The value of a prototype practiceNews
Posted by: The Probe 5th February 2020
As you will likely know, there are more than 100 practices testing the prototype. On the whole, feedback seems to be increasingly positive as the programme evolves, though there are still a few creases that need ironing out. Many practices find the possibility of delivering fewer ‘UDAs’ (or the equivalent of) while maintaining the same size or even growing their patient base complements the provision of private services. With a lower activity target, there is more opportunity and time to provide patients with a wider choice of treatments and grow the private revenue of the business.
On the new prototype system, the cost of delivering the contract is considerably lower, making it a viable option for businesses. The NHS output is therefore easier to manage with a lower level of activity. This frees up the dentist’s time to provide more white fillings or crowns for patients seeking such treatment – before, they would have had to concentrate on delivering UDAs to hit the NHS contract target.
Impact on practice value
The ability to provide more private services and increase revenue also boosts profits and, consequently, the value of the practice. The lower cost of delivery further improves the numbers and benefits any principals who consider selling.
For example, the costs of delivering private dentistry involve only materials, lab bills and paying the dentists. Say a practice increases its private revenue by £50k. That would give a 33.8p increase per pound in EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) for the average dental practice beyond the fixed cost base. When you do the maths, that equates to £16,900 in addition to EBITDA. Using the average EBITDA multiple from our recent goodwill survey of 7.60, this provides an increase of £128,440 in the valuation of the practice.
This is clearly a significant rise in value, demonstrating a potential benefit of the latest prototype system for practices. It also shows what might be possible for individuals and businesses when they are less pressurised by the NHS contract. They have more time to promote preventive measures and to offer greater treatment choice with the potential for more private work.
A desirable trait
As a result of the potential we are currently seeing in prototype practices, they are becoming desirable businesses for many buyers, with many willing to pay a premium.
Further fuelling demand is a general sense that the prototypes are here to stay, which is hugely positive from an acquisitions point of view. If the current system or something similar is to become the reality for all, those practices already set up to operate the programme will be one step ahead. Think back to 2006 – practices that piloted the PDS system had fantastic UDA values of up to £28/29, while those not involved with the pilots didn’t receive the same benefits. This makes practices with the prototype very attractive business perspectives as they are likely to do very well from any unilateral contract variation.
For anyone thinking about buying a prototype practice, it’s crucial to make sure that your bank manager understands the new contract. If they don’t, they might calculate their valuation based on the old contract and this could make it very difficult to secure finances. By working with experts who know how to liaise with the banks, such as the team at Dental Elite, you can avoid this and many other possible complications.
Author: Luke Moore is one of the Founders and Directors of Dental Elite and has overseen well in excess of 750 practice sales and valuations. With over 11 years working in the dental industry, Luke has extensive knowledge in both dental practice transfers and recruitment and understands the complexities of NHS and Private practices.
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