These are nervous times. Headlines relating to finances and the economy are often fairly negative. However, when it comes to the dental market it is perhaps worth looking on the bright side.
The 2008 credit crunch did not see an immediate slowdown of dental deals. Whilst lending was withdrawn from many deals, in many sectors, banks generally took the view that lending to dental practices (particularly to NHS dental practices) was a safe bet. Those dentists that took the leap of faith, buying a practice in 2008 will be approaching he end of their 15 year bank lending terms. I am unsure if I have spoken to any practice owners now who regret investing at that time.
The autumn statement released today by the Chancellor has meant there will be changed to capital gains tax allowances, which will have a bearing on the tax due on proceeds of sale for capital gains beyond April 2023. Given the delayed introduction to this change there may be a spike in sales prior to this deadline. However, in the grand scheme of things it is a modest increase in tax due compared to the realisation of capital held in a business. There has also been no announced change to Entrepreneur’s Relief from Capital Gains Tax, which maintains the significant benefit to anybody considering selling a business of this nature.
The bigger influencer to the dental market is unfortunately likely to be the so called ‘mini budget’, released and then effectively withdrawn earlier this year, together with increases to the Bank of England Base Rate.
Practices are valued on the basis of a multiple of the adjusted profit of a business. Whilst funding is likely to still be available to acquire these businesses, the reality is, that when using debt to buy a practice, higher interest rates will mean that new practice owners will often earn less money as an owner than they did as an associate. Whilst this may be less of an issue for a corporate group buyer with private equity backing, it is going to have a bearing upon individuals buying a practice. For some time those working within the industry have been conscious of very high profit multiples being used to value practices, which has been driven by demand. A re-adjustment to asking prices may be on the cards. If you are considering selling your practice you should bear this in mind.
However, high interest rates are not necessarily a bad thing for dental practice owners.
One of the biggest challenges currently faced in the dental industry is the lack of associate dentists available to work in practice. This is driven, in part, by the desire for dentists to maintain a work life balance whilst continuing to receive an income significantly above that of the average worker. In short, few dentists want to work a five day clinical week. However, a young dentist with a significant mortgage at home and a family support may now need to reconsider their working hours. The rates being paid to associates have only received modest increases when compared to the increases on mortgages, utilities and food costs. The reality may be that the squeeze in the cost of living will reduce the dental vacancies, and is likely to mean that more UDAs are performed in towards the back end of the 2021/2022 year going forward.
The final consideration is the apparent desire for practices to ‘ditch’ their NHS commitments. Recent market goodwill surveys produced by Dental Elite show that there continues to be a strong desire from purchasers for practices with an NHS element. Indeed my own experience of the 2008 financial crisis demonstrated that an NHS practice is one that is looked upon positively by a lender. However, the move away from NHS correlates strongly with demand for private services being experienced. For practice owners who have no desire to sell on at this stage, the chance of making greater profits from private work may be alluring, but it is a gamble on a premise that the current levels of demand will remain static or increase. If your plans to sell fall in the ‘middle distance’, I would anticipate some practices choosing to capitalise on the patient waiting lists to improve your profit figures (which will in turn be used to calculate the value of the business when the time comes). However, the simple fact remains that NHS income is a constant source of secured income, it is not to be handed back lightly.
The future is still uncertain and there is a degree of nervousness. But, a logical conclusion to the current economic situation gives us cause for hope.
