Dr James, 1s:

What is up? Everybody Looking forward to another episode of the Dennis who Invest podcast with returning face Kevin Saunders, and we're here today to demystify the concept of goodwill, which I certainly don't know very much about, and I know a lot of people listen here in that boat as well. And additionally, even if you do have a good understanding of how it works, who better to enhance your understanding from? Who better to learn from than Kevin himself, who is obviously someone who is pretty knowledgeable on this field? Kevin, how are you today?

Kevin, 34s:

Good thanks, james, good to see you and speak to you again.

Dr James, 38s:

Oh, absolutely wonderful as always. How have you been since your last book?

Kevin, 41s:

Bush Fresh, yeah good actually the market was a bit quiet following the term or the end of last year and it seems to be picking up now, lots of associate dentists looking to buy the first practice. So yeah, all good.

Dr James, 53s:

Buying, but what about squats?

Kevin, 57s:

Squats as well. Yeah, I've got both. Yeah, there's definitely a spiking interest for squat practices, but also for established practices as well.

Dr James, 1m 6s:

There we are, and one random question because I don't want to pull this on too much for tangent Is Christmas usually a common time that people buy dental practices?

Kevin, 1m 16s:

So it takes a long time to buy dental practice. It could take, you know, six to nine to twelve months. What you tend to find, though, there's a spiking activity leading up to Christmas where everybody thinks it's the end of the world and you have to finish everything off and Solista's definitely down tools a week before everyone else breaks up, so I get very busy. I don't think people look to buy anymore than they do any other time of the year, but I think the autumn, probably more the autumn. The autumn gets busy because people finish this summer holiday and they come back with renews.

Dr James, 1m 45s:

Duster, Whatever. There we are. Okay, no, I was just curious. They just popped into my head when you were mentioning that. So I'm curious, Kevin. Obviously there'll be a lot of people listening to this podcast and they'll be at varying degrees of understanding of the concept of goodwill. So if we were just to really break it down and describe goodwill as a concept whenever it comes to dental practices, how would you do that? How would that look?

Kevin, 2m 10s:

Yeah, okay. So the first thing to say is obviously I'm always going to do this with a finance angle, given that's my background. But yeah, so, and it is a conversation I have with a lot of associates looking to buy their first practice about the concept of goodwill and what a practice's value is actually is. And I get asked the question all the time is this practice worth what I'm paying for it? And it's really hard because it's not an exact science, so there are some factors to look at, but basically it's about what is worth to the person buying it, I guess. And the value is that the actual qualified values will have a method of valuing practices. But even then you'll find a value in one firm will be different to another value in that same firm and then one firm will differ to another firm. So it's a real minefield. But I think if we just say, basically, what have I seen recently? I mean it does appear that in the last year the market softened a little bit for dental practices. I've noticed more people putting offers in on asking prices rather than bidding over the top. Most valuations that come back from qualified value, as though they seem to be on spot on there. But they're okay. I haven't had too many problems. The only one I saw recently that was a bit of an issue was a practice had an NHS clawback and the value did actually down value the practice slightly and put a comment in saying if they hadn't had the clawback it would have been worth. You know it's worth X but it would have been worth Y. So we got around that one, so that was okay. So that's what I've seen recently. A good point of reference actually for knowing when you're looking at a practice is someone like Christine Kogue, because they are childhood surveyors. They have a dental market review, I think, on their webpage and they give multiples of the rework profit. So by the rework profit they're often to what EBITDA, which is earnings before interest, tax, depreciation and amortization, but basically it's the profit at the bottom of a set of accounts and you add back the things like depreciation that aren't really tangible. And to give you a couple of examples on an owner-occupier business in London they're talking about a 4.1 times multiplier of that rework profit, birmingham's about 3.8 and the North about 3.6, 3.7. So you multiply that profit up and that is supposed to give a loose guide to how much a practice is worth. But there is more than that to consider. What's the potential to expand the practice? How new is the equipment? Goodwill you were asking what's the definition of goodwill? Goodwill basically, it's quite hard to pin down how that relates to dental practice because there's so many different factors. So, yeah, that's where we are at the moment with the markets. I think probably something that's quite interesting to talk about is how do the banks be goodwill, and this is where many dentists actually don't fully understand. But goodwill doesn't have any tangible security value to a bank. It's not like bricks and mortar. So when they're lending to dentists, banks are actually lending on an unsecured basis and that is almost unheard of in the commercial finance world. It's mainly just healthcare professionals that get that deal. So, firstly, banks attach no tangible security value to it. How much they lend? As a rough rule of thumb, you can say about 80% of the goodwill value and that is the value that the panel value for the bank will go out and value the practice at. It can be slightly higher than that for certain cases, and it's really hard to tell you which cases, because it could be because the loans the practice sell values a bit more modest, maybe 360,000, 400,000, and the bigger chance of getting more than 80%. Or it could just be for a different factor, which it just depends its case by case basically.

Dr James, 6m 23s:

So, if I understood correctly, goodwill and EBITDA they're the same thing?

Kevin, 6m 29s:

I would say sorry, no, not exactly the same thing. No. So EBITDA is the reworked profit and that is one method for calculating goodwill. And the agents some like Christine Coe, the Vaniwers, will use a multiple of the EBITDA to calculate the goodwill.

Dr James, 6m 48s:

Oh, I see Right, so OK. So the goodwill is the EBITDA and the multiple together.

Kevin, 6m 56s:

So, for example, if you had profit and you added back depreciation and the director's drawings and interest paid to banks, all the things that a new owner wouldn't basically have, and let's say you've got 100,000. Well then you do the multiplier and let's say the multiplier was four times, then you know the actual goodwill value with about 400,000.

Dr James, 7m 21s:

Oh, I've totally understood. I've completely understood that. Now I know I knew what that meant.

Kevin, 7m 28s:

It's like that. I mean again, I'm not a valuer and it's more complicated than that. So it depends on the potential to expand the practice, how new it is, what's the location shopfrontage or upstairs. I've really dumbed it down there, but that's a good guide to use if you're out looking for a practice. You just download that report from Christine Coe or someone like them.

Dr James, 7m 50s:

Dominant Dine is a good thing. That's completely fine.

Kevin, 7m 52s:

Anyway.

Dr James, 7m 52s:

Kevin, sorry, before I buy it and now you're in full flow.

Kevin, 7m 56s:

No, I think I've finished that section. So that's how the bank's view goodwill. It hasn't got any tangible security values to them, the reason being that goodwill could be about the vendor, and the vendor might go and all the patients may follow, in which case the bank's left holding alone with nothing, no security attached to it, so they don't attach any security value to it, but they do lend a going to it. There we are. So then on to the next part. I think if we're thinking about goodwill for vendors because it's not just about associates buying I think you need to think if you want top dollar for your practice, when you're selling you need to show healthy fees and profit and you need to not disguise anything. So I get so many occasions where a dentist will approach me to buy a practice and he said, oh, but it's okay, because the vendors told me there's an additional X amount of cash that isn't shown through the books. I said, well, that's fine, but the banks will not recognize that. So they'll lend based on the profit and the financial accounts, and if that doesn't add up for the loan or the level of money the vendor wants for the practice, it's just not going to happen. I mean, then they need a cash buyer, which they're few and far between. So if you're looking to sell your practice, for a couple of years running up to it, make sure everything's going through the books. Don't over exaggerate expenses, unless it's something like we mentioned, like depreciation, which is something that could be added back. Don't over estimate other expenses, because then you're relying on a bank agreeing to add that back to the bottom line when it comes to the serviceability calculation for a loan. So just don't take the risk. Basically, let us say, pay a little bit of tax in the couple of years running up to selling your practice and it is to risk someone not going to get the finance to buy your practice. And then finally, I've got. How can we use goodwill values? So, for people buying their first practice, they'll often wonder how do dentists get up to two or three practices? Well, basically, you can gear up on the goodwill value of your practice. If you buy it and it's worth half a million and within a few years you've taken it up to 700,000, you can basically refinance and borrow up to 80% of the value, which usually provides the deposit for the second practice you're about to buy, and then, additionally, you can borrow 80% of the goodwill value of the second practice you're going to buy. So that's how people do it. Once you've got the first one to the hardest, after you've got that and you've built some value into that practice and raised the goodwill value up, you can jump and get two to three, etc.

Dr James, 10m 37s:

So you can leverage up pretty fast when you get over that first hurdle.

Kevin, 10m 40s:

Yes, you need to show that you've bought the practice and everything is running well. If you approach the bank after six months, they're probably going to say no. But once you've got a couple of years of financials under your belt, then it's far easier to do so.

Dr James, 10m 58s:

Amazing, okay, cool.

Kevin, 11m 1s:

So yeah, that's how you can use your goodwill value. Another regular conversation I have with people is about repayment of the goodwill loan and I always say to them again go and talk to your accountant. That general advice is usually don't rush to pay off your business debt, because you can offset the interest of tax purposes. If you're going to repay something, repay your personal debt. But people are always in a rush to pay it off. I think they feel better about that. But generally speaking, you can grow the goodwill value by increasing fees etc and inflation tends to road down the loan value you paid. So basically, you don't want to rush to pay that off and you'll probably pay it from selling the practice eventually. A bit like if you have a buy-to-let property, you've generally taken interest on your loan and it just sits there basically until you sell the property.

Dr James, 11m 53s:

There we are Good to know.

Kevin, 11m 56s:

Another point as well on that note obviously being able to offset interest for tax purposes. There are some products out there for larger loans and by that I mean over the 700,000 ish whereby you can take quite a big chunk of the good rule on interest only and just repay a small amount, and obviously that maximizes the tax benefit because the interest is potentially higher and also it's good for cash flow because you're not sinking money into actually repaying the loan or just a small portion of it. So again, it's another product that's out there for some of the larger practices.

Dr James, 12m 36s:

Interesting stuff, okay, cool. So in your experience, kevin, what would you say is the most common situation in which most people purchase their practice? Like how does that arrangement look whenever it comes to goodwill?

Kevin, 12m 52s:

So if it's an associate buying their first practice as I said earlier, it generally tends to be that they'll be able to raise about 80% of the good rule value They'll have to put a deposit in of 20%. Again, there are nothing set in stone. You might occasionally have an associate who offers up a second charge on their main residence to get a 90% loan, but generally ruffle, the thumb bank will end 80% and you put the 20% deposit in.

Dr James, 13m 20s:

Right. So that's usually around the point where people can start thinking about purchasing the dental practice whenever they have 20% off the value off the practice, whatever that is.

Kevin, 13m 31s:

Yes, you do get a long time to save up because the dental practice purchases tend to take six to nine to twelve months. But you need to be aware of that, plus the additional fees such as security fees, solicitors fees, evaluation fees, etc. But yes, that is a ruffle with them.

Dr James, 13m 49s:

Very cool, Okay cool. So brighter times ahead for perks and dental practices. By the looks of it, fingers crossed, they don't want to speak too soon. It appears to be.

Kevin, 13m 58s:

Yes, there seem to be people looking again. I think people are still a little bit hesitant about NHS at the moment but, that said, I've had a couple of great NHS practices come up recently and people are looking to buy them, thinking well, it's still guaranteed income as long as you can cover that and you're not too much at risk of associates or not being able to find associates. Shall we say yeah Then? Yeah, it guarantees patients through the door and you can build the private income on top.

Dr James, 14m 26s:

Cool. What would you say? This is very much a sort of liquor finger and put it in the air sort of question, really anecdotal information more than anything else. I'm curious. Let's say, let's go in the north of England and let's say that you've got a three surgery practice and let's say that it's mixed. Let's just go with that for the moment. What's the typical valuation of a practice that meets that criteria at the moment? Just to give us a little bit of a point to navigate from.

Kevin, 14m 55s:

The question. It's very hard to answer that because every practice is different. It depends, as we said earlier, because it's a multiple of the profit of the practice. You could have two practices side by side, similar premises, and one's got higher profit level than the other. It just depends on the sort of services being offered, etc. But in the north, as we said earlier, it's about 3.6 times the rework profit. That's how it's calculated.

Dr James, 15m 27s:

Gotcha. Maybe a better question is what's the cheapest you've seen in a practice like that? Go for just from experience.

Kevin, 15m 35s:

Well, that's another good question. There are occasionally practices out there that go for 300, 350,000. That can seem a bit frightening sometimes to an associate because generally those practices aren't very profitable because you're only turning over 300,000 a fees but you've got the same expensive staff salaries etc. They tend to not be making very much money. To my mind they're great practices to jump on, providing you have got capacity within the practice to grow the fees. By that I mean you haven't got a single surgery practice where it's matched out. At the moment they can be some of the best ones to buy because there may be a little bit uncompliant, but you just get the help of a professional to make the practice compliant, introduce all the new services that you got or treatments that you can and grow the income from there. At the end of the day you're left with a much smaller loan than someone who's had to spend to buy a practice for a million pounds. But it does need a bit of work. When they're at that level it's hard to show that a bank loan can be serviced. It needs a careful report written by me, a media cash flow forecast, and we need to show how a purchaser could cover their personal expenditure while they're growing the practice.

Dr James, 16m 52s:

Yeah, got you. I was just curious whereabouts the benchmark might be. If I was to buy a dental practice, I'd probably buy something along those lines. I always say that they're the dental practice equivalent of a do-or-upper in the B2L world.

Kevin, 17m 11s:

Yeah, true, actually, although I'm quite passionate about helping people start squat practices up, I think it's probably easier and probably the route if I was a dentist I would say would be to look for one of those small, modest practices that was a bit run down and buy something that's got an existing income. You haven't got all the issues with the building work and cost overruns on that. You're ready to go. You just need to refocus a little bit, bringing the new services and do all the things that perhaps weren't being done before in the practice. But it is quite hard to find those because most dentists are pretty smart and they do the right thing. So it's much more common to find a practice that's valued between 500 and a million.

Dr James, 17m 52s:

Yeah, yeah, yeah, yeah, yeah. Okay, got you. Then one more thing I was going to ask, and this is just purely out of curiosity. I just heard you talking there. Let's say, 80% is the typical loan that you can get for purchasing a practice. How does that differ whenever we're borrowing to set up a squat? Is it still around about 80%?

Kevin, 18m 12s:

No, so a squat's a bit different. Tends to be around about 70% of the set up costs. If we say there's no freehold, it's just, at least, premises tends to be 70% of the set up costs and even then it can be restricted to. You know, you're probably talking about 250 to 300 to 400, those kind of levels of finance, basically.

Dr James, 18m 35s:

Yeah, yeah. I was on another podcast I can't remember the exact one and someone was talking about 100% loans. Is that a thing? Is that possible?

Kevin, 18m 45s:

Definitely not on squats.

Dr James, 18m 47s:

Yeah.

Kevin, 18m 49s:

On an established practice. It kind of is because if you've got a practice already, as I said earlier, you can gear up for the deposit on that practice and you can borrow 80% on the second practice. So you have achieved 100% loan by doing that. Banks also have a policy that says in theory they can end up to 100% on an NHS practice. However, in practice, if you're an associate buying your first practice, they're probably not going to give you the 100% Again, it's case by case. It's probably more likely for an existing operator and if they've got an established practice already, they probably can do what I said at the beginning, which is to gear up on the first practice. So yeah, it is there, but probably not for the first time. Buyer.

Dr James, 19m 31s:

Got you. Okay, cool, kevin. If there's anybody listening to this who is thinking about buying a dental practice in the here and now, do you have any words of wisdom to offer them just before we round up?

Kevin, 19m 42s:

Yes, so save as much money as you can, because you'll need it for the fees. When you find that perfect practice, you find that a lot of my clients won't quite have saved what they needed to. They'll have thought about it after the event. But save the money up in advance as much as you can and, as I always say, maintain your bank accounts well. Don't have any unpaid items on your bank accounts or be exceeding overdrive facilities, because that's like red rag to a ball for banks.

Dr James, 20m 15s:

Gotcha, kevin. We're going to round up proceedings just now. If anybody listening today wants to know more about yourself, where are they best to find you? Okay?

Kevin, 20m 25s:

yeah, I mean not that they can email me or call me All my details on my webpage, which is saromas-a-r-o-m-a. Saromacouk. If they can drop me an email or call me and we can take discussions further.

Dr James, 20m 43s:

Top stuff. Kevin, thanks so much for your time today. We'll see you back on the Dennis Invest podcast very soon, I'm sure. Thanks, James. Thanks so much.