Business in Focus - Spring 2021

BUSINESS

IN FOCUS EDITION 04 | SPRING 2021

It’s in our nature to grow your business.

KEY RECRUITMENT TRENDS IN 2021 FINANCE

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DENTAL PRACTICE VALUATIONS - THE MEDIESTATES WAY

VALUATIONS

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

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ADVICE

DEALS AGREED IN 2021 •

RECRUITMENT

UPDATE

Cost of inaction - can you afford to wait until it is too late?

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

The pandemic has been merciless. It has propelled great practices to excel and not so great practices to suffer. Interestingly, practices that have been able to adapt quickly and view the challenges brought on by the pandemic as ‘opportunities’, have been more profitable than they have ever been.

How is that possible?

During the last twelve months, some major life patterns changed leading to a change in requirements placed on a variety of services used, and the location where those services are used. Here are a few examples that have led to the profitability increase of the savvy dental practice owners.

These examples are an extrapolation of the trends observed and some are generalised, however they show the direction of market travel: •

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•

•

Commuters by and large stopped commuting. This resulted in a substantial raise in home working. By staying closer to home, use of some services moved closer to home. Dentistry is one of those as there has been an upsurge in the number of patients registering with dentists closer to their homes, where possible, leaving dental practices near their workplace for a ‘close to home’ solution. This has seen a reduction in the amount of dental service provided by city/town central locations.

It all begins with a thorough assessment of the business, so that the way the practice works can be modelled. This forms the basis of any future development and an opportunity to benchmark the business against other dental practices of a similar size/location, as well as against the ‘best in class’.

Accounts Management information Staffing information Income breakdown etc Input

A year of Zoom and Teams calls, as well as other forms of online communication involving seeing oneself on camera, have led to an upsurge in search for aesthetic dental services supported by the availability of funds (from the previous point), as well as all time low interest rates making financing options more attractive than ever.

Patients who have registered with a private and/or a dental plan practice are discovering that compared to their NHS practice the difference in the cost of service is, in most cases, not huge but the difference in the level of service provided, in most cases, has been eye-opening.

Can you afford not to know the business fundamentals of your dental practice? If you are looking to make it through the pandemic and continue to trade profitably post pandemic, meticulous financial management is vital now more than ever.

If you are predominantly a private dental practice and have not taken advantage of the ability to extend your hours, increase your prices, digitise your practice and attract the patients that have moved closer to your locality, you are missing out on the opportunities. We can show you how to do that.

If you hold an NHS contract, you will know that the expectation is that the contract fulfilment rates are likely to increase post 1st April. If 45% has not been reached during this last quarter, you should be in a position to understand the impact of potential underperformance on your finances, as well as adopting a proactive approach to alter your business practices in order to accommodate the new requirements and thrive. We can assist in helping you understand the fundamentals so you can take charge of your business moving forward.

Roadmap

Practice valuation

Business development plan

Business transformation model

We are here!

Destination

Output Growth Financial control Maximise value Success

Individuals who were not affected by furlough or redundancy, have not had the opportunity to spend their pounds on the services they would have usually spent their money on. There is pent up demand as well as pent up funds.

Depending on how the practice was able to adapt to the emerging trends above, and others that have not been listed, has led to the practice owner’s positive or negative experience of the pandemic, in respect to their business’s adaptability. That experience is not fixed and can be influenced by diving deeper into the fundamentals that power each business, leading to the ability to take control and influence the future.

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The process

The steps are:

1. That practice assessment is the ‘valuation’. It is a deep dive into the practice figures and provides thorough modelling of the way the business operates now. This includes input of the current financials and, in many cases, extraction of data from the practice management system. This enables the synchronisation of the finances with the operations, leading to interesting insights of where the business is.

2. Through the discovery in the valuation process, opportunities for development become apparent. Gaps in benchmarking, gaps in services offered and operational insights drive the Business Development Plan highlighting what is possible.

3. How do we put it in practice? Business transformation model takes the business from the current situation to the desired outcome.

To embark on this process is free and there is no commitment to stay in the process. You are free to leave anytime without any tie-ins. Your commitment is your time and giving us the access to the information which will help us to help you. As we guide you through the process, we will treat your data with the strictest confidence according to the GDPR rules and develop the transformation plan tailored specifically to your business needs.

We source the solutions specific to your business needs and by being part of the world’s largest dental network, our reach is unrivalled in the marketplace.

To take the next step contact us at MediHoldings: 01332 609318 mediholdings.co.uk

MARKET INSIGHTS

Deals Agreed on Dental Practices in Quarter 1 of 2021

By Dean Barker As can be seen from the locations of the “deals agreed” on the map, the demand for dental practices all around England and Wales has not diminished during the second lockdown.

In fact, the number of deals agreed and moved to SSTC has surpassed the same period in 2020, with Covid-19 having little impact on the dental acquisitions market.

Key demand areas first Quarter of 2021: •

The bigger Urban city location still seems to have a bigger pull-on buyers, even though there has been widespread news of individuals looking to relocate outside of these areas for a new way of life.

•

With the number of NHS practices coming to market still not at the same levels as previous years, due to the level of the NHS contract which has to be fulfilled, this has pushed multiples paid on these types of practices beyond the multiples paid before Covid-19 arrived.

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Practices with high-income levels are attracting even more viewings and offers than ever before due to the competitiveness of the multi-site operators and corporates.

•

Corporate activity has grown under lockdown this year compared to 2020 when Covid-19 was not an issue. In 2021, there has been a 25% increase in the number of viewings by corporates compared to 2020, which again highlights the demand for practices in the UK dental market.

What type of deals have been agreed in Quarter 1 of this year ?

Size – Numerous deals varied in size and range from £250,000 to £3.5million+.

Types – The income mix of the practice types where deals have been agreed are: 5 Private Practices 4 NHS Practices

9 Mixed Practices

Q1 agreed deal types

As can be seen from the analysis above, the demand for all

types of practices in the UK is currently as high as it has ever been.

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MARKET INSIGHTS

Practice Completions on Dental Practices in Quarter 1 of 2021

By Dean Barker With practice transactions continuing to complete in England, Wales and Scotland in the first

quarter of 2021 (shown on map), it demonstrates that Covid -19 has not slowed or stopped the completions of dental practices throughout the UK. Who has completed on the acquisition of these practices in Q1 of 2021?

With 17 completions taking place in the first 10 weeks of 2021 whilst under lockdown, it shows how attractive it is to the buyers, banks and private equity to acquire dental practices in the UK.

3 Practices have been sold to corporates

2 Practices sold to multi-site operators

4 Practices sold to the current

associates who have taken over the practice

8 Practices sold to first time dental practice owners

Q1 completed acquisitions types

How have completion time frames been affected by Covid-19 ?

Practice completion time frames should have been affected by Covid-19 but we have not had that experience. This was mainly due to all parties in each transaction pulling together, to complete in time to beat the HMRC budget announcement for 2021, where there were major worries around entrepreneur’s relief and capital gains tax changes with the potential of affecting the value of the sale.

The average time frame for completions in this period was 8.4 months.

This can be broken down further by practice type: NHS 9.3 months

Private 8.4 months

10 8 6 4 2 0

4

NHS

Private

Mixed

Mixed 8.2 months

RECRUITMENT

5 Key recruitment trends during 2021

By Phillip Barker

1

Locums will be in demand

Whilst we hope the future will be brighter during 2021 it is still uncertain; England still do not know what the contract targets will be through 2021. We believe that this will spark a locum recruitment drive during the latter part of 2021 to deliver the outstanding UDA’s or shortfall that may arise. Watch this space!

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Reliance on Recruitment Agencies

In February of this year, MediCruit did a survey focused on practice owners to gain personal insights from the ground up.

The results show that 80% of practice owners expect to recruit at least once per year, of these, 47% listed recruitment agencies as their source, ranking 2nd behind word of mouth. We have seen a 23% increase in positions registered during the first two weeks in March compared to February, whilst we are not back to pre-pandemic levels, we are seeing smart practices capitalise now on the candidates that are available.

3

Diversity, Equality & Inclusion

2021 will be the year when practices will support new Diversity, Equality & Inclusion goals. Diverse teams foster better employee engagement and productivity. LinkedIn’s Global Recruiting Trends report found that diversity is a key trend that has impacted the way business engage their candidates.

According to the report’s findings, 78% of companies prioritise diversity to improve culture.

The GDC are also striving to support strongly in these areas, with their website reading:

“

The GDC over the next 3 years will be a champion of diversity, equality and inclusion inside our organisation, with the sector we regulate, and with the public.

The GDC will achieve this vision through the effective delivery of the following strategic objectives:

• Ensuring that our regulatory activity is fair, transparent and accessible to all • Ensuring the public are able to engage effectively with our services

• Embedding an inclusive workplace culture at all levels in the GDC where all staff feel valued, welcome, integrated and included

“

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Counter Offer Ethos

A counter-offer is where the candidate’s current practice tries to match, or improve on, a new job offer made by another practice – and it is very common in the dental industry! The counter-offer might make the candidate feel flattered and needed. The practice offering the new position needs to be aware of this and make sure if they have found the right candidate that the candidate knows how much they want them to work at the practice very early on. The other practice offering the candidate new employment need to ensure their original offer is attractive enough, so that the candidate would still be interested in the event of a counter-offer from their current practice. You’ve found the perfect candidate that fits well within your practice – now it’s time to make them an offer!

5

Equipment, Tools and the Digital Era

Dentists tend to be happier and stay longer in a practice where the surgery equipment is regularly updated and serviced. The switch to digital dentistry has rapidly accelerated with more dentists each day wanting to move with the times. We find that a digital practice with a large order book portfolio is a very attractive proposition when discussing new opportunities.

Allowing dentists to clinically flourish and work with materials of their choosing makes for a more confident team.

Partnering with MediCruit will enable you to identify the skills your dental practice needs, inform you of the market changes, provide valuable resources and free up your time to focus on driving your practice forward.

To find out more how we can help please contact us on: 01332 609318 mediholdings.co.uk

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VALUATIONS

Dental Practice Valuations The Mediestates way

By Dean Barker Dean Barker, Director of MediEstates, explains the benefits of annual practice valuations and provides exclusive insight into the unique MediEstates valuation process.

It is never too early in a dental-business owner’s career to seek a practice valuation. In fact, regular valuations can boost profitability and provide the best possible set-up for the next career stage.

Valuations – more than just for sales

The purpose of a valuation is not limited to selling a business. There can be huge advantages to having a practice valued on an annual basis. The worst-case scenario for a practice owner wishing to retire is finding their business is worth far less than they expected. Annual valuations beginning earlier in a career can help to prevent any unwelcome surprises prior to selling. Many of our clients use regular valuations for their long-term financial planning to help them achieve their retirement goals. In some cases, we have even helped clients bring their retirement age down. Our team at MediEstates works directly with practice owners year on year. We offer expert guidance which can improve overall efficiency, boost sales and ultimately increase the value of their businesses.

Protecting futures and stimulating growth

Knowing the value of a business provides options for the future should anything unexpected occur. It is a crucial time for many business owners and an increasing number are working to protect themselves against further disruption. However, this does not mean dental-business owners should get a valuation then batten down the hatches in anticipation of another storm. Valuations can be used to grow portfolios by providing leverage for up to 100% funding for another site. Practice owners looking to expand may have no need for lending services – an attractive prospect, particularly in the current market.

The MediEstates valuation process

The benefits of annual valuations can be seen in our comprehensive valuation process. We cover everything about the business to ensure we reach a true valuation and identify any areas for development. Our Practice Valuation Managers (PVMs) take the time to build a relationship with the client and gather the information we need, which is generally two years’ worth of accounts, alongside a multitude of information to understand how the practice operates. The subsequent document we compile will detail all aspects of the business including staff costs, associate pay rates, capitation schemes, equipment and cost lines you will see throughout sets off accounts. The PVM will process the data to find the practice’s adjusted net profit and EBITDA (earnings before interest, taxes, depreciation and amortisation). The final part of this initial stage will be to calculate two multiples – one for the adjusted net profit and one for EBITDA – to reach two valuations for the business. These multiples are essential to the valuation process. They are derived from realtime market activity and evidence from our in-house system, which houses data on all factors that affect practice values including practice size, location and income. By comparing information gathered from our client against in-house data and current market

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activity, we can find true, evidenced-based valuations that ensure a more accurate market value.

Two valuations are better than one

One valuation is only partly useful to clients. We need to calculate two valuations, each of which focusses on a specific buyer type. The price for a dentist who plans to oversee the day-to-day operation of a practice will be different to the price for a multi-site operator adding a practice to a larger portfolio. In the latter case the vendor can expect a post-sale agreement in which they could leave on day one, or agree to be tied into the business for anything up to 5 years. It is therefore vital to take this factor into consideration when valuing any practice.

Democratic processes and complete transparency

Following calculation of the two valuations, the PVM will submit these along with the full practice details to a panel of six Valuation Managers and myself. We review and assess each case to ensure the multiples applied are the most appropriate for each practice, after which we cast our deciding votes on the most accurate valuations. Once we have taken a practice through this rigorous process, we are ready to share the information with our client through a combination of documentation and one-to-one communication. Our aim is to ensure the client understands exactly how we have reached the valuations and why they are some of the most accurate on the market. But our work does not stop there. We offer expert advice to improve the efficiency of dental businesses with the use of benchmark figures relevant to their practice type.

Benchmarking to analyse costs and increase sales

The extensive practice information we gather allows us to retrieve benchmark figures for virtually every part of a business from any part of the UK. For example, we can compare staff costs against those of similar practices, revenue streams of same-size practices, or the average UDA rate for different regions. We can even compare insurance prices for various types of practice to see if our clients are getting a good deal. As well as working to analyse practice costs, we also use benchmark figures to help business owners boost revenue by, for example, comparing regional treatment prices or chair time percentages per practice type. Even small changes can yield good results. Our guidance is also backed by a superb support network, with Henry Schein and Software of Excellence ready to cover the financial, software and supply needs of any practice.

Empowering practice owners Benchmark comparisons and annual valuations give a practice the best chance of maximising value in every area, from property rental yields down to the cost of a bur. In addition, MediEstates can provide an overview of the entire market, including current conditions, information on private equity and corporate activity. Business owners can use these insights to understand the market and gain confidence from the knowledge they are running their practices as efficiently as possible. In short, benchmark comparisons and annual valuations from MediEstates can inform and empower practice owners.

INVESTMENT

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

ID 58468

Lincolnshire - Fully Private

•• •• •• •• ••

Prominent high street position Ample room for expansion Very well equipped following recent investment Established over 14 years Public and on street parking

•• •• •• ••

Tenure: leasehold Surgeries: 2 Turnover 2020: £233,831 Profit: £101,720

£295,000

ID 57822

ID 56737

Cleveland - Predom NHS

East Sussex - Mixed

•• Very profitable predominately NHS dental practice •• NHS GDS contract in excess of £275,000 •• Town centre location •• Local public transport services also give patients direct access to the practice •• Excellent reputation •• An additional surgery could be installed at a later date if required •• •• •• ••

•• Highly profitable modern mixed practice •• Mixed income streams - NHS contract, capitation scheme and fee per item •• Genuine potential to grow the business and increase the turnover •• Even clinician income split •• Located in a well populated residential area and offers free parking •• Excellent reputation •• Good transport links from both A22 and A27

Tenure: leasehold Surgeries: 1 Turnover 2020: £319,541 Profit: 173,359

•• •• •• ••

£411,659

Tenure: freehold Surgeries: 4 Turnover 2020: £614,999 Profit: £187,306

£895,000

Practice success stories ID 53380 Brigg. Lincolnshire

Predominantly NHS practice. Freehold Sale

D L

O S

•• The practice is located on the edge of the town centre close to shops, amenities •• Close to the railway station.

•• The practice is situated within a Grade II converted residential property set over multiple floors •• SOE software •• Long established with excellent reputation

•• On street Parking •• Car park close by •• •• •• •• ••

Tenure: freehold Surgeries: 6 Turnover 2020: £632,350 Profit: £247,217 Asking price: £1,095,000 plus Freehold £250,000

£1,200,000

ID 53165 Cambridgeshire •• Well-located with free parking facilities and potential to add a 4th surgery •• Predominantly Associate led •• Small NHS Contract with a significantly above average UDA rate •• Large Practice Plan capitation scheme with over 1,100 patients registered •• Limited marketing activity to-date and opportunity to offer further services

Mixed •• Chair-time capacity can be increased by 32% •• Significant new housing development nearby presents opportunities for patient recruitment •• •• •• ••

ID 56946 Reading, Berkshire •• Large mainly private practice laid out across four floors offering both general and specialist dentistry. Located in a busy area with a loyal and long-standing patient base. Fully computerised practice.

Tenure: Leasehold Surgeries: 3 Turnover 2020: £422,748 Profit: £198,679

£750,000

Predominantly Private •• •• •• ••

Tenure: leasehold Surgeries: 4 Turnover 2020: £1,384,512 Profit: £362,651

£2,975,000 7

SUCCESS STORIES

Make your dream a reality Please see below a case study for an existing practice owner looking to raise finance to purchase a second practice, also reviewing their existing loan in order to make savings. We hope you take much from this and we would be delighted to discuss your plans with you so that we can assist you in making them a reality.

Plan

Our client, John Peters, an existing practice owner, approached MediEstates regarding a 4-surgery mixed practice that he was actively seeking in a town in the South East. Principal led, the current principal established the practice over 30 years ago and was selling due to retirement; both John and the vendor were interested in MediEstates brokering the sale. We at Henry Schein Financial Services began our discussions with John on how he could fund this exciting opportunity whilst also considering how refinancing the outstanding debt on his existing practice could reduce his current monthly payments. The building freehold was also available for the sale and benefited from a flat above the practice that was rented to tenants which further attracted John. This of course provided ample opportunity to convert the flat into a surgery at a later date in order to grow the business.

The principal was happy to remain at the practice for 2-3 years post completion allowing for a smooth transition. John planned to work part time in the new practice, whilst also working part time in his current practice.

John was qualified in Implantology, implant treatments were previously referred out and so this allowed for John to retain these patients. He also planned to take on specialists in Periodontics, Endodontics and oral surgery in order to provide patients with a vast array of treatments whilst ensuring continual growth at the practice Practice Financials

There was stability in the mixed income streams totalling £635,575 provided by way of an NHS contract, capitation scheme and fee per item. This also included the rental income of £825 per month from the flat above. It was important to take into consideration the remuneration of the existing principal post completion during the transitional period, but this was offset with John drawing very little from the practice initially.

Lending Opportunity

Thrilled by the opportunity, John was planning to place an offer of £905,000 for the purchase of goodwill and £350,000 for the freehold.

We set out as instructed to approach the lenders to obtain indicative terms so that John would feel more comfort in placing his offer. We also explored refinancing John’s existing practice finance loan to consider potential savings. John had a loan of £400,000 outstanding over a term of 5 years at a rate of 4.25% above base. John benefited from responses from our exhaustive panel of healthcare specialist lenders. We use our expertise to present a case in the most favourable way to the banks, obtaining preferential rates that may not be attainable for those who apply directly.

Bank Offer

Offer as below:

New Practice Acquisition loans Loan Amount*

Goodwill Loan

Rate

Term

1.6% above base

1% of the loan amount £9,050)

1% of the loan amount £4,000

15 years

Arrangement Fee* Monthly Payments

8

£353,500

2.25% above base

£6,084.36

20** years

£1,749.84

*Arrangement fee added to the loan

** Term available for 25 years also, John preferred the shorter term

Refinance Loan Amount

Previous Loan

New Loan

4.25% above base

2.25% above base

N/A

1% of loan amount £4,000

£400,000

Rate

Term

5 years

Arrangement Fee Monthly Payments

£7,561.34

Monthly savings Annual Savings

Savings over term

£404,000 5 years

£,7215.38 345.96

£4,151.52

£20,757.60

*Arrangement fee added to the loan

The bank required a 1st legal charge over a Life policy – requirements set out in offer letter. We at Henry Schein Financial Services work with a partner that perform research using a range of providers to source the most competitive insurance quotes.

John placed the offer on the practice and the vendor accepted.

Post sale plans

We have since worked with John post completion as he is digitalising both practices, purchasing and financing the equipment through Henry Schein Dental and Henry Schein Financial Services. We plan to touch base again in the new future when he sets out plans to convert the flat into a surgery where we will look to support John in sourcing a facility to finance the renovation and equipment purchase. John plans to use some of the savings made from the refinance to cover part of this.

Thinking of purchasing equipment like John?

Take advantage of the 130% super tax deduction for investment in dental equipment as announced by the latest government budget*. *Your Accountant will be able to advise if you are eligible

Contact Henry Schein today for equipment quotes

Speak to our expert financial team today 01332 321702

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

£914,050

Freehold

HSMH001-01-21

The lender with the most favourable indicative terms were happy to proceed with the proposed offer as all aspects of the plan satisfied the lenders criteria and they provided credit backed terms for both the practice acquisition and refinance. The lenders arranged for a valuation of the practice and property; the surveyor presented their findings

indicating that the purchase price for both the goodwill and the freehold was fair. Due to the proposition of refinancing John’s existing practice loan, the bank was able to lend 100% on both the freehold and goodwill for the new practice acquisition.