting myself because I think it’s important to take the time to do it and to make sure it’s done at the right times, but not forgetting about it. So, although we’re not going in day one and actually changing everything, making sure that that plan is known to your accountant, is known to somebody who you’re going to be speaking to. That’s going to help hold you accountable to some degree. So probably that comes on to making sure that you have good advice going forward and making sure that people that are acting for you act in a way that or provide that assistance for the specialism that you have. And I mean, to be fair, you probably know that part of PFM, as we look after 1400 clients on our dental accountancy side and now, and people like the specialism, people like having somebody who understands UDA’s clawback, how clawback should be implemented into a set of accounts, understanding regulations and associate pay it’s really having the right people acting for you going forward and you really start to read your journey. The journey doesn’t start the day by the practice. It’s actually that it’s the start of the journey for you next 30, 40 years.

Dr James: 

Love that. Again, some words of wisdom, Martin. There’s been tons of those on this podcast today. Certainly some real gems in there. Thank you so much for your time. If anybody who wants to reach out to you off the back of what you’ve said today, where are they best to find you?

Martyn: 

Probably our website pfmdentalcouk. Our telephone number will 9 up for 670820. Website have all the information about us.

Dr James: 

Wonderful stuff. Thank you so much, Martin. We shall chat again super soon. Yeah, lovely speaking.