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Dentists Who Invest

Podcast Episode

Dr James: 

Fans of the Dennis who Invest podcast. If you feel like there was one particular episode in the back catalog in the anthology of Dennis who Invest podcast episodes that really, really, really was massively valuable to you, feel free to share that with a fellow dental colleague who’s in a similar position, so their understanding of finance can be elevated and they can hit the next level of financial success in their life. Also, as well as that, if you could take two seconds to rate and review this podcast, it would mean the world. To me, what that would mean is that it drives this podcast further in terms of reach so that more dentists across the world can be able to benefit from the knowledge contained therein. Welcome.

Andrew: 

Welcome to the Dennis who Invest podcast.

Dr James: 

Back everybody to another episode of Dennis who Invest official podcast, episode number 31. Apologies on my behalf for the brief hiatus between this episode and the previous ones. I’ve just been so insanely busy I’ve missed them. I’ve missed them. I hope everybody’s missed them as well as much as I have. That would be nice. But it’s nice to get back into the swing of things and we will resume regular weekly broadcasts from this point onwards. So again, once again, apologies on my behalf. Looking forward to getting back into the swing of things, I have actually arranged some really interesting episodes coming up over the next few weeks. So more space or more information on those as they’re being released. And we’ve got a particularly interesting one today because this is a post that ignited, I don’t want to say, controversy. It wasn’t really controversy, was it so much, andrew? It was more just a lot of interest really. There was a post on the group regarding the, the topic of this podcast, which is practice valuations, but with a specific focus on those intangibles such as goodwill, etc. What those terms mean and how they’re valued. Because that is, that is like black magic, wizardry. You know, how can you possibly extract a value from something like that? Someone is going to shed light on that today, someone that you may recognize from one of the previous episodes of the podcast. I’m very pleased to see him again, because it’s been a while since we spoke. Of course, he’s a very busy man and he’s taken some time out of his Saturday to talk to us All. His name is Andrew Acton. How are you today, andrew?

Andrew: 

I’m very good, James, and thank you for having me back. I know you’ve been busy, so it’s not been easy to fit this in with everything else that you’re going up.

Dr James: 

Oh, my pleasure. My friend, I know that you’re at a conference today, aren’t you? So you’re kind of just ducking out between lectures, isn’t it?

Andrew: 

I’ve just stopped here for an hour, which is good, but we’ve got plenty of time.

Dr James: 

I see Awesome, brilliant. So, as I say, this topic, the topic of today’s podcast, is going to be on practice valuations, with a unique, a little bit of a unique slant, because we’re going to focus on how those valuations are extracted from the intangibles that we spoke of before. So we’ll come to that in just a moment, but what I wanted to know first of all there is a lot of debate generally among dentists about how to value a dental practice, and lots of people seem to have a different view. Can you elaborate as someone in the industry? Can you elaborate on why you think this is? Why is there not just a clean cut? This is your bottom line, this is how much you’re bringing in, this is how many surgeries you have and therefore, this is what the valuation of your practice is. Why is that?

Andrew: 

I think it’s a bit like, you know, as a nation, we have sex about the value of things. We’ve got Houses, cars, stocks, shares. You know, I look at your Facebook group regularly and people comment on their shares and their Bitcoin and what’s going up and what’s going down and as a nation, we’re just obsessed about it. Therefore, it’s reasonable to follow that through to the value of dental practices and, in reality, the approach taken by many is quite similar in terms of the inputs and I can talk through what those inputs are. But the bit where it starts to become you know, to use your word, that black magic, that’s when you start to come down to the comparables and that’s when you look at an individual practice and you say, well, how does that practice compare to other practices? And, depending on the quality and age of your comparables, that’s when you start to get differences in terms of values, because some people talk to their mate in the pub and they might be using comparable of a different practice in a different area, of a different profile. So guess what? They’re going to get a different value. Somebody like myself. This is my world, so I would hope I’ve got a good database of comparables and I should be able to get down to a very similar practice in a very similar area. That sold for an amount and I would have that comparable. But from where I am to where some of these other people are, that difference is quite staggering. And that’s where the differences come and that’s where you get that debate and conversation about when I would pay more than next, or I think it was worth that, and for me it comes down to what are you basing that valuation on? Because if you’re not basing it on good quality, up-to-date data, then you’re probably going to get a number which might be some way from the truth.

Dr James: 

I’m going to say as well someone’s dental practice, it’s their baby, it’s something they’ve created and growing. Maybe there’s a little bit of a motive factor that comes into it as well, and maybe it’s up to you to just dish out the cold hard logic a little bit. I suppose from time to time Would you say that that’s something that comes into play. Oh, completely.

Andrew: 

I mean you get you kind of get. Practice owners fall into two camps really. You get those that have owned it for 12, 15, 20 years and it is their baby, it’s their life. They may have started it from a squat, it’s their wealth, it means everything to them. Their team members feel like family, their patients feel like family. It’s really important that that practice gets passed on to somebody who’s going to recognize their legacy and treat it in the way that they treated it. And that is a very emotional seller and for them, we might work with those people for six or nine months before they feel comfortable getting to the stage where they get a valuation and they start on the sale journey. Because there is a time, there’s the emotional time needed to reconcile the fact you’re going to be selling and at the other end of the spectrum you get very commercial owners who came into it with a view of getting out of a certain number and when they hit that number they want to go. So you get the two ends of it. There’s more people who emotionally attach to their practice than not and when you meet those people you can really feel it. You know it’s like yourself, you know you get. You get really invested in something.

Dr James: 

There is such a massive human factor in dentistry. There’s so many moving parts, so many people involved and yeah, I can totally understand why that might be the case. Someone’s just poured so much love into something that it’s hard to just see it in their cold, hard light of day because it’s entangled in this emotional aspect in their head. I totally get that.

Andrew: 

It’s all wrapped up together. You’re right, it’s all wrapped up and on that that’s, you can definitely spot the difference between an independent young dental practice and a corporate young dental practice. Because there’s culture, there’s, there’s a vibe, there’s a family feel to it. So, yeah, when it’s done well, it works. It works really well.

Dr James: 

I could totally see myself being like that, not really being able to look at it in a logical fashion, because I love it too. I don’t know, maybe I don’t know the factors, but I could see that someday. Yeah, let’s get under the bonnet. Can you walk me through when you’re valuing a practice? Can you walk me through that process, what you look at from start to finish to arrive at that final figure?

Andrew: 

Yes, sure, of course, Ken, it will take a few minutes, so bear with me. In essence, what we start with is we want to look at these financial accounts for the last three years. The last three years are important because if you have three years of anything, you can see trends, so trends in terms of income, core cost and profit. The caveat to that at the moment is most people accounts for the period 2020 are going to look old because of COVID. So 23 March to the minimum 8th of June, dental practice was shut, so we need to factor in that. The accounts of 2020 are going to be peculiar, so that needs to be taken into account. But, yes, we’re going to look at the accounts for three years. We want to see what the income looks like, core costs and by core cost are meaning staff costs, lad fees, materials, associate costs and hygiene costs. We want to get a good handle on what those are. Within that profit and loss, there’s also going to be the profits in at the bottom, but what we also do, which is important, is then look at what items we can add back to that profit, because you’ll probably be familiar with EBITDA. So EBITDA is earnings before interest, tax, depreciation and then amortization. And just to explain what that is the earnings is the profit and then the before. We add back to that interest, tax, depreciation and amortization. And amortization is depreciation of goodwill. And what we also do is we add back to other items as well, because there will be costs incurred on the business which are specific to the principal. So there might be motor costs, there might be using their office of home, there might be extraordinary travel and course costs that we increase it. And what we also do, importantly, is we get the practice to a state that reflects a full-time principal, that it may require an adjustment to associate costs. And when you’ve done that, you’ve then got a reconstituted net profit and that should be the profit figure which the buyer would effectively be taking on and would be the profit that would enable them to draw money out in the business themselves but also, in turn, produce the cash to repay their bank loans. So again, that reconstituted net profit figure is really important. What we also do is we look at management information as well and this is effectively the income that the practice has produced over the past 12 months. And going back to what I was saying about COVID, it’s important that we get up to date figures to see how the practice is performing now, because the now is really important. So we need to see monthly figures, ideally broken down by clinician, by income type, and we need to know what period it covers as well, because then what we can then start to do is build an idea as to what, on an annualised basis, the true income of that practice is for a full-year period. And what that also enables us to do is take out those rough edges of COVID, because we want to know what’s happening now. We then also want to see what the NHS income looks like if there is an NHS contract, and is that practice delivering? And I know the delivery at the moment is changing, and at the moment we’re leading the NHS practice delivery up to 60% of their contract activity and at some point that’s going to change. So we need to keep tabs on that. We also want to look at the plan-based income. If there is plan-based income, then plan practice, plan D pass, whatever it might be. What’s that monthly recurring income? How many patients? And then also the independent private density that’s coming in as well. So that’s kind of the number side of things, and again, the more information you can provide, the better. So if it can be broken down by clinician, that would be perfect. But with that information that’s going to enable us to do the financial assessment. But, as you’ve said, goodwill it’s an intangible. It’s not just about the financials. There’s a whole host of non-financial matters that we need to look at as well.

Dr James: 

Awesome. So that goodwill that you spoke of, that is something that intrigues me, because I just really wonder how you can quantify it. I get that it matters, but I just wonder how you quantify it. So is that something you can talk about a little bit more in detail?

Andrew: 

Yes, so we’ve got the yeah. So, in terms of how we quantify it, we look at all that financial information and then, when you want to quantify and analyze and assess it, you also need to roll into it the non-financial measures of that practice as well. So you need to look at the location of where the practice is. What’s the catchment area? What’s the demographic profile of the patients in that area? You need to look at the team members. What do the team members do? How long have they worked in that business? What’s the spread of skill mix within the practice, not just clinical but non-clinical as well, because all these factors are feeding into the overall performance of that practice. Small things like is there a car park? If you’re on a town centre and you have a car park, that’s a massive benefit. If you don’t, is it easily accessible by bus or a train? You want to get really under the bonnet and understand what makes this practice tick, because the numbers for me, the numbers are always just the representation of what that practice has been delivering. What marketing techniques are being used? Is there a well-developed website? Are they part of their local community? Is there a social media presence? All of this goes into the melting pot because that’s going to give me a really good three-dimensional view in terms of how that practice is set up. Once I’ve got all that information, I’m now able to consider what the value of that practice will be. I can now start to lay those numbers out and build that picture as to where that practice is at. What it also means is I’m now going to be able to go into my database of other practices and start to make some comparisons and say, right, so I’ve now got a free-serve you practice in this town centre, predominantly private, working out of a free hold property. What have other practices in that area and of that profile achieved on the open market? That’s when we start to get a bit closer in terms of what the specific value of that target practice will look like comes out of.

Dr James: 

The social media thing. I get that. I just feel like within my bubble, post-covid, it’s always been important. Now it’s evolved, it’s got this whole other tier of importance. It’s significant, it seems to, at least in my world, on my bubble and in my immediate circle of friends it’s taken on this whole new tier of relevance. I’m just wondering how much does that Instagram with 20K followers that’s assigned to a dental practice? How much does that add to the valuation in real terms and your experience? Is it a little or is it a lot? Hard to say, obviously, but I’m just curious. Real quick guys. I’ve put together a special report for Dentist entitled the Seven Costs and Potentially Disasters Mistakes that Dentist make whenever it comes to their finances. Most of the time, dentist are going through these issues and they don’t even necessarily realise that they’re happening until they have their eyes opened. And that is the purpose of this report. You can go ahead and receive your free report by heading on over to wwwdentistinevestcom forward slash podcast report or alternatively, you can download it using the link in the description. This report details the seven most common issues. However, most importantly, it also shows you how to fix them Really. Looking forward to hearing your thoughts.

Andrew: 

In isolation, 20,000 followers on Instagram doesn’t add to your value one bit, because the followers in themselves are worth nothing, because I could go and buy 20,000 followers in the next couple of weeks and I could have 20,000 followers. That doesn’t add value. It does add value is if it’s a well curated follow sheet. You’re posting good quality content and that good quality content is bringing patient inquiries. Those patient inquiries should translate into patients who then visit your practice and take treatment. That produces an income and, in turn, profit. In themselves, it doesn’t make any difference. However, if you’re using that platform effectively by posting good work to that potential patient base and they’re DMing you via Instagram and they come to the practice and receive treatment, then that Instagram channel is worth a fortune. It’s no different to having a good website. If I’ve got a really pretty website with loads of bloody pictures but nobody’s using it to come and receive treatment, to me, it’s worth nothing. When people say to me well, will you pay me extra for my website? If your website is as good as you’re telling me, that should be generating so many patients you can’t cope and that would filter into your financial performance. In isolation, none of these channels add value. What they should be doing is creating a world of noise which is producing patients to come to your practice, and it’s the delivering the treatment that adds to value. It’s not the glossy website.

Dr James: 

Just anecdotally, Andrew, I’m just curious. You’ve also been doing this for a while. At what point did that become relevant or did that become something that you would consider as part of a practice valuation? Having a social media presence Is that just been over the last, since post COVID, or has that been for a while? I’m just curious how long this has been something that’s relevant to your valuations or something you’re conscious of.

Andrew: 

It’s been for a while. I think websites have probably been around in terms of a serious marketing channel Only for about seven, eight years prior to that, they really were just electronic grossures. They were just a signpost to the practice, whereas now there’s some amazing interactive websites. We start to see people using AI within QIBE bots and ways of interacting with patients on there. It’s a great way to showcase some of your work. From that point of view, websites have been around for a while. Social media platforms we’re still in its infancy. There are very few people who are using social media in a way to engage new patients. Lots of people are using it to promote themselves or their practice. I don’t think they have the systems in place to really harness the power and generate new, new patients. I would say it’s probably no more than a year or two, but there’s some amazing accounts out there. Some people are doing it really well.

Dr James: 

Yeah, it can. From personal experience where I’m working at the minute and they use it extremely effectively. They’ve taken on member of staff who solely just films treatments they solely film treatments. And the number of patients that have come to me and said I’ve been following you guys on social media for two years and I’ve just taken the plunge and that regular content, it just plant seeds, it plant seeds and seeds and seeds and it just it translates into interests which can eventually be monetized. Go by it in the correct way. I know yeah and from go on, sorry.

Andrew: 

So I go. I was just gonna say I put from a practice value point of view. Having a number of strengths to produce inquiries is important. I always get nervous if somebody’s put all their eggs saying to the Instagram basket or just into Facebook. That’s dangerous because when they come through that channel because you don’t, you don’t own the algorithm If they change the algorithm and those people then can’t find you anymore, suddenly you’ve lost that as a channel. So I think, whilst it’s good to have like a baby I think it’s called a hero channel but you have this main channel that you focus on. I think you also need to have a number of different channels so you don’t become too reliant on one area, because if something changes and you lose access to those people, yeah, that can be a real problem.

Dr James: 

What about if Instagram goes out the window and tick tock is where it’s at, and tick tock is not something that I Feel like. I’m a little bit too old for tick tock and there’s probably a lot of people I don’t is tick tock?

Andrew: 

I think it takes over. I think a lot of us are gonna need to get dance classes on If tick tock becomes a way forward.

Dr James: 

See, this is what I mean, because this is what people watch and yeah, I don’t know, I’m yet to see someone effectively Married dentistry and dancing videos, but when that happens, I think that there could be a gold mine there, particularly for those sorts of patients who like their ABB and things like that Not to generalize too broadly, you know, but I Think also you’ve got to stay open to how things are changing, because you’re right, I think you know tick tock it did start as that kind of dancing and I think it’s moved on.

Andrew: 

You know, I I I’ve got an account, I look at it very frequently, but there’s all you people who are doing house renovations and they’re tracking their progress through tick tock. You know tick tock is is out there at the moment. You may have seen there’s also this new audio diet in that called clubhouse Twitter’s trick trick. So Twitter spaces, twitter, are coming up their own version. You know it keeps moving and evolving and I just think that, from a dental practice point of view, you need to be aware to being seen on the right platforms for your patient demographic because, remember, if you’re looking for, say, females in the 18 to 24 year category, it might be the tick tock is a really important channel for you and you need to embrace it and work with it. If you were looking more for the for the denture market and this is a generalization, but it might be that tick tock doesn’t resonate so strongly with people if you are in the denture market, I think you need to understand your patient profile and appear where they are, because I think lots social media platforms and, yeah, marking generally is there’s a phrase which is go where the eyeballs are and wherever people are looking, that’s where you want to pop up. So I think there is some work to make sure that you understand the demographic of who you’re trying to get to and then appear on the platforms that suit those, because, again, it’s all about getting patients in the chair, because that’s where you produce your revenue. It’s not just about a marketing game.

Dr James: 

I heard an interest in saying the other day attention is currency. Okay, attention is currency because you can monetize it and your reputation is leverage off that currency. You know, as everybody knows, lever it. Well, maybe not everybody knows, but leverage in trading is when you borrow money to magnify your position so you can increase your exposure by multiples by having a good reputation, which is your leverage effectively. So it’s just another way of thinking about it, which I thought was quite interesting. I did read as well on the topic of instagram and tick tock. I read that 60 percent of posts on instagram from pages over 10k followers Something along those lines are reposts from tick tock. So the content is actually originally from tick tock. Okay, so it just gives you a little bit of insight as to what way that shift in attention is moving. And I don’t even have a tick tock account. I don’t really even know anything about it, but I just know that if there’s a trend in there and that’s coming to surface, it’s worth paying attention to. And it’s those early movers that can be on a platform whilst it’s just expanding, that can really capitalize on that. Just something to think about, something to think about. So I had another question as well. I know that what a lot of people do. Perhaps they make the mistake of comparing their practice to practice that similar in their local area and deriving evaluation based on that. How important is that to your decision making process to arriving at the value?

Andrew: 

The the we’re back to the comparables. The comparables are critical and the largest determining factor in terms of the cap the top and bottom of your value is going to be the location. The location is going to drive the maximum you can achieve as a multiple and the minimum as well. But then once you get the location sorted, even within an area you know an in a lease hold is going to value different than a private practice in a free hold. And then you’ve got some vagaries and the like. So if you’ve got an NHS practice in a lease hold with a really short lease that isn’t protected by the landlord and tenant act, then you’ve only got three years to run on the lease. In theory it should have a high value because NHS practice is a sort of tough one. However, if you’ve got a lease that may not necessarily be renewed, that has taken the desirability right down to the bottom end of that range. Equally, if you’ve got a private practice with a free hold, that would value quite well relative to the practice with a lease hold but no security. And this is where the subtleties start to kick in and people start saying well, my friend sold for this and my practice is similar, and similar isn’t really good enough. You really need to dig a bit deeper. You need to know the location. It’s that location, the numbers, what is the tenure of the property? Who produces the income? And, sadly, everybody also wants to hear the biggest number possible. And, life being what it is, quite often people who have sold before possibly may exaggerate how their sale went. So what you’re?

Dr James: 

doing is with your deal, but reading between the lines, I’m sensing that this is something that’s been a bone of contention perhaps in the past. Is that fair to say?

Andrew: 

It is, and the reason it gets me is the shame of the whole thing is I don’t want people to start from the wrong place, because the first number they hear is the one that they believe. And if their friend says, oh, it’s worth a million pounds, and then they come to a guy like me and I’m like, well, I’m really sorry, it’s probably only 800. I shouldn’t be apologising, it’s 800. They were told a million pounds and that was the wrong number. So the start point was the wrong place, but, life being what it is, we feel like we’re then being dumbed down. No, no, no, I was told it was a million pounds. Well, you were told the wrong number and that’s why I think, sure, it’s good to talk to friends and people, but you really need to get this professionally valued by somebody who’s in the nut, because at least that way you’re starting based on facts. It’s a bit like you’ve got shares on the stock market and it’s not going to the official record of what the market value for those shares are on the duck and, honestly, a friend who sold some shares two years ago and he says, well, they’re worth 13 quid, and then when you actually go to the stock market they’re only worth 9 quid. You think, oh, what a shame. And it’s like, well, no, the 13 pounds was the wrong number. But you feel that you’ve been caught. You feel you’ve lost something. So I would encourage people to get it valued professionally and then you know what it’s worth. And then you’re dealing in facts and that comparable data. Not only has it got to be in the right area, it’s also got to be up to date, because practice values they tend to change about every nine to 12 months. So if you’re dealing with somebody who sold their practice perhaps two years ago, their value is going to be out of date relative to where we are now. So the word of caution is just be careful where you’re getting your advice from.

Dr James: 

Fair enough, interesting stuff. And just to wrap up, I wanted to ask short and sweet how do you know if your practice valuation is correct? Is there any red flags? If it’s on the market for too long and no one’s getting back to you, what’s your any rules of thumbs on that one?

Andrew: 

So when we value, it’s not an exact science. Lots of people think it is. They want to pin you down to a number and in my experience and I’ve been doing this for over 20 years it’s not an exact science. If I come up with a valuation and I’m within 10% of that number, either high or low I think that’s not a bad guesstimate on that number. Typically we sell practices for 97% of the valuation, so that’s not a bad guess really. But the two ways you can make sure that the valuation is the best valuation you can get and it’s being tested is the first thing is any practice for sale should go on the open market, so it should never go to a limited audience, because a limited audience isn’t gonna get you the best value, so it always has to go to all the people who are looking for practice in that area. So the open market is absolutely critical. And then the second way is and the approach that we use at Frank Turner Associates is we use a sealed bid process, and a sealed bid process basically means that people get to put an offering for practice but if there’s multiple people who want that practice, everybody who’s interested gets only one chance to put in their best and final offer. So if the valuation of the practice was a little bit low, that’s gonna get reflected in the market because when people get their opportunity to put in their best and final offer, they may put an offer of 10, 20, 50, 100,000 pounds more than it was valued for because of the competitive market. And that protects us. To make sure that we always get the best value for our client and it sells to the best price, we don’t do bidding, we don’t do an auction, because that’s just not fair. It takes an exceedingly huge amount of time and ultimately what happens in Mike’s is somebody overpays and then through the sale process they then want to renegotiate the price. But by going to the open market and using a sealed bid process anybody can take confidence that the value of their dental practice or the sale price achieved has been the best that was available at that time.

Dr James: 

That’s awesome, andrew. Andrew, this has been absolutely filled with golden nuggets today, can I just say, and even though I don’t own a dental practice, I’m definitely going to keep a lot of this stuff in mind, should that day ever arrive. Andrew, thank you so much for taking the time to talk to us today. Is it anything that you’d like to say, just to wrap up? Anything powerful, punchy and impactful, or you’re quite happy with everything that’s been said so far?

Andrew: 

No, I think the key thing is, if you’re going to get your practice valued, get it valued professionally. The danger of talking to friends is you’re going to get a skewed position and it might be skewed up or it might be skewed down, but you’re not starting from the right place. So I encourage everybody get their practice valued independently and start from the right place.

Dr James: 

And, as I recall you saying in our previous podcast, Andrew, when you’re thinking of selling a practice, it’s not just about getting that valuation on the day you decide to sell. It’s even worth getting an opinion, maybe even a few years beforehand, or even just a touch base, because there’s certain things that you can implement so that, when that day does arrive, you can be valued as much as possible and there might be some worthwhile investments that you can do in the meantime. That was the one thing that stuck. That was one of the things that remained with me from the previous podcast. That was what you said, wasn’t it Andrew?

Andrew: 

100%, james. 100% I mean in a perfect world people would talk to me two to three years before they sell, because if there’s nothing to do and they just maintain their position, then they’re no worse off than just carry on performing well. However, as you said, quite often I can come up with ideas of things to improve the performance either increase the fees and adjust their work and styles so they add more profit to the business. And if people come to me two or three years before they want to sell, I can have an impact and I can help increase the value of their practice. If there isn’t anything we can do, then there’s no downside to it. There’s nothing worse than people coming to me saying can you value my practice today and I want to start selling it tomorrow Because there’s no opportunity to do anything. So no, I’m glad you remembered that bit, because that’s a good one.

Dr James: 

That was really good. It really stuck with me. Yeah, cheers for that Awesome Andrew. Well, as I say, another podcast filled with absolute golden nuggets. I think for anybody who’s listening today, they’ve probably learned a lot. Thank you so much for taking the time to talk to us, andrew.

Andrew: 

No problem, thanks a lot.

Dr James: 

Speak very soon, my friend, in a bit. See you later.

Andrew: 

Yeah, cheers, James, farewell.

Dr James: 

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