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July 2023

 

Goodwill Hunting – Part 2

Lis Hughes of Frank Taylor & Associates continues her discussion on how to increase the goodwill in your practice. Last month we looked at lease lengths and potential extensions, the benefits of doing work ‘in house’ rather than onward referring. This month we look at efficiency, maximising the return on your assets and what a healthy set of accounts might really look like.

It may seem obvious, but the greater the time you have a chair in your practice occupied, the greater the revenue for the practice. Take the example of a practice with a principal working five days a week and two associates and a hygienist each working three. Total capacity is 20 days per week (five days multiplied by four staff), yet occupancy is only 70% (14 clinical days are worked each week). This may drop further if staff are out of the surgery (for example on holiday, or training courses), so you can see how occupancy rates may drop to the 60-65% mark quite easily. I would always advise a practice to aim for 80% capacity at least, to better make use of the assets in the surgery and to allow a bit of a cushion or contingency against unexpected and temporary drops in chair occupancy.

Driving up chair occupancy should always be the primary focus before you consider adding an extra surgery.  A new surgery doesn’t come cheap and doesn’t add to the goodwill value immediately. You’ll need to be confident you can recover the additional costs for the fit out, and remember, any new space won’t recover costs very quickly if the chair isn’t occupied!

Another key feature when trying to increase the goodwill of a practice for a sale is to ensure your accounts are healthy.  Any buyer interested in buying your practice will ideally want to see steady growth and stable performance at the very least. Erratic “boom” and bust” results from one year to the next will not inspire anyone with confidence.

Given this, there are three key areas a buyer may look at.

Firstly, turnover – how much revenue does the practice generate?

Secondly, profit – is the practice bringing more in than it spends? Its ability to do so will determine the level of income a principal can draw and the speed at which repayment of any borrowings can be made.

Thirdly, cash – the payment for the profitable work the practice does.  The old adage ‘cash is king’ is spot on as you need it to survive. The underlying operating profit may not appear in the accounts but can be adjusted via the goodwill calculation to add back non-essential or non-recurring items of expenditure.

One other point worth making is that profit and cash are not necessarily the same thing. There are many reasons for this, but a good example is if the practice purchased some software, and expected to use it over a period of, say, five years. You may pay the vendor up front (i.e. in year 1) for the software but use it for five years. The accounts would show a depreciation charge (say one fifth of the purchase cost) every year for five years. In this example you’d have a big cash outflow in year one, but your profit would be ‘smoother’ with the cost spread as a depreciation charge over five years.

In terms of growth, steady and consistent is key. Declining or loss-making practices can make buyers nervous, but so do rapidly growing practices in the year prior to sale.  Buyers want to see consistency. This applies to the team in your practice too as a stable team says so much about the culture in a dental practice.

Across every element consistency and stability really do add to the goodwill value of your dental practice. After all, remember, the buyer of a dental practice pays for the past, but they are buying for the future.

Practice - Hertfordshire

Practice location: This practice is located in the county of Hertfordshire, in a thriving market town on a busy high street with a lively mix of shops, independent cafes, and restaurants. There are excellent road and rail links and ample parking very nearby.

Practice type: This is a two-surgery mixed practice and is being sold to facilitate the retirement of the current principal. The practice has been established for over 70 years and under present ownership for 25 years. The practice is housed in a previously residential property and has a delightful garden that has been very well maintained. The current principal is retaining the freehold and will create a new 15-year lease.

Practice financials: The gross fee income from management information for the past 12 months is in the region of £300,000 per annum and the NHS-GDS contract has a UDA rate of just over £27.00 per UDA which generates 32% of the income. The balance of the turnover is evenly split between private FPI and a capitation scheme. The income is generated by the principal working five days a week, a hygienist working one day a week and they are supported by one full-time and two part-time nurses/receptionists.

Price achieved: A price of £380,000 was achieved which was in line with the asking price.

Agent's comments: This practice has been a well-run entity that has suited the owner perfectly. He is the first person to acknowledge there has been no desire to increase chair capacity or to market the practice and has relied solely on the existing patient base. The practice is ripe for new development and whilst it is in need of some capex, there is such an opportunity for growth it would be great ROI.

Number of people looking in the area: 2,335

Practice - Surrey

Practice location: This practice is situated in a large Surrey town that has a typical London suburb vibe. It is very well established having been in situ for over 60 years. It is shop fronted and based in a prominent position with excellent footfall. The area benefits from efficient bus and rail connections and is popular amongst commuters.

Practice type: This is a well-established associate run, mixed four-surgery practice that is being sold to facilitate the retirement of the existing principal. The practice occupies a previously residential semi-detached property and is being sold as a freehold.

Practice financials: The gross fee income from management information for the past 12 months is in the region of £750,000 per annum. The gross has an even 50/50 split with a NHS contract with a UDA rate of just over £30, and the balance of the turnover is from private and no capitation scheme. The income has been generated by three full-time associates and a hygienist working four days a week. They are supported by a full-time practice manager, a full-time and two part-time receptionists, and three full-time and three part-time nurses.

Price achieved: A price of £1,800,000 was achieved which was slightly higher than the asking price.

Agent's comments: This is a slick operation and fitted the requirements of the new owner who already has two other practices in the area and an appetite to buy more. It has a great reputation in the area and there was a significant increase in patient numbers during Covid when many commuters were working from home. From the MI provided, returning to work does not appear to have had any impact on these numbers.

Number of people looking in the area: 2,277

Practice - Greater London

Practice location: The practice has been established for over 50 years and is situated in a busy London Borough which is home to a large residential population and benefits from excellent local amenities. It is being sold as leasehold with a new 15-year lease in place.

Practice type: This is a two-surgery mixed practice which is located in a shop-fronted property with the added benefit of two allocated car parking spaces. It is being sold to facilitate the retirement of the principal.

Practice financials: The gross fee income is in the region of £275,000 and 98% of the income is generated by a NHS-GDS with just over £33.00 per UDA. The income is generated by the principal working five days a week, and one part-time associate. The team are supported by a full-time receptionist and one full-time and two part-time dental nurses.

Price achieved: A price of £825,000 was achieved which was in line with the asking price.

Agent's comments: So many of our principals have enjoyed their careers in dentistry, however, the impact of the pandemic, coupled with the issues of staffing, has caused many to reconsider their future plans. Here, the principal has had to return to full time work whilst a new associate was found and this was enough to make the principal bring forward his retirement plans.

Number of people looking in the area: 3,176

Practice - South East London

Practice location: The practice is based in one of the larger suburbs of South East London, in a thriving and affluent community.

Practice type: This is a two surgery, mainly NHS practice which occupies a well-presented semi-detached property with onsite parking and numerous car parks nearby. A new 15-year lease is being created and the principal will be staying on post completion.

Practice financials: The gross fee income from management information for the past 12 months is in the region of £375,000 of which 63% is NHS with a UDA rate of just over £31 per UDA. The income has been generated by the principal working three days a week and one part-time associate. The team are supported by a part-time receptionist and two full-time nurses/receptionists.

Price achieved: A price of £825,000 was achieved and was slightly less than the asking price.

Agent's comments: This practice owner continues to enjoy dentistry and wanted to relieve himself of the burden of practice ownership to simply enjoy clinical work. He is more than happy to undertake the NHS work leaving the incoming principal to work and develop the private side. He was prepared to accept a price which was slightly less than the asking price as he felt the incoming principal would be good to work with and receptive to the opportunity of being mentored by this principal.

Number of people looking in the area: 2,419

Frank Taylor & Associates

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