Despite changes to the regulatory, legislative, contractual and funding landscape faced by health professionals, there has remained a strong demand for dental practices.
Values of NHS dominated dental practices has markedly increased in recent years and agents continue to report significant interest levels when a NHS practice comes to market, this heightened interest leads to the agreed sale prices often exceeding expectations and this is particularly true of the larger contracts.
The improved availability of funding from banks keen to lend to the sector will inevitably be playing a part in the rising demand and prices in the market. Agents report however that there is also a rich vein of prospective buyers that are happy to provide significant equity, in the form of collateral security or private funds, to support an acquisition. The demand for NHS practices could also be a result of the changes to NHS dental contracts although the reformed contracts aren’t expected to be the norm until at least 2018/19. Whilst this could create uncertainty in the market, participants seem focused on acquiring ahead of changes rather than waiting to see what they hold.
The national trend of reducing Units of Dental Activity (UDA) rates paid to associates has increased levels of gross profit and EBITDA available to prospective buyers. Furthermore new practice owners are able to negotiate their associate rates down, particularly in university towns where there is a ready supply of newly qualified associates prepared to accept roles where the incumbents leave. Many associates are becoming more inclined to purchase their own practice in order to safeguard their incomes into the future. On top of this is the continued appetite of larger operators such as BUPA, Oasis and IDH to make acquisitions in this area.
As valuers it is always important to us to focus on market evidence relating to the geographic location of a practice and in this respect we see a clear north/south divide as prices rise particularly in London and the South East.
The value of a dental practice will however be dependent upon a number of factors, such as tenure considerations, however in order to help compare relevant deals done it can be useful to allow for a notional annual rent, whilst also considering whether on a fully managed or a sole practitioner basis, that takes into account the nature of the practice and if there are any specialist elements to consider.
Whether current levels of transaction activity can be maintained is unclear in the longer term but agents suggest that there is a strong pipeline of interested parties that would support the acquisition market for some time yet.
Change and volatility in a market such as this makes utilisation of independent valuers such as Eddisons, highly experienced in the sector, a priority as we are able to gather all available transaction evidence from the market place and analyse relative to any given scenario.
It is always useful to bear in mind that many dental practice transactions are 'conditional', perhaps based upon partnership entry, earn-out arrangements or vendor lock. As a result, the price achieved under a conditional arrangement may not constitute an 'arms length' market value available to the Bank if they had to realise their security. Further, fee income can often be overstated where additional income is derived under a Vocational Dental Practitioner (VDP) contract, a temporary top up contract or where there is risk of underperforming of required UDAs. Further complications can come from other contracts in areas such as orthodontics or sedation.
Growth in the dental sector has been further supported by the availability of funding for leasehold based practices due to strong serviceability and that the purchasers are often a practice associate whose ability to purchase has relied upon the vendor retaining the freehold interest. The trade related leasehold business could be used as security against a loan however the lease will likely be subject to normal forfeiture clauses such as non payment of rent and breach of covenant which, if invoked, could affect the lenders security position.
It would be important to establish whether the lease is protected by the security of tenure provisions in The Landlord and Tenant Act 1954 that ensures a new lease can be obtained upon the expiry of the existing lease. If not, the value of the leasehold interest could be negatively affected as you approach the lease expiration date.
Eddisons valuers have an excellent understanding of business tenancies and are able to determine the appropriate market rent for dentist (D1) premises. We discuss complex leasehold arrangements with solicitors to ensure the bank’s security position is not reduced and also use our experience and knowledge of how the physical location of a dentist within a medical/health centre can influence market rent.
Our dental practice team is located throughout the UK and would be happy to discuss your valuation requirements and offer advice on costs and timescales, simply complete the form above or below and a member of our specialist team will contact you promptly.