Valuing a dental practice: a guide
It’s true; most of us do manage to leave the most essential question until last when we come to selling a practice. This path is well trodden: you ring up the valuer, get him to pop round, show him the surgeries, show him last year’s accounts, then wait a couple of weeks for the report and hey presto, you’ve got your value. Or have you?
Now, I’m not trying to make this all sound incredibly simple, because frankly (no pun intended) I really like the way dental businesses are valued. When I first came across the idea of valuing a practice as a percentage of sales I thought someone was having a laugh. I mean, what about the bottom line?
What about ‘turnover is vanity, profit is sanity’ and all that jazz? And, not wishing to miss a trick seeing as everybody has become experts in this field recently, but what about EBITDA (pronounced E bit da). Hands up who knows what that stands for? Who thought is was something from a Julie Andrews movie – e bit da far so la tee doe… To be honest, I quite like that, but actually it stands for Earnings Before Interest Tax Depreciation and Amortisation (yawn).
Okay, I’m going to let you into a secret here – it actually is the right way to start a valuation of a
business, but if you have got an ounce of sense, I’d keep it very much to yourself. Don’t tell your associate, and for heavens sake don’t tell your bank manager.
You see, valuing a business using EBITDA (far so la tee doe…) goes something like this. Firstly calculate the EBITDA (simple) – let’s call it ‘the profit’ – then research the industry multiple and that could be anything between 3-10 dependent upon the industry. But, let’s say for argument’s sake, that it’s six. So, the value is the profit multiplied by six (in this case). That is all well and good, but there is one downside that sticks out to me like a sore thumb – you have to make a profit first.
So, if you had the chance (for the purpose of valuing your business) to increase your profit or your turnover, which do you think might be the easiest? Profit? Get the new business, give it to your associate, let him keep 50%, give another 10% away in lab fees and materials, then give a load more away in overheads and huzzah, you might get to keep a fiver in every hundred if you are really lucky. Five times six = 30. So that would be £300 in every £1,000. Of course, that is presuming the model supports six as a multiple, it could easily be a lot less.
Here’s another idea. Just for a laugh go out in the street, give the first 10 people you see £20 and ask them to pop in to your practice for a free check up. Now who thinks they couldn’t sell at least (at least!) one thousand quid’s worth of treatment to 10 new patients? And, if turnover equals value, (even at 80%), then that would £800.
Of course I’ve made the figures up and they are nowhere near the truth – but hopefully you get the point. Despite the model being ridiculous – and the whole accountancy profession laughing at it – we must all do what we can to preserve it and all those wonderful people who come round to value the practice.
Anyway, where were we?… Oh yes, what is the question that is always left till last? Try this. How much of the sales proceeds do I get to keep, you know, after tax and all that? Now, if you kept your eye on the ball, it would be the only question and, seeing as how the lovely new coalition have left the tax rate for sales of businesses at 10%, you get to keep 90% of the proceeds.
So, here’s another wacky idea: what if you could grow your practice (not your profit incidentally) and sell it, based on the turnover model, and keep 90% of the proceeds? How would that feel?
Well it is an interesting thought as far as I am concerned, and I genuinely think some of you should consider it as a strategy for the short to medium term while we are in a climate that supports it.
For example, if the tax rate on the sale of businesses rose to 40%, for how much more would you have to sell your business to keep the same net proceeds? Well, for those non-mathematicians among you, the answer is 150% more than in the current climate.
So, it strikes me that we have a win-win situation going on here. Practices valued on a basis that is the easiest for us to influence, and a tax rate at the time of sale far more favourable than just about anything.