Lunch, multiples and market momentum

Thomas Coates shares his takeaways from the latest Dental Elite Goodwill Report and explains why operational strength, not hype, is driving today’s dental practice market.

Last Thursday saw me attend the launch of the latest Dental Elite Goodwill Report in Birmingham. A room full of brokers, solicitors, accountants and assorted dental sector experts gathered to dissect the numbers over an extremely civilised lunch and, inevitably, compare war stories from the transactional front line.

Stronger businesses, smarter buyers

As a Solicitor acting on practice sales and acquisitions day in, day out, what I found most interesting was not actually the headline multiples. We all know the market has remained resilient. The more revealing point for me was why.

The report repeatedly points toward a market now being driven less by speculative exuberance and more by genuine operational strength. Higher turnover. Better margins. Stronger systems. Better run businesses.

For years, there has always been a temptation in the sector to talk about goodwill multiples as though they exist independently of the underlying business. They do not. A mediocre practice with messy compliance, poor Employment and HR processes and support, weak management information and overdependence on one principal will only get you so far, however “hot” the market supposedly is.

Conversely, a well-structured business with strong EBITDA, stable income streams and proper operational discipline continues to attract serious buyer appetite.

Reading between the lines of the report, that feels increasingly true across all buyer tiers. I’ve heard anecdotally tales of certain practices being more attractive to buyers due to the involvement of certain “big name” dental business consultants with their involvement almost being seen as a “quality assured” stamp, however the evidence now seems to actually bear this out.

It also augers well for the growing number of switched on practices signing up to our own Oracle HR and Employment Law support service and accompanying Compliance products.

One particularly interesting trend was the growing aggression of smaller consolidators and ambitious independents who previously had been simply priced out of larger opportunities by funding constraints. That appears to be changing quickly. Improved lending conditions, higher LTVs and longer repayment profiles are clearly having a real impact on competition levels.

Performance over postcode

As a transactional lawyer, I suspect this has two practical consequences.

Firstly, competitive tension in deals is likely to remain strong even if the wider economic backdrop becomes a little less friendly.

Secondly, sellers are going to need to become increasingly realistic about what buyers are actually scrutinising. Buyers and lenders alike are becoming far more sophisticated. The days of “back of a fag packet” valuations based purely on gross fees feel increasingly distant.

One of the most telling lines in the report, in my view, was the observation that location influences value, but performance drives it. That feels exactly right from what we are seeing in live transactions.

There was also a subtle but important acknowledgement that some of the recent increase in activity may have been accelerated by tax planning concerns around CGT and Business Asset Disposal Relief. Anyone active in the market over the last 12 to 18 months will recognise that immediately. There was definitely a sense in parts of the market that vendors did not want to miss the train while the station master was still vaguely friendly.

Overall though, the key takeaway for me is that the dental market thankfully still looks fundamentally robust because the underlying businesses themselves are, in many cases, stronger than they were a decade ago.

Excellent event and excellent company. Many thanks to the Dental Elite team for the invitation and hospitality. It’s always a pleasure to spend time with people who genuinely understand the sector.