It cost between $7,000,000 to $15,000,000 to buy a dental practice that generates an annual revenue EBITDA of between $500,000 to $2,000,000 using a base multiple of 3 to 7 times EBITDA.
If you are thinking of starting a dental practice, then you ought to know that starting from the scratch is not the only way you can kick off.
You can equally choose to buy a currently running practice from a dentist who wants to sell for one reason or the other. While buying a dental practice on your own will certainly require some serious capital and other requirements, it isn’t as impossible as you might initially think.
As long as you take your time, do your research, and find a lender that works with your business plan, buying a dental practice is possible.
There are numerous reasons that can make a dentist sell his or her practice, and it is not usually because the business is going bankrupt. Some dentists are getting ready for retirement and won’t have any need for the practice anymore. Or, they might want to move into a new area of business – the reasons usually vary from person to person.
In some cases, the seller actually wants to continue working in his practice as a dentist, they just don’t want to take on all the control and responsibility needed to run the practice.
They’re looking for a buyer that can breathe some new life and investment into the practice so as take it to a new level. It’s always important to talk to the seller directly when buying a dental practice. Understand why they’re selling, as this can help you gain the upper hand during the buying process.
Buying a dental practice all by yourself will usually mean you spending a lot of time chasing loads of different things and you can very easily end up with a bad deal.
Instead, you should get professional help from experts that can assist you. You need dental accountants to help you with the financial side of buying the practice.
Not only that, you also need solicitors to help with the sale, a broker, and so on. The bottom line is that you can’t go at it alone if you do not want to have regrets at the end. Without question, practice ownership continues to be the most lucrative career option in dentistry, and dentists are striving to go independent.
How to Estimate the Cost of a Dental Practice
Let’s just assume that you have seen the dental practice that has all you need, the next thing to do is to find out if you can afford it.
One key concern of buyers of businesses is how they can make sure that they are getting the right price the business is worth. Nobody wants to pay more than the actual market value of a business. So how do you know how much a dental practice you want to buy is worth? There are many variables to take into account.
In figuring out this cost, buyers usually employ the EBITDA rule. EBITDA is essentially the easiest way of measuring the profitability of a dental practice.
It stands for Earnings Before Interest Taxation Depreciation Amortisation. The more profitable a dental practice is, the higher its value will be. So, before you rush into buying a dental business, make sure you know the EBITDA to figure out the market value.
You may have to look at the last three years or so of accounts when working out profitability so as to make an accurate estimation. There’s no real point going any further back as it doesn’t make much of a difference in the way the business is run.
By assessing the accounts and looking at the income and other factors, you can ascertain if the dental practice is on an upward trend – or if things are progressively declining. So, this prevents instances where you see a dental practice with decent profits, but these profits are way down on what they were three years ago, which shows a persistent decline that could continue.
Process of Buying a Dental Practice
While there is no one laid down procedure one must follow when he or she intends to buy a dental practice, but there are necessary processes that must not be bypassed. These are:
1. Make your Initial Enquiry
Here, you need to find a dental practice that you like the look of, and your team can make an initial enquiry with the current owners. Essentially, it’s a way of registering your interest. You can call them up and indicate interest in their offer.
2. Carry out Valuation
You must not take their word for it, you need to find things out for yourself. The dental practice needs to be valued, so you know how much it will roughly cost for you to buy it.
The best way to do this is by visiting the practice to see the physical state of it, how operational it is, and also so you can request financial records to figure out the EBITDA.
3. Make an Offer
If you’re satisfied with what you’ve seen, then it is time to find out if you can afford it. You should now negotiate an offer for the dental practice.
Get help from people with experience to do this! You might make numerous visits to the practice before this, just to ensure it’s the right one for you. Then, make your offer based on the valuation.
4. Agree on laid down Terms
The Heads of Terms are essentially the terms of the sale. This is where both parties agree on the sale price, and it’s put in writing. You negotiate these terms, then sign the contract, which means the sale will go through at this price, provided everything else falls into place.
5. Make your due diligence
This is a job for your legal team as they assess critical areas of the dental practice to ensure that you’re getting exactly what you’re paying for and there are no hidden issues.
6. Wrap it up
Once due diligence is carried out, you can complete the buying process. Transfer your funds to the other party’s bank account, and you are the official owner of a new dental practice.
How Much Will It Cost to Buy a Dental Practice?
Well, this will depend on the value of the dental practice, but it’s highly recommended you have at least a 10% deposit when you are looking to buy.
The starting point is to work out the value of a dental practice, then ensure you have the money for the deposit. If you don’t have the funds, then there’s less chance of a seller accepting any bids as they can’t trust that you can gain the money needed to buy the practice. So, never place offers without having the financial capacity to pay for the deposit.
Nothing is stopping you from buying a practice that has an existing NHS contract. You should only seek out a copy of the PDS/GDS contract just so you can check everything in it and see if there are possible change of control clauses.
If you buy a practice with an NHS contract, then there’s a 28-day period between the exchange and completion that adds to the NHS side of the deal.
Prices to consider before opting to buy a dental practice
From a buyer’s perspective, the purchase price is not always what one may think. The money paid for the practice is only the beginning of the actual cost.
There are a number of fees and charges that you’ll need to factor in when considering an acquisition, including valuation fees, solicitor and accountancy costs, and bank charges.
Having knowledge of these will allow you to begin budgeting, as well as giving you a more realistic expectation of what you can afford and how much you will need to borrow. Furthermore, you will be able to narrow down your search criteria, which will save you time when searching for future premises.
Bank Valuation Fee
Valuations underpin nearly every financial decision made – from mortgages and investments to corporate finance transactions, assessment of company accounts and stock exchange listings. A valuation is for the lender’s benefit to confirm the practice exists and is satisfactory security for the loan.
Banks will rely on a valuer’s expertise to check how much the property you are buying is worth, which can be different to what you have offered for the practice.
By enlisting the advice of a professional valuer, the bank can be sure that if things go wrong and you fail to repay, they can repossess the property and get a decent amount when it is sold.
You’ll need to cover the cost of all the legal work associated with purchasing the practice, including certain searches and surveys which may well need to be carried out as part of the due diligence process.
The cost of solicitors can vary considerably depending on a number of factors, such as whether the property is freehold or leasehold, if assets or shares are involved and whether or not the practice is partly or wholly NHS or private.
Practices with NHS contracts require additional legal work and obviously if you purchase as a limited company it can take the solicitor longer to iron out the paperwork and ensure that everything is in order.
Accountancy and Bank Fees
A detailed financial forecast of income and expenditure, using the existing practice accounts and benchmark statistics as an additional guide, can provide a more accurate assessment of whether or not you will be able to cover the costs involved and meet repayments.
Ultimately, this forecast gives the credit team confidence that all the figures stack up and that any projections are realistic.
Some banks can be particularly pedantic about conducting their own checks, which can delay proceedings. Contract exchange and completion can also take several months, particularly for NHS practices.
There are plenty of things that can interfere with you buying a dental practice. Some of these are caused by the seller and tend to revolve around negotiations and due diligence.
They may try stalling tactics while you negotiate, but due diligence is usually the longest aspect of buying a dental practice and can take a long time.
But, if things aren’t in order on your end, then this can disrupt the process as well. Ensure you have all your relevant certificates like your GDC registration. If everything is primed and ready, then it’s much easier to move the process along.