Business In Focus - Autumn 2020

BUSINESS

IN FOCUS EDITION 02 | AUTUMN 2020

It’s in our nature to grow your business.

NEW INVESTMENT OPPORTUNITIES Practices for sale See page 5

YOUR DETAILED ANALYSIS ON THE 2020 MARKET FINANCE

•

THE IMPORTANCE OF EVIDENCE-BASED VALUATIONS

VALUATIONS

mediholdings.co.uk 01332 609318 contact@mediholdings.co.uk

•

ADVICE

FUNDING AND FINANCE MADE SIMPLE •

RECRUITMENT

UPDATE The practice brokerage market remains buoyant

At MediEstates, we have implemented several ways to assist our clients in securing the exit from the business they have built up or effecting transitions through reduction of clinical hours worked, into retirement. Our consultations and practice valuations are all now online, at a time to suit the client and to facilitate confidentiality. The practice valuations managers are easily accessible and have the up-to-date knowledge of the current environment and its affect on goodwill values and multiples based on practice location, size and turnover.

Light at the end of a tunnel

By Maja Thompson Welcome to the latest edition of Business in Focus.

This year has challenged businesses and made us all rethink the way we live our lives.

Freedoms and social interactions that we took for granted have be restricted changing the ways we engage with our loved ones and the social interactions we have within society. This has brought challenges we never knew could be challenges (who knew two meters was so far away) and they have affected the way we conduct business. Many changes, as they came on so suddenly, took us by surprise and most of us had that feeling of being in a dream (or a nightmare) that does not seem to end. We are still living through this challenging period in hope that there is an end in sight resulting in a positive new world we can all enjoy.

Many positives also came out of the sudden change to our routine. The work commute is shorter or non-existent, in most cases, due to home working.

Ability to spend time with the loved ones throughout the day, has become a luxury we did not have, and home-schooling allowed us to get closer to our children and help them with the challenges they faced. More people spent time in nature, and some even took up running and other outdoor pursuits for the first time improving the health of the nation.

At MediHoldings, we used the opportunity to review how we do things and look at ways to build relationships with our clients focusing on solving the challenges they faced during the closure of dental practices, and the subsequent sudden reopening in early June, bringing with it PPE and fallow time challenges.

Keen cashflow management became a priority as business owners focused on survival in the early days of closure followed by revival on reopening in a new, restricted, world.

While the practices have reopened, the work landscape has changed and the return to normal services is far from ‘normal’. The level of patient attendance at the practices is substantially reduced and the BDA reported that: “In August dentists delivered 811,029 courses of treatment - about 25% of the number typically carried out.”

Beyond that time, we have seen an increase in patient dental appointment attendance, anecdotally sitting at around 60-70% compared to 2019.

To find out more about dental practices sales and valuations, dental recruitment or finance, please contact MediHoldings: 01332 609318 mediholdings.co.uk 2

Practice valuations managers understand the key factors affecting the value of a practice and utilise benchmarks to help business owners understand how their business compares to the averages in their area and the country. Benchmarks at MediEstates are continually updated, based on the practices recently sold and this forms the basis of our evidence-based valuations.

Resurgence of recruitment in private dental practices

During the lockdown period with practice closures, recruitment paused across the country. Candidates that were due to start new positions were left in limbo for months, until the dental world started moving again. Inevitably, number of positions have been lost during this period but recently we have seen a resurgence in the numbers of candidates registering with MediCruit.

Private dental practices have started taking on new team members. The return to full NHS capacity has been slowed down by the reduced UDA fulfilment requirement, so the private dental practices are leading the way in dental services recovery.

Increase in lending in the dental field due to all time low rates

With the onset of the pandemic, Government stepped in and has been supporting businesses in their survival.

Some businesses have continued to prosper and develop utilising the bank lending with rates around 2.8%-3% above base. Several banks on our panel, still have a strong affinity for healthcare lending, and are eager to lend to dental practice owners looking to refinance an existing practice finance loan. They are offering rates are as low as 1.5% above base so this could be a great opportunity to review your current arrangement, freeing up cash flow within your business.

ANALYSIS

2020 market insights By Dean Barker Offers made on dental practices in 2020 show a booming market!

With a total of £292m of offers made on practices since the start of 2020, there seems to be no slow down in the demand for dental practices.

As can be seen, the value of offers made in July, August and September are higher than any other months in 2020, even the pre-COVID-19 months of January, February and March 2020.

We anticipate that these levels will be exceeded in the final quarter of 2020.

£60,000,000

£40,000,000

£20,000,000

£0

Jan

Capital Gains Tax consideration

Feb

Mar

Apr

May

Age of dentists who have sold their practice

Over the last decade, Government has helped UK entrepreneurs flourish by offering Capital Gains Tax (CGT) reduction through Entrepreneurs Relief (ER). Since April 2020 called Asset Disposal Relief (ADR), capital gains are generated on sale of assets (business, property etc.), which are currently taxed at 20%. With ER, disposal of assets up to the value of £10 million was taxed at 10%. Since March 2020, the asset sale ceiling has been reduced to £1 million and all sale proceeds over this figure are taxed at 20% or higher.

Jun

Jul

Our data shows that the average age of dentists who have sold their business in the last 18 months is between 51-60. The largest percentage, 88%, is represented by dentists aged 50+ years old.

Aug

Age

Sep

%

22 - 30

0%

31 - 40

7%

41 - 50

5%

51 - 60

47%

61 - 65

24%

We believe that the currently 65+ 17% relatively small percentage of dentists in the 41-50 bracket, will increase over the coming 12 months, due to the extended tie in periods now being included in the offers from corporates and mini consolidators.

It is widely expected that the ER and ADR will be completely abolished, and CGT raised to 40% in the next Budget, which has been postponed this autumn.

A surge in new buyers

The number of new buyers registering to buy practices has changed throughout the year, with the month of March 2020 seeing the lowest dip, as seen in the chart below. All other months have seen a rise in the number of new buyers registering, with the upward curve growing more from June onwards. We have seen a large upsurge in Associates looking to move into practice ownership, which has increased exit options for practice owners looking to sell their business.

Increase 2019 v 2020

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

21%

25%

7%

-10%

13%

57%

45%

36%

45%

Number of viewings on dental practices for sale in 2020 shows confidence returning Dental practice buyer viewings slowed in April and May, as can be seen here. As the estate agents reopened and the viewings of the private property market resumed in May, confidence returned in the dental practice sales market and face to face viewings resumed. Face to face viewing activity levels in September were higher than the pre-COVID-19 viewing levels in February and March this year, showing a strong growth in this area. We expect the levels to continue to grow as we move further towards the end of the year, satisfying the pent up demand.

120 100 80 60 40 20 0

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

3

ANALYSIS

2020 buyer demand By Dean Barker Corporate & Large Group Activity

Whilst Bupa are out of the acquisitions market, this year has also seen COVID-19 temporarily slow down the growth of other Corporates and large groups.

During the onset of the pandemic, it was interesting to observe the actions taken by different buyer groups, please see a summary of actions below: •• Groups pulled out of transactions all together

•• Groups pushed transactions to Q4 of this year, to ensure the revenues streams were as were pre COVID-19

•• Groups adjusted their offers changing aspects of the offer and generally increasing the tie in periods.

Whilst a handful of Corporates and Groups have still been offering on practices throughout the year, from August we have seen the activity returning to similar levels to Q1, albeit with deal purchase structures changing.

MediEstates understand the market in detail, so let us help you grow.

Mini Consolidators

This sector continues to grow faster than any other. There are now 470+ multisite owners in the UK, compared to 350 in mid 2018, showing growth of 34%.

Growth in this sector has been increasing the price for dental practices for multiples over the last 24 months. We expect investment into this sector will continue to drive the number of multiside owners up along with growing the portfolio of exiting multisite operators.

NHS Practices Demand

After experimenting with prototype contracts over the last few years, it is expected that contract reform will take place in England in 2020. This has not dampened the attractiveness of owning a NHS practice, with the demand for practices with GDS contracts and the new Orthodontic contracts of 10 (7+3) years remaining very high.

Premiums are being paid for practices which have a GDS contract with a UDA value of over £29, along with NHS practices in London, West Midlands and urban/city areas.

Private & Mixed Practices Demand

There are 2 segments to this sector; 4+ Surgery practices with income levels of over £700k

The demand for these types of practices has climbed since August, with the large groups and corporates trying to attract similar types of practices to join their expanding portfolio of practices.

This activity has pushed multiples price close to where they were in Q1 before COVID-19 in the UK. The remaining practices with income lower then £700k

With the upsurge in the number of Associates looking to be the masters of their own destiny, and moving into practice ownership, this has driven new buyer registrations up by 47% over July to September this year, compared to 2019. There is a continuing trend of moving outside the large cities and Associates are seeing their fund stretch further, when buying practices away from the large cities. This is also part of an emerging trend of a move outside of the large cities driven by a search for a better life balance.

Lockdown webinar success Lunchtime Lockdown series was a big hit with practice owners, over 2000 attendees from the UK and Ireland joined our first two webinars this week.

Hosted by MediEstates and the Spot-on Business team the successful webinars reached maximum permitted attendees thus re-runs had to be made available.

Directors, Phillip Barker and Maja Thompson, hosted the event, with presentations from expert dental practice business planners, Andy McDougall and Anne-Marie Houston.

Andy and Anne-Marie covered how Covid-19 will impact the cashflow of UK and Ireland dental practices, with an anticipated economic downturn. The first lesson, aptly named ‘Business Survival’ focused on the immediate situation with the following major topics covered: the importance of cashflow and forecasting, CBILS loans, borrowing and furlough.

Lesson two ‘Business Revival’ then looked more in depth at the cashflow models needed to forecast a practice into 2021 and the impact Covid-19 might have in different scenarios for all dental practices with the lockdown stalling all patient treatment and subsequently all private income. Pricing, additional costs, PPE, additional hours of work and protecting clinical staffing structure were key areas also. A back to work Gantt chart has been made available to attendees following Lesson 2 to help with all the business procedures that need to be address and how to prioritise, a video tutorial is to follow.

With a positive focus on the revival of practices, Andy explained that his current clients will not be forced into closure but can instead realise a path to recovery that may not be too far into the horizon.

Phillip Barker said: “Now more than ever, it’s important to be sharing views and market expertise with practice owners.

We wanted to offer support and guidance to the profession during the uncertain times we are all currently facing, whilst also looking to the post lockdown future and the opportunities we can take to be back to business as usual”

To revisit the webinars or join for the rest of the series, please visit www.gotostage.com/channel/mediholdings 4

INVESTMENT

Find your dream practice We’ve done the searching for you Practices for sale

ID 56917

East Sussex - Mixed

•• Highly profitable mixed practice •• Circa 10,000 UDAs at £31+ •• Well located and parking facilities close by •• Fantastic reputation •• Huge potential to grow the business

•• •• •• •• ••

Tenure: leasehold Surgeries: 2 Lease (p/a): iro £9,000 Turnover 2019: £510,207 Turnover 2018: £510,107

£770,876

ID 57189

Greater London - Predominantly NHS

•• South West London •• The income of the practice is mainly NHS with a small amount of private •• Good UDA rate •• Very profitable practice •• Excellent location amongst shops and residential properties, fronting onto a main road and includes on-site parking •• Well established practice for over 70 years

•• •• •• •• •• •• •• •• ••

Tenure: leasehold Surgeries: 2 Lease (p/a): iro £25,000 Turnover 2020: c£272,763 Turnover 2019: £266,299 Turnover 2018: £272,232 Profit 2019: £117,025 Profit 2018: £112,555 Net adjusted profit: £129,305

£555,710

ID 57094

Surrey - Predominantly Private

•• Two fully equipped surgeries •• Located in an affluent and highly sought after part of Surrey, with excellent local public transport services •• Income is generated from a well-known capitation scheme, hygienist appointments and a small amount of implant work •• NHS income in excess of £30,000+ •• Fully computerised (SOE)

•• Tenure: freehold •• Surgeries: 2 •• Freehold Value: £450,000 (stv) •• Turnover 2019: £678,899 •• Turnover 2018: £644,894 •• Profit 2019: £368,391 •• Profit 2018: £342,102 •• Net adjusted profit: £302,775

£969,384 + freehold (subject to valuation) ID 55293

Suffolk - Mixed

•• Mixed practice with a good sized NHS contact and capitation scheme •• Stable business, secure income streams •• Even clinician split •• Stunning period property, very close to the town centre with plentiful parking •• Desirable practice to work at - good staff retention •• Further potential to increase turnover

£1,741,666

•• •• •• •• •• ••

ID 57145

•• Highly profitable with potential to grow •• Large shop frontage •• High Street location •• Free parking outside •• Lots of shops and amenities close by •• Good transport links •• Modern, fully digitised practice •• General dentistry, capitation scheme in place

•• •• •• •• •• •• •• •• ••

Tenure: leasehold Surgeries: 3 Lease (p/a): iro £21,250 Turnover 2020: c£596,307 Turnover 2019: £618,296 Turnover 2018: £608,525 Profit 2019: £224,503 Profit 2018: £184,518 Net adjusted profit: £299,776

£967,538 + freehold (subject to valuation) ID 57376

Tenure: freehold/leasehold Surgeries: 6 Lease (p/a): £36,000 Turnover 2019: £1.091,607 Turnover 2018: £1,081,176 Net adjusted profit: £350,218

Lancashire - Predominantly Private

Northamptonshire - Mixed

•• Three practice, mixed income streams •• NHS contract in surgery access of £250k and a capitation scheme •• Fantastic split •• Well designed and large practice with a lift for disabled access •• Post-sale support provided, the seller would like to stay on if required •• Good staff retention

•• •• •• •• ••

Tenure: leasehold Surgeries: 3 Lease (p/a): £15,024 Turnover 2019: £879,083 Net adjusted profit: £391,531

£1,809,479

The above is a small selection of the 100+ practices we have for sale.

Interested? Visit mediestates.co.uk or call 01332 809318

5

RESULTS

Practice success stories Client 524 Newcastle Upon Tyne Alma Dental Practice

LD

SO

•• Three surgery, predominately Private completing in 7½ months (During COVID19) •• Acquired by a first time buyer and supported by an existing practice owner

Offers in excess of

£400,000 + freehold option

Client 22270 Merseyside Arrowe Park Dental Practice

D L SO

•• This two surgery fully private practice was brought to the marketing in 2019 due to the vendors plans to look to retire •• The practice treats a mixture of fee per item paying patients, some specialist treatments and has a well known capitation scheme

•• Three surgery, predominately Private completing in 5 months (During COVID19) •• Acquired by a partnership owning another practice

£856,231+ freehold

£490,000 + freehold option Client 3081 West Yorkshire Airedale Dental

•• Fantastic reputation and the staff pride themselves on the care that they provide to their patients in a unique and relaxed environment •• Well positioned in an affluent town, just a five minute walk from the bus station •• On-street parking is available alongside a large car park close by •• Situated in the heart of the South Downs National Park, an area of outstanding natural beauty and voted one of the best places to live by the Sunday Times in 2016 •• Turnover: £258,686 •• EBITDA: £95,467

£290,000

“ 6

D L SO

•• Three surgery, predominately NHS completing in 12½ months (during COVID19) •• Acquired by a first time buyer and supported by existing practice owner

Ref 49741 West Sussex Mulready Dental

D L O S

Client 9903 Aberdeenshire Cults Dental Practice

D L O S •• NHS practice with room for growth •• Acquired by first time buyer •• Full asking price achieved

£400,000

I recently sold my Practice with MediEstates. I had been dreading the process as my colleagues had warned me that it could be daunting, but everyone at MediEstates we’re very supportive at every stage, keeping me regularly updated.

I am particularly grateful to Shannon Loonam who encouraged me throughout the sale, and whose reassurance was invaluable. I would certainly recommend MediEstates to anyone considering selling their practice.

”

VALUE

The importance of evidence Dean Barker explains the importance of having evidence-based practice valuations 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 evidencebased 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.

• 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.

Secondly, an incorrect valuation can lead to The valuation multiple significant problems further down the line.

Once adjustments are made to the figures, Once an offer has been made on a practice, a valuation multiple is applied. To ensure this a bank’s final loan agreement is dependent is evidence-based, there are several different on the valuation of the practice by an factors to consider: independent valuer. This ensures the valuation is in line with the proposed purchase price.

• Bank valuations: with most transactions Should there be an anomaly in the valuation requiring a degree of bank funding, it’s when compared to the agreed purchase price, important to understand how banks are the bank can refuse to lend, valuing practices. To ensure putting the entire transaction consistency in valuations, To ensure an in jeopardy. our finance team is in regular contact with major evidence-based valuation, What’s plain to see is it’s banks’ specialist lending essential that valuations it’s important to teams and underwriters, reflect both current market incorporate anticipated so we can understand the rates and attainable asking levels of lending they are financial changes before prices, and this can be willing to go up to, and achieved using evidencethey happen mitigate any risk of the based criteria to make the transaction falling through process as objective as • Market data: this is invaluable when selling a possible. This is why it makes sense to enlist practice. Our data allows us to look in detail at the support of a dedicated dental practice the practice location, then compare it with any broker, who can help you achieve the right practice recently sold in the surrounding area. valuation and manage the practice transition.

This shows how many buyers were interested, the Evidence gathering number of viewings, the level of offers received and, significantly, what multiple of EBITDA or A valuation is the first step in the sales process, adjusted net profit was paid for the practice and, before a practice comes to market, it is necessary for everyone concerned to gather • Benchmarking: this looks at practice performance in comparison to other similar practices nearby. a significant amount of information to ensure This will indicate if a practice is overspending the valuation is realistic. or underspending in specific areas, and we can Speaking as one of a team of dedicated liaise with the vendor to find the reasons why practice brokers, here are some of the steps •

Buyer intelligence: we have regular meetings we take to reach an accurate valuation: with group/corporate buyers (both private • We go through an earnings before interest, equity-backed or self-funded) to understand tax, depreciation and amortisation (EBITDA) their buying criteria based on their strategies calculation to make any necessary and targets. This allows us to have a better adjustments to the profit and loss account. insight of where the market is at with multiples This includes removing personal costs, such on associate-led practices as claiming for personal motor expenses, • Trend analysis: this refers to the monitoring and any one-off costs in a given year, such of the average prices and level of goodwill for as a new IT system or treatment centre NHS, mixed and private practices across the

“

”

• T o 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

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 evidencebased 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.

What is the value of your practice now?

Did you know that all of our clients have their practices revalued yearly?

This gives the business owners a good idea of the current value of their (usually most valuable) asset and helps with financial planning. This yearly re-valuation gives our clients comfort with regards to their future and an opportunity to change aspects of their business, if the figures are not where they would like them to be.

Our practice valuation managers assist many businesses in reaching their potential by giving them the tools to understand the key financial drivers of the value of their business.

How do I improve the value of my practice?

As with anything in life, to be able to solve a problem you first need to be aware of it. Having a yearly practice valuation allows you to understand the value of your dental practice.

If the value of the practice does not align with your expectation, you can to make a difference to the numbers.

The MediEstates practice valuation manager you work with, will give you a full report of how the practice valuation has been created and what the key financial drivers are for the valuation. These key financial drivers are derived from the benchmarking carried out over several years and based on values of practices sold.

It is continually updated to take in market conditions and variations; hence we call it evidence-based valuation.

If the numbers in your valuation are not where you would like them to be, our practice valuations manager will refer you to Spot On Business Planning, headed up by Andy McDougall, who could be able to suggest practical ways in which you can double your profit in three years. Spot On provide business expertise and act as an extension of your team, working with you to achieve profitable growth.

For more information about Spot On Business, call 01949 851723 or visit spoton-businessplanning.co.uk 7

LENDING

Finance market overview

By Kimberley Parker We hope that you and your teams are well, we send our very best wishes.

We would like to provide you with an overview of the current lending market, which is very positive with regards to bank funding, helping to make your dreams a reality.

Banks are keen to assist customers within the healthcare sector during this extraordinary time, utilising government backed schemes to assist with cashflow including the making practice finance available for the purchase of a dental practice.

With that in mind, the banks appetite is still fully present as practice purchases continue to take place. The banks have altered their policy on loan-to-values (LTV) and have been requesting deposits of around 20% - 25%. Some banks on the MediHoldings panel will consider going up to 90% LTV on the goodwill element and 100% LTV on the freehold, should the purchase meet their requirements.

The lending rates received are generally around 2.8% - 3% above base. A number of the banks on our panel have a strong affinity for healthcare lending, and are eager to lend to dental practice owner looking to refinance an existing practice finance loan. They are offering rates as low as 1.5% above base therefore this could be a great opportunity to review your current arrangement, freeing up cash flow within your business. The additional funds could be used to assist with a purchase of another dental practice.

Over the past few weeks, banks have provided valuable insights with regards to buyers looking for a new practice finance/refinance loan, who have taken out government backed loans during the COVID-19 period, e.g. CBILs or Bounceback loans.

They have noted that taking out a government backed loan could affect an application for a practice finance loan. If you have taken out a CBILs or Bounceback loan, and are interested in purchasing a practice/refinancing your current loan(s), please don’t hesitate to contact us as we specialise in finding the perfect finance solution to assist you in making financing and refinancing as straightforward as possible.

Banks are assessing each case on its own merits and so we have the expertise to create a portfolio for you that will allow a full positive assessment. At Henry Schein Financial Services / MediHoldings we are dedicated to supporting you throughout your practice purchase or financing journey. We will ensure that you receive the very best, tailored service enhancing your personal experience. There is no obligation to move forward with a deal that we source for you and with the interest rates being very low, we can source the most competitive deals for you.

This is a perfect opportunity to review your current financing situation and maximise the use of the fund saved through refinancing.

SPEAK TO OUR EXPERT FINANCIAL TEAM TODAY 01332 321702

Case study

The example below shows a group of 3 practices reduced their rate from 4% to 3% saved a huge £129,000 over a 5 year period.

Site 1

Site 2

Site 3

Loan amount

£1,500,000

£1,500,000

£1,500,000

Monthly cost

£15,400

£15,400

£15,400

New payment

£14,600

£14,600

£14,600

Annual saving

£9,600

£9,600

£9,600

£28,800

-£5,000

-£5,000

-£5,000

-£15,000

Current %

Proposed new rate Monthly saving

Assumed redemption penalty Year 2-5 saving

Total savings

mediholdings.co.uk 01332 609318 contact@mediholdings.co.uk

3%

£800

4% 3%

£800

4% 3%

£800

£13,800

£115,200

£129,000

HSMH012-10-20

Year 1 saving

4%