Dr James, 0s:

The UK dental practice market is constantly evolving, ever-changing and dynamic, and that's why we're joined today by Mr Luke Moore, head of Dental Elite practice broker within the UK. Luke is going to be sharing with us the highlights from his company's recent market outlook report, so that we can get the best bits and also understand what we can expect in these coming months. I'm also happy to share that there is free verifiable CPD associated with this podcast episode. Whenever you finish the episode, all you have to do is click the link in the podcast description. It'll take you right through the Dentist University website. You'll be able to complete a short questionnaire and, once passed, you fill in your reflections and we'll go ahead and email over to you your verifiable CPD certificate, which is entirely free. What that means is this podcast episode will be able to contribute towards your verifiable cbd hours during this learning cycle. Look, welcome back to denison invest podcast. Let's talk, because that is something that you have released very recently with dental elite, right?

Luke, 1m 7s:

yeah, so we've um, so every sort of about may or may sort of mid-may time we release our annual goodwill report, which basically covers every transaction that we've acted on in the previous fiscal year, um up until the end of march. So it takes about a month or six weeks or so to kind of collate all the data. Um, and what that looks at is, as an agent, we act on anywhere between sort of 100 to 120 individual dental practice transactions in a year, and we think that's in a marketplace where roughly somewhere between 500 to 600 deals happen in a year. So it gives you coverage of somewhere between sort of 20 to 25% of the market. And as an agent we act on transactions that might be worth 50 grand, transactions that might be worth 10 million and 10 million pounds, um, and so it kind of gives you a broad flavor of what the trends are in the market who's buying, who's not buying, what they're paying, what they're not paying um and basically what's going on, whether that's nhs, mixed or private 50 grand for a dental practice. I mean, obviously that's when you've kind of got a far sale, so that. So when you're talking about those, they're normally losing horrendous amounts of money, which does happen, because don't when we do what. I guess the one trend is which we, to be fair, we don't talk about in the report um is that we are getting approached by more and more squats, um as in, and they're people who sometimes have been really successful. So we've had some really successful sales or practices that have only opened in the last sort of three to four years that have happened in the last year, where they've sort of built it up, got it to like a million to 1.2 million in revenue, said, look, you know what this is. As far as I want to take it a, because there's a pivot point when you sort of get beyond 1.2 to 1.3 mil where if you're selling the business, then you're more likely to sell to a group, and if you sell to a group you're more likely to have post-sale conditions, ie staying on for a period of time. So quite often quite a few of the frequent squatters for lack of a better word um will, um, uh, will tend to sort of get to that sort of 1.2 to 1.3 mark, and then sometimes we'll come to market and then they'll do it all over again in another town. So we see that quite a lot, um. But equally, what we also get is, unfortunately, we get the other side of the coin where we get people who've sort of spent 200, 300 grand on the site and it just hasn't worked for whatever reason, and so often and there's something there's no, there's no reason sometimes it's pure cash flow. Sometimes it's a case of, if I look to open a squat, you've got to be there, you've got to be available to treat patients when they want to be treated. But they've spent all of the money in getting money in, in borrowing a load of money to open this snazzy dental practice, and then they've forgotten the need to earn a living, so they've taken an associate job three days a week somewhere else and actually that means that the business can't thrive. At the same time, um, and sometimes it's just picking the wrong location, wrong area, whatever, um. So yeah, unfortunately sometimes we do sell practices 50 grand, and they're normally the ones where it hasn't quite worked out. Or sometimes you get a really distressed you know principal sale. You know someone, maybe down in the southwest peninsula, who's, you know, done doing a couple of underground private work and is just approaching retirement and just wants someone to take over the lease. Basically so it's a nominal figure interesting, interesting.

Dr James, 4m 0s:

I'm glad that I asked then, because it was just that that stuck out at me then I was like how does that work? So thanks for the context. 25% is quite the sample size of the market. So I think it's fair to say that any conclusions we draw from this, well, they certainly have some data to back them up, some good data.

Luke, 4m 16s:

Yeah, absolutely and obviously. I guess, in addition to that sort of 25%, what our team are doing is we're talking to M&A managers all day long. Talking to m&a managers all day long. So even if we're not directly acting on a sale, often we know what certain deals we have enacted on what multiples they've gone for. So after they don't feed into the report, they probably do feed into our valuation methodology when we're signing stuff off of our panels. So yeah, so broadly, we have an overview of what's going on across the whole market interesting, all right.

Dr James, 4m 40s:

Well, I'm intrigued to hear more. I guess a good thing to start off with asking is what do you feel has changed this year? Because this data is fresh off the flipping press, right. You know it's hot off the press right. So, as a man who's been in the business for as long as you have, there's going to be certain things that stuck out at you that were just like wow, this is different, or this is new, or that surprised me.

Luke, 5m 5s:

Interested, interested to know. Yeah, so I guess the I guess the first thing is is that a lot? I think there's a bit of an urban myth there out there that and most of the deals that we act on are sold to dental groups, um, whereas actually, you know, roughly speaking, that only represents about 30 of the market. Still, the most common purchaser in a in the dental practice market is someone who's buying their first, second or third dental practice and that is by far the vast majority of transactions, if anything. Actually the corporates and they'll come back to the corporates being quieter in a minute. But look at the corporates in terms of what people expect them to be, ie sort of the big five to ten corporates. You know your portman dentex is your envisages, your my dentist, your boopers you know they are still. You know they are still a lot, lot quieter and a couple of them aren't even buying at all. So people perceive that as corporate. Now, what I deem as a corporate and for the context of this survey, because we break the report into two is anyone who's already got more than five practices in their estate, and I guess the biggest trend at the moment is probably the most active buyers of what we call our tier four buyers, and they're the people who've got somewhere between five to 10 dental practices in their estate and they're probably the most active group buyers within that corporate selection at this point in time.

Dr James, 6m 13s:

Right, so you would define corporate as over five.

Luke, 6m 18s:

Over five. I mean corporate is a big word, it's probably the wrong word, but we call it groups in the report. So we say that basically, when you get to five practices, at that point you, from our purposes, are considered a dental group because you know, as most people will find, you have got to that kind of level. When you get to five sites, you're not in the site every day, you know you're not the principal dentist who's making individual decisions. At that point you start to have to have some infrastructure. So you'll start to see an area manager, you'll start to see maybe some sort of hr presence and you know, maybe a principal who isn't working in the practice, who it comes and does a visit once a month or something along those lines. So it's slightly it's a slightly different culture to what you've got when you're in sort of that one spot, one to four bracket interesting.

Dr James, 6m 57s:

Look, you know, just whilst we're on this teeny tiny tangent from the subject matter at hand today, when it comes to getting the finance for acquisitions, as in, you're the principal and you want to buy the next practice and the next practice and the next practice. People have told me or I've heard whispers again, to use your phrase you talked about earlier maybe a bit of an urban myth here that you hit a little bit of a glass ceiling whenever it comes to the banks being willing to give you funding at around a five to ten dental practice mark. Is that true?

Luke, 7m 23s:

and I think that is in part true. Yeah, because I think what we're starting to see and the reason why I think tier four, as we've dubbed them, are probably active at the moment is they had a really quiet period through covid. So I think a lot of them sort of you know, because they had a lot of individual bank debt that they'd given personal guarantees to they didn't really buy for sort of two to three years. So what happened was is they've paid down a lot of this debt and they've built up a lot of cash and now, all of a sudden, they've come back and said you know what? Actually, you know, I think these businesses are selling businesses and we're going to go again and they're buying, they're borrowing more money and then you know, they're leveraging, if you like, what they've already got within their existing estate for having paid down. Now, again, when you get to that five to dental practice mark is that the borrowing does become slightly different. So when you're borrowing a practice by your second or third practice, you're probably still getting away with borrowing 80% of the value of the practice with a 20% deposit give or take. There'll obviously be some nuances, Whereas when you get to the five practices mark. People want to see that there's more skin in the game. So, more realistically, you're having to put more of your own assets in, so be that sort of 40 to 50% mark. But sometimes that's not in cash terms. Sometimes that's by offering security over whatever growth you've got in your existing practice portfolio. But it's not quite as straightforward as going to the bank and saying, right, here's an individual asset, I want to buy it for a million pounds. Here's 200,000 pounds. Will you give me the money? Because they will consider everything else that's going on in the background and they're also going to want to see how your existing estate's performing. So you've got at that point. Often there is a bit of a pause because what banks want to see is that okay. So now you've got four practices. How well are you running them? Because we get you'd probably be a good dentist, but are you actually a good business person? And can you make sure all the wheels are turning if you're not actually in the practice delivering the income?

Dr James, 9m 7s:

and you know that's a interesting one because, uh, you know again not the really subject matter at hand for this podcast again today, but the shift from owner operator to associate led. You just have to know your numbers that much more. I was talking to an accountant not so long ago and he said James, it might interest you to know that in his experience outside the corporates depends how you define corporate. He said that you'd be stunned how few practices actually are associate led and he he reckons it's about 10 or so.

Luke, 9m 39s:

Yeah, I think that's probably accurate because most people will tend to, you know, buy the one, and that's why we deem them as one, two or three independents, because when you get to sort of the third practice mark, that's the point where you can't have a physical presence in every practice every week, you know, because very few principals go. I'll do one day here, one day here, you know, and they get to practice four, and they're doing one day a week in each, because people just find that quite destabilizing. So you're right, when you get beyond that sort of you know, most people, when they're up to that free practice mark, normally have some kind of clinical presence in the practice, you know, at least on a fortnightly basis, whereas I think and that's where your 10 figure comes in um, because most people, most practices, you know, within the uk, are still owned by the independent sector interesting and to throw another stat at you, what we dub as tier three and tier four. So that's anyone who basically owns from someone anywhere between five to twenty dental practices, that group of practices, and there's only actually about 600 unique ownerships within that.

Dr James, 10m 38s:

So it's quite a small group of people within that sort of five to twenty dental practice footprint yeah, you know, I'm actually even surprised that it's that much so, 600 people who have, who have that level of that number, yeah, I'm not sure people as in each might be.

Luke, 10m 51s:

There's some partnerships within that, but there's 600 different ownership um basis is basically within that group there you go.

Dr James, 10m 59s:

I'm even, to be honest, I'm even surprised it's that many. But there we are. But I love stats, so absolutely. Stuff like that is more than welcome on the podcast. I was going to say something. What was I going to say? Just out of interest.

Luke, 11m 11s:

I showed a podcast last Friday.

Dr James, 11m 13s:

I showed a podcast last Friday super interesting podcast I shot on friday last week with a chap, uh, in um scotland advanced dental care. I believe it's called philip fryle. Okay, oh, they're the frills. Yeah, 10, 25 dental practices and he still works four days clinically mind-blowing. Yeah, I mean it's great. That's actually a bit more common than you think.

Luke, 11m 36s:

So like you've got anushka brogan, um of demira against and I think she might be after 50 practices now she still does one day a week clinically. So a lot of you know quite often that kind of that grouping of sort of to the tier threes, to tier fours actually really like their dentistry and so they often still do a day a week and a lot of people are quite surprised that they do well, there you go, interesting.

Dr James, 11m 58s:

Okay, let's talk valuations, because this is some of the fun stuff that usually comes out of these reports and we did. This is pertinent because we did a podcast on this maybe like four or five months ago, so it'll be interesting to see how things have moved around a little bit. What? What are you seeing out there? What is, uh, mixed, mixed, private nhs? What are the valuations? How are they moving around?

Luke, 12m 19s:

yeah, so this of course based on completed transactions as opposed to valuations, but I guess, yeah, to do a bit of a stat dump then. So the average purchase price last year was £1,267,078. And that's for just the business element. So if we take out any properties, obviously they distort the figures. So that was the average purchase price of a dental practice we acted on last year. But you can kind of see the trends between the individual groups. So if you look at what we call our tier one buyers now they are people who already have more than sort of you know they're sort of 50 practices plus within the already within their estate. So that's sort of the big five. You can visit your departments. Their average transaction value for us was 3,245,000. And that's the same for the tier two. So the people who've got more than 20 practices already. They were 3,484,000. So what you can start to see is the bigger groups are moving towards buying bigger stuff. What they've dropped away from is doing a huge volume of acquisitions. They're focusing now on just buying really big deals and doing less of them. Now that's in part by design and in part by that's the way the markets move, because I guess what you've also got is, as I mentioned earlier, is a really active market of people who've got somewhere between five to 20 dental practices and because they're being more competitive, often they've got the ability to be more flexible in their deal terms. So, for instance, if you sell into a group, often as part of their covenants with the bank is that they have to offer 70% or 75% upfront and they have to defer 25%, and a lot of people have the misconception that that's to de-risk the deal, but often that's only in part. Often it's part of their lending that they can only borrow five times EBITDA at the point of completion. That's all they can pay at the point of completion and the rest of it is all about cash flow lending. So they're you, so all they're doing is basically borrowing the money off the vendor. Now, of course, if you're a tier four buyer and you're not and you're not answerable to an investment bank or you're, you've got more flexible lending terms within your existing estate. You may be able to pay more upfront and accordingly, that's where I think some of the bigger groups are losing out on some of the more mid-market deals and that was quite a big trend last year is kind of seeing how that happened.

Dr James, 14m 33s:

Interesting, okay, and then anything else that leapt out at you when you got the data stream.

Luke, 14m 40s:

Well, the other thing I guess is that the average ebitda multiple um last year was 7.16 um, which is actually a little bit lower than it was in previous years and and I think anecdotally a little bit, people were a bit confused by that, saying well, actually, you know, I thought the market was improving. You know, interest rate stability seems to settle down a bit. Um, obviously we've got the whole thing with trump and all the all the other stuff that's going on, so we're not in a totally stable world, but we're probably more stable than we were sort of two or three years ago. But I think the thing to remember is a lot of these deals actually um are deals that might because the average transaction takes nine to twelve months is these are deals that are kind of feeding through um that might have been agreed sort of nine months previously, when maybe stability wasn't quite the same. And secondly, going back to my, what my point was about the bigger groups is a lot of people now are taking the view but particularly because you know of that we seem to be in a more imbalanced economic climate is if someone says to you, okay, I'll give you a million pound, but I'll give it to all on completion. A lot of people are taking that deal. Then they say the 1.1 or the 1.15 um deal where I'm saying, well, I'll give you 70 on completion and then I'll give you 10 a year for the next three years on the basis of the fact that you guarantee the income and maybe you grow it by a bit as well. Um, people are saying, look a bird in the hands about them and two in the bush. And of course what that does from my perspective is it does mean that it does deflate the multiple slightly. Um, but it's, but he's quite again, you know that's more and more common that people are saying you know what? It's not all about the price for me anymore. I'd much rather take a deal where I know I've got my money and I've got the flexibility to do what I want. And I think some of that is where some of the bigger groups and I don't mean all the big groups by this by any stretch before someone that I get told off um is that some of the big groups have got principals now out in the marketplace who are now ex-principals, who haven't had the best experience post-sale.

Dr James, 16m 28s:

Interesting. So people are taking the cash up front, and that's more. You know the reason behind that, or at least the theory the reason behind that is is because they well, they sense potential turmoil coming up and they want to. Just you know behind that or at least the theory, the reason behind that is is because they well, they, they sense potential turmoil coming up and they want to just, you know, take the cash basically, yeah, I think everyone's got their own reasons as to why they do it.

Luke, 16m 48s:

I think for some people it's, you know, is that one of the main motivations for the sale of the business is to lose some stress, and their idea is is that if they've got all the money and they, they are then choosing themselves how much holiday they take and how much income they do post-sale is that that doesn't matter. I think actually, a lot of people find it more stressful sometimes to sell the business and then be tied in for four years with a target over your head, thinking oh actually, you know, can I take another couple of weeks off and go to the surf of France this summer? Oh no, probably not, because actually, as it stands at the moment, I'm only running to 88% of my annual target. I really need to be here delivering some dentistry and a lot of people, and I think some people look at it going well. Actually, to honest, why did I sell my business? I sold my business because I wanted more freedom and I wanted to be able to enjoy my life, and now I'm deciding not to go on holiday because I'm worried about my target understood.

Dr James, 17m 35s:

What about nhs versus private, any anything we can talk on there?

Luke, 17m 42s:

yeah, no, absolutely yeah so in terms of um at the moment it's fair to say that that difference between the markets. So if we're talking about sales to independence, nhs and mixed practices are still exceedingly popular, and a lot of that is because people still like the security of an nhs contract, so they like the idea that you've got that kind of guarantee, kind of monthly inflow. And so what we're seeing is that when you go into the areas where recruitment tends to be a bit easier because there is a geographical disparity between it, you'll find that NHS practices in particular do really really well in those areas. But also because people perceive that they can leverage a lot of the NHS into private dentistry and then if ultimately in three, three years time, when they've got their feet under the table, they want to do the private conversion, then then they can do it themselves. But at least in the interim they know they've got the security of getting their monthly loan repaid every month. And we see the same for plan practices. Actually plan practices do really well in the market for that reason, that kind of guaranteed, kind of monthly info um. Whereas, conversely, if you go to the group side of the market, actually you'll see the private practices tend to be the jewels in the crown, and that's what a lot of the groups are hunting down, because, arguably, in private practices you've got more control over your income. Thus you've got more control over the underlying EBITDA and profitability in terms of what's going on. Now you'll notice in the report that there is a degree of absence in data of big NHS practices being sold, and that's the reason for that is twofold. The first is that big NHS practices and we deem an NHS practice to be more than 80% of its income derived from NHS the ones in sort of the really urban, sort of London and Manchester kind of areas. They don't exist to the same level that they existed before, because a lot of people, as we've gone through the last few years there's been much more um disgruntlement with the nhs have moved their practices to be more mixed, so they've fallen under that 80 percent threshold. So so that number. I think the primary reason is that less of those practices exist. And the second reason is is that if you go out to the, the regions um, and what I mean by that is the areas where recruitment is deemed to be tougher um, which you can see on a heat map in the report. So I'm talking about the southwest peninsula sort of some, some stretches of the northeast you'll notice that sometimes those practices just don't sell because at the moment you know, there is quite a lot of uncertainty if I buy 30,000 UDAs in Cornwall, am I going to be able to find the dentist to service it? And some sometimes even if you put a low multiple on it, often it's still. Finding a buyer can be tricky. So there is a bit of an absence in data at that point. But I guess, focusing on NHS for a second into the regions and focusing on the recruitment side of things, you'll notice that if you go to the northeast and you're an independent buyer and you're buying here on a multiple of what we call fair, maintainable trade as opposed to EBITDA. So what I mean by that is it's the EBITDA plus whatever the principal would earn if they worked in their nine to 10 sessions a week. So it's a higher profit figure but you pay a lower multiple for it as a base. But if you're going up to the Northeast you're paying pretty much a whole turn less as a multiple of FMT than what you pay if you're buying the same price in Birmingham. Likewise, if you go to the southwest, you're paying 0.6 times lower than what you would pay in one of the urban natures. And again, that's two reasons. It's considerably less competition because generally if recruitment's tougher in an area, normally it's because less dentists live there, so you've got the same thing about if you're a buyer Less buyers live there, so you've got less competition.

Dr James, 20m 58s:

And I think the second thing is just that degree interesting and, yeah, completely get how people who are operating over 80 percent of their turnover is nhs is. That must be super flipping, rare these days. I mean mix. I can see how. Yeah, okay, cool that there'd be scope for a mixed practice in those areas, but you're going to get a lot of private football football in the center of those sorts of cities, so I can, I can completely see how that's a that. Well, that stacks up. Basically, and just out of interest, pure interest. Um, I know you said the report is more about valuations than multiples, but if multiples, I just find them so fascinating and I think a lot of dentists out there do. If we were to talk about the multiples of nhs using your definitions that we talked about just a second ago, uh, nhs, mixed and private. Uh, as things stand, ballpark figure, liquor figure, put her in the air. How do those, how do those compare? Uh, well, I can actually give you live data. So if I'm talking about a sale to an independent dentist.

Luke, 21m 57s:

So this is going back to our fmt, which obviously is most of our audience here. If you're buying an nhs practice, you're typically playing about 3.16 times as a uk average um fmt for that. And again to put a bit of context to that, the average fair maintainable trade in the report was 227 grand um and and that's on a typical revenue of 575 000. So it's about 39 of the practice turnover is typically fmt. So if you're paying 3.16 times for that, that translates into about 130 of turnover. To kind of make the maths easier. If you're buying a mixed practice, as I said, they are the jewels in the crown for the independent market. So you're typically paying 3.87 times FMT for that practice. Again, translating that back, that's about 155% of turnover give or take. And if you're buying a private practice and and the smaller private practice, as I said, do tend to be less popular because sometimes that people look and go is there a reason why this business hasn't grown? Um, they will. They typically get 2.96 times fmt, which translates into about 125 percent of turnover give or take interesting. So mixed right biggest multiples yeah, and I think that's yeah, it is because I think A it's a much bigger grouping, because it's anything that's more than 20% NHS and anything that's less than 80% NHS, it's basically everything in between. But secondly, I think it's because people perceive if you've got a mix of income streams, you've probably got a bit of plan, you've got a bit of hygiene revenue, a bit of NHS, you've got some security over the income, whereas I think sometimes if you're a fully private practice and you're a one-man band and you're relying on all the patients coming to the new dentist when it's sold, that's seen as a much riskier acquisition than something that's more mixed.

Dr James, 23m 42s:

And does that data change if we're talking about corporate acquisitions versus independents? Talking about corporate acquisitions versus independents?

Luke, 23m 49s:

Yeah, so if you look at it from a sort of sale to groups, if I find my right data table for a second so if you're looking at a mixed practice, they tend to sell for about 6.9. On last year, on average they sold for 6.98 times EBITDA. But again going back to my earlier comment, that's because there isn't that many predominantly NHS practices that sold, whereas the average NHS multiple was 7.2 times. But that's a really small data pool and that's often because people recognise if this practice is still NHS. Actually, there's probably a massive opportunity to be able to scope this and we did quite a few of those in London and the South East where people looked and said actually, do you know what? I can relocate this practice and I can actually rather take this from a two million pound revenue practice to a three and a half million pound revenue practice within two to three years.

Dr James, 24m 36s:

um, and it's quite interesting how you know those opportunities are really rare, but who prepare premium for them and they come up, um, whereas, conversely, private practices, which are the jewel in the crown for the group, sales to groups with 7.36 times as an average multiple and if I'm correct as well, correct me if I'm wrong the reason why those multiples are going to be so much higher as well is am I right in saying that whenever a group buys it, it's usually going to be more than one practice right which is going to put the multiple up?

Luke, 25m 2s:

yeah, um, no, groups do tend to buy more individual assets than they buy multiple assets. Um, again, I think that's something that sort of changed about four or five years ago is that to get a premium now on your multiple to be a group, you've got to have a lot of EBITDA. So we're talking sort of a million to one and a half million pounds in EBITDA to be really warranting some kind of premium on your EBITDA multiple as a group, whereas before I think five years ago people used to buy four or five practices, group them together. They're paid, say, six times for them and they go and flip into a group for seven and a half to eight times. There was an instant markup. Those kind of days have gone because I think a lot of the groups realized they bought rather than buying what they thought were buying. They were buying groups. They were actually buying just a collection of assets without any infrastructure. So nowadays A the market's got a lot more competitive, so they have to pay higher multiples for individual assets. And secondly, I think people will look at it and go what is what? Am I actually benefiting by buying multiple practices? Am I benefiting from an infrastructure? Am I benefiting from anything that resembles a group and normally you don't get that unless you've got at least a million to a million and a half in ebitda I'm actually really glad I asked that question then.

Dr James, 26m 8s:

Is it's much more nuanced than one would have thought then? Really isn't it by the science of it?

Luke, 26m 12s:

I mean five years ago. Yeah, buy a collection of dental practices, you know, bunch them together, sell them on, you get an EBITDA, you get an EBITDA markup. Just don't get that anymore look.

Dr James, 26m 20s:

Is there anywhere that the listeners of the podcast can download this report? Maybe we put a link below the podcast.

Luke, 26m 27s:

But of course if you go to the dental elite website there'll be a link um on there anyway which is dentalelite.co.uk.