When it comes to the valuation of a dental practice, there are two important reasons why it should be evidence-based.
Firstly, if a practice valuation is not evidence-based or is overestimated, it’s likely the vendor will have problems attracting interest in the sale or they will receive offers not in line with the asking price. Either way, it is probable the practice will remain on the market for a lengthy period.
Secondly, an incorrect valuation can lead to significant problems further down the line. Once an offer has been made on a practice, a bank’s final loan agreement is dependent on the valuation of the practice by an independent valuer. This ensures the valuation is in line with the proposed purchase price. Should there be an anomaly in the valuation when compared to the agreed purchase price, the bank can refuse to lend, putting the entire transaction in jeopardy.
What’s plain to see is it’s essential that valuations reflect both current market rates and attainable asking prices, and this can be achieved using evidence-based criteria to make the process as objective as possible. This is why it makes sense to enlist the support of a dedicated dental practice broker, who can help you achieve the right valuation and manage the practice transition.
A valuation is the first step in the sales process, and, before a practice comes to market, it is necessary for everyone concerned to gather a significant amount of information to ensure the valuation is realistic.
Speaking as one of a team of dedicated practice brokers, here are some of the steps we take to reach an accurate valuation:
- We go through an earnings before interest, tax, depreciation and amortisation (EBITDA) calculation to make any necessary adjustments to the profit and loss account. This includes removing personal costs, such as claiming for personal motor expenses, and any one-off costs in a given year, such as a new IT system or treatment centre
- To ensure an evidence-based valuation, it’s important to incorporate anticipated financial changes before they happen. For example, annual adjustments to the minimum wage and any change in the percentage of staff pension contributions an employer needs to pay. Similarly, for practices with an NHS contract that receive an inflationary increase each year, we incorporate the uplift as soon as these are known
- For a vendor wishing to retain the freehold of the building, we compile a 16-page evidence-based report on commercial property rates in the local area to ensure the rental expectations of the owner are appropriate
- Every practice is valued for purchase, either by an individual dentist (owner occupier), or by a group/corporate provider (associate-led). These have different operational costs and valuations associated with them, and we take account of this when determining the valuation.
To ensure an evidence-based valuation, it’s important to incorporate anticipated financial changes before they happen
The valuation multiple
Once adjustments are made to the figures, a valuation multiple is applied. To ensure this is evidence-based, there are several different factors to consider:
- Bank valuations: with most transactions requiring a degree of bank funding, it’s important to understand how banks are valuing practices. To ensure consistency in valuations, our finance team is in regular contact with major banks’ specialist lending teams and underwriters, so we can understand the levels of lending they are willing to go up to, and mitigate any risk of the transaction falling through
- Market data: this is invaluable when selling a practice. Our data allows us to look in detail at the practice location, then compare it with any practice recently sold in the surrounding area. This shows how many buyers were interested, the number of viewings, the level of offers received and, significantly, what multiple of EBITDA or adjusted net profit was paid for the practice
- Benchmarking: this looks at practice performance in comparison to other similar practices nearby. This will indicate if a practice is overspending or underspending in specific areas, and we can liaise with the vendor to find the reasons why
- Buyer intelligence: we have regular meetings with group/corporate buyers (both private equity-backed or self-funded) to understand their buying criteria based on their strategies and targets. This allows us to have a better insight of where the market is at with multiples on associate-led practices
- Trend analysis: this refers to the monitoring of the average prices and level of goodwill for NHS, mixed and private practices across the country. It allows us to identify changes in goodwill values and regional variations to ensure our valuations stay valid in the context of changing market conditions.
For anyone looking to buy or sell a dental practice, it can be difficult to fully comprehend the intricacies and importance of evidence-based valuations. As one of the UK’s largest specialist dental practice brokers, Mediestates’ dental property experts are here to guide you every step of the way.