Dr James, 0s:

EBITDA is something that's not really ever properly explained to us dentists. This applies to people who currently own a dental practice, dental principals, and also associates who will one day own a dental practice. We've got to know this inside out so we know how we get it to work for us, and that's why I've got with me Mr Luke Moore, head of Dental Elite, who valued over 200 dental practices last year within the UK. He shares with us the need to know concepts and inner workings of EBITDA so once it comes to that eventual practice sale, we can put things in place to get the best number, not just on the day but long beforehand. This podcast is all about multiples and getting the best multiple. Here's one thing that we need to cover, because I've never covered this before on the Dentists Who Invest podcast how does the bank of england base rate affect the price that you can get for your dental practice when it comes to sale?

Luke, 51s:

well, we should what we do. It's quite timely because we're recording this on the 10th of february, so last thursday uh base rate dropped to four and a half percent um as opposed to sort of the heights. It was, um, at 5.25%, and that's probably the biggest quantum because if you put that into a financial metric, that means if you borrowed money, it was 5.25% and of course most commercial loans are on floating rates. Very few commercial loans will be on fixed rates, so every time those rate changes, things like people who borrowed money a year ago and people who will borrow money in a year's time is that now, if you borrow, borrowed a million pounds, that debt in terms of servicing is now seven and a half thousand pounds cheaper than it was when base rate was 5.25. So if you take that seven and a half grand and then that's seven and a half grand in theory means that from a purchaser's perspective that's seven and a half grand. They haven't got to pay the bank ten million pounds of debt. In theory that means that when it comes to buying a practice and they're looking at the numbers and they're doing what we call stress testing, which is working out what's going to be left once they've kind of paid the bank and whether they're going to be poorer or better off as a result of buying a practice, that second half-price goes in the pot and might make the opportunity look sexier or better than it was to start with, which means that in theory the business is more attractive, which means in theory it clumps the market, which means that people might be prepared to pay slightly more for the practice now the base rate's a bit lower than they would have done before because in theory they will be better off. Not in theory they will be better off, because then you're paying less back to the bank to buy the practice in the first place.

Dr James, 2m 23s:

So it drives the value of the asset, which is actually one of the reasons they put the base rate down right.

Luke, 2m 29s:

Yeah, that's the exact purpose of dropping base rate. The exact purpose of dropping base rate is to try and plump the market, is to get people to go out and spend more money rather than holding themselves in and putting it in a savings account and doing nothing with it. But that is the reason why we dropped base rate and in theory, in reality, 25 basis points from 4.75% to 4.5% two and a half grand. We're talking about a million pounds. Is it going to change the world? No, it's not. But when you look at these kind of compounding effects of we've now dropped by 3.5%, seven and a half grand, there's quite a lot of money in the grand scheme of things, especially when you consider that's every year, um, so over a 10-year cycle, that's 75 grand. You haven't paid the bank, um is that, you know, in the fall, is the time it does have an impact on the market. People but, you know, become um more aggressive. The other side of things to look at is that when you look at how dental groups buy and I think there's a misconception sometimes that dental groups aren't borrowing money, that it's all private equity money the truth is the private equity boys will put some money in and then they use that money to go and raise a low debt and then another bank probably one of the challenger banks and not a typical Lloyd's or similar, so like if you use Aries Bank, for example. So they are more expensive debt but it's deemed as riskier because it's associated with multiple lending all over the time, where there's less control and no vertical guarantees and that kind of stuff. But every time base rate goes down it has an impact on them as well. So if you've got private equity sat at the top saying, well, if I invest my money, my expectation- is I get? the same return. If you've got to pay a little bit less to the bank, then that will make these softens that return. Which means that then when people can't, when the dental groups look at buying taxes, you know there's more money in the park because it has to be a fixed rate back to private, to whoever an expectation if they're not servicing and you know debt at a more expensive rate interesting, and you know not to go on a tangent, but, as you were saying a second ago, this is one of the main reasons that they do drop interest rates because it's cheaper borrowing.

Dr James, 4m 27s:

And then obviously, what that means is that assets are more affordable, which cause assets to go up in price. And then it is also linked to inflation as well, which is the reason why they put up interest rates in order to try to pull inflation down. So there's a little bit of a balance in that, there isn't it? But anyway, that's just a little bit of a financial history and financial know-how for people who are listening to the podcast. And yes, of course, that logic holds true in the dental industry as well. But to bring this back specifically to the dentists who are listening to this podcast, I bet a lot out there who are either practice owners or considering practice ownership or thinking themselves. Right, that's all well and good, that's a little bit of wind in our sails. But what things can we actively do in order to get the best multiple whenever it comes to sale of our dental practices? And you and I were talking off camera, weren't we, Luke? And we said well, there's kind of really two sides to that question. There's what we can do beforehand a period of years, perhaps even beforehand to get the right things in place for that eventual date, and also things that we can do immediately surrounding that date.

Luke, 5m 30s:

So maybe it's best that we start with the things that we can do beforehand. Yeah, um, well, first of all, if I can throw out this thing, we start with um, because the biggest thing is is that, of course, you know, I can talk about improving multiple, multiples and the stuff you can do, which I'll do in a second um but to a large extent, multiples are impacted by environmental factors. So we spoke about base rate there. Of course, cost of debt is one of those factors, but it's also to do with how aggressive other people are in the market, whether dentistry is in favour at the moment, sort of how dentistry features in the press, what associates are earning out in the marketplace. As to whether there's an incentive to buy a practice or whether there's to be, it's actually more needed to be a locum. So, whilst there's an incentive to buy a practice or whether there's to be, it's actually more needed to be a locum. So, whilst we can, in a sense it's a bit more than chipping around the edges. But the biggest factor that implements multiples hardens environmental factors, and you or I am the end of this listening to this podcast has very little control over um. But to answer your question now. I've got the disclaimer out. The way, um, is that if you're is it, you can separate it into two things. So the first that we'll talk about is what you need to do two or three years in advance of sale, and the reason why I say two or three years is because you need to allow time for these changes or these, these actions. If you like to bed into the opportunity, to bed into the practice, um, you can't just do them six months before you come to sell the practice and then turn around and go well, no, I've done what you told me to do. And my high risk associate dentist, who was grossing 400,000, you know I've now split that book, uh, and I, you know he's dropped to two days a week and I've got someone else doing two days a week, because the reality is actually your new associate who's doing the two days a week, he's dropped off your high performer. Actually, they, they might not reach the same level and it takes longer than six months to kind of let that kind of work itself out. So that's the kind of change that you, you, you want to actually do quite a bit in advance. Um, I think this is never moving to the run tiers and there's never a perfect time. Something always happens and we're used to that. I even when they say it's designed because I'm thinking of the kind of things that the plants are one night which enables you to increase your multiple. So I find it always takes a little bit of one there, which is to do with high-risk associate dentists. Um, and a lot of people come to us and they say um well, my practice is great because I've assisted myself in the business, so I'm no longer a risk to the business because I don't do it. But the problem is is that when someone comes to buy in practice, you're the only variable that someone's actually got any control over as part of the sale, because they can contract you to staying on in the practice and to doing X number of days a week and your associates can resign at probably three months notice from the day after completion, or even before in a worst case scenario. So one of the things that a lot of people get quite apprehensive of is when you have really high risk associates, and what I mean by high risk associates is people who, you know, maybe grow some more than sort of 350 to 400 000 pounds a year annually, because the risk is they can do exactly. What I just said is that they can resign a month after completion and they can be really really hard to replace, which means that actually your person could have bought your practice and all of a sudden you know business that was turning over, say, a million pounds, is turning over now 900,000 pounds, because the dentist who left actually had a really good rapport with the patient, that she did a load of implant work and sold it in the right way, so the uptake from patients is really high, and now all of a sudden we've replaced them with a new dentist who doesn't have that rapport with the patients, who doesn't have that rapport with the patients, who doesn't have the trust with the patients or even doesn't have the conversations in the right way, and even though they're working the same volume of days, they're just not delivering the same level of income that you would expect from the previous dentist. And so it's the kind of thing where, if we're talking about multiples, it's the kind of thing that will bring someone's multiple down. So it's not some of the cheats they know about taking your four-day drop in two days. Imagine doing those things. All you can think about is no, think about how you don't get yourself into that position in the first place. If you've got a good associate who's doing three days a week and all of a sudden you want to drop on Thursday, then you might want to go out and the thing is to offer that associate another day, or the right thing is to actually bring someone else into the business. So you've got the diversification of risk who does your first day instead and starts to pick up your patients, and then maybe they can pick up the next day later on down the line, and that gives you a bit of growth as well, as opposed to just staying with what you know. So that's one aspect.

Dr James, 9m 48s:

Is key. Man risk the term.

Luke, 9m 56s:

Yeah, that would probably be a very you know that's one is key man risk. The term yeah, probably a bit. Or a term, perhaps a term, yeah, yeah, key man risk. It is a problem, particularly where you've got practices now where they do a lot of big high ticket treatments. So I'm talking like smile makeover stuff, big sort of multiple implant implant cases. As you is it, you really want to make sure that that is over more than one head in your practice. Um, when you come to sell your business, amazing.

Dr James, 10m 15s:

So that's a, that's a one big thing. We need to just tick off the list right there and you're in full flow. Just then I'm sensing there's more we can do beforehand yeah.

Luke, 10m 23s:

So the other thing and obviously that also applies to yourself as well for your principal. So if you're there you're grossing out six hundred thousand pounds a year. To a certain extent it's great whilst you own it because you've probably got a really strong profit function. But you've got to understand that the trade-off is when you come to sell your business is you're going to get a lower multiple. So you have two decisions. Either you accept that and say, well, actually I've earned the profit whilst I've owned the practice and that's great and I'm going to get slightly less for my business. Or in the couple years in the run-up to sell, you start to introduce the second dentist or third dentist. You take some of your patients to diversify some of that risk. So, to use your term, you're not quite as much of the key man as what you were before. Um, the other aspect is nhs contracts. So again, loads of practices now don't want to do nhs work um, so they're gradually just work a road um offering more, more patients, private treatments, and it's more common in all this formula. We go into France for, say, 10,000 EU contracts and they're delivering to 5,000 of those UBOs At the next rate, because the private works are nuts or overall as a business they're more profitable. But the challenge then becomes when you go to a bank to kind of borrow money is that if you've got compounded breach notices on that contract so you're now on like your second or third breach for underperformance then under sort of nhs contract legislation they can permanently reduce that contract to 5 000 uda and or, in worst case scenario, they could potentially cancel the contract. So there's nothing worse than kind of moving the prance and there's nothing wrong with removing the practice more privately. But what you need to make sure you're doing is that you're having those conversations with the area team and you're gradually reducing your contracts, even if it is on a permanent basis. If they want to give you a temporary reduction, it's almost better to do that permanent reduction and deliver your NHS contract within the underperformance leverage that you're allowed than have sequential breach notices, because that will be a problem when it comes to lending and if it's from when it comes to lending, it's a problem that impacts multiples.

Dr James, 12m 15s:

Awesome, this is gold dust, because these are the things that we don't necessarily realise. Was there more to that, more big ones you can think of?

Luke, 12m 24s:

The other one is also about signing income. So again we go to Francis. Nothing wrong with it, granted your foot off the pedal, um, as you come up to sell, or retirement, um, and it's just those kind of little nudges um sort of 20 30 grams and it doesn't look like a lot on the accounts because you've dropped 20 grand of income. And it's quite easily explained because, oh, I just don't do as many thrivers as I used to because I play extra round the golf or something along those lines. Um, but of course the challenge is and we mentioned deflation just a few minutes ago is what that probably means is that all of your costs are probably still going up because we're in an inflationary environment. Inflation will probably still hit just sub 4% later this year, which means your profitability is going down at a much more rapid rate. But ignoring that for a second, because that's probably a consumerism lie, but what it does do is it does sense a theme of the fact that, well, yes, but if you are doing slightly less work because you put your prices up, your income's gone down by sort of 20 grand, which means you're probably doing 40 grand less work than you were doing if you were to compare it on a life-to-life basis. Is, where are those patients going? Is it a case of the fact that those patients are now dissipated to another competitor? Is it a case that there just isn't demand in the area? We're not getting as many new patents as there were, and it raises all these kinds of questions, if you like, around the sustainability of the business. Whereas if you can present a business to market which is, even if it's only gone up by 10, 15 grand year on year in revenue terms which, when you compare it on an inflation basis, on a life-to-life basis, in reality is in real terms, the business probably has gone down, people still don't perceive it that way and that's the thing with multiples. It's all about perception. If the perception is the business is shrinking, then people get concerned and then again direct impact to multiple. People are prepared to pay less because it's perceived that the risk is higher, whereas if you can just make some small tweaks and make sure you just maintain that income or just do little nudges five, ten grand then your multiple will be higher I love it.

Dr James, 14m 17s:

Wow, and those, those would be the big ones that you can think of off the top of your head. Those, these are all these. All these are pertinent to things that we can do before it comes to the sale date they.

Luke, 14m 26s:

They're your big kind of like pre-sale sort of risks that directly impact. There's stuff you can do about financial structures and stuff like that, but again, that's a conversation for a different day. In terms of multiples. Your biggest thing is to make sure that you are thinking about how your accounts look and how your accounts will be seen.

Dr James, 14m 44s:

If you're just looking at the hard reality of what your financial statement is saying, let's now shift this conversation across to things that we can, or perhaps even should, do around the date of sale. How does that differ, or what other things should we consider?

Luke, 15m 0s:

Yeah, I mean, a lot of this is kind of more soft stuff, but it's more than anything else.

Dr James, 15m 3s:

It's a bit like you know you put your house on the market and you think, oh, it's got that garish pink wallpaper.

Luke, 15m 7s:

We can't have that in the lounge anymore. We're got that garish pink wallpaper. We can't have that in the lounge anymore. We're gonna, we're gonna clean it all back. No, yes, yeah, I mean it's not quite that drastic when you come to sell dental practice, but it is curb appeal, um, you know, the reality is I would never advance anyone goes and splashes out on a new dental chair before they sell their practice, because you're never going to get the money back. You're much better off letting someone else do that and taking a bit of it on purchase price. You'd still be, you know, better off. But there is some substance in saying do you know what, if the outside of the practice looks really tired, um, before you, um, you know, before you put it on the market, freshen it up, because you know most people will make an instant reaction or they will see no way of thinking before they walk through the door of that business. And if your practice has still got the e missing from dental, so it looks like the dental practice now when they turn up, they've already got the e missing from dental. So it looks like the dental practice now, when they turn up, they've already got the perception that your business is something which hasn't been looked after and hasn't been um well kept to use. What so? And if that's the reality of just the aesthetic, the outside of the practice, what else is going on with the patients and with the staff and are you buying a problem? So you've got to think about curb appeal. You know, both from the exterior to the practice and those initial first perceptions of you know how well decorating is the you know, is the, is the um, is the waiting room when you walk in the practice. And if you still got a den plan poster up from 10 years ago with their old branding on, you know, think about that kind of stuff just before being quite a step into the practice. That's really. That's kind of really important um, and it gets the other practice to the other thing to think about is sort of how percent scope for growth, because the biggest thing is we are in a world now where debt is that much more expensive and what people want to know when they're coming to view your practice is how they can add value to it. So it's really important that you give them those ideas here over the course of your viewing as well. And so you want to be presenting not just what you are doing but also what you haven't done. So I need to, rather than say, you know, I would have them. I thought I would have done an invisalign open day for probably about a year or two. Um, you know, looking at the brand section, you know if you've got, you know, something which is really promoting your teeth whining, rather than say, but the reality is, you haven't done teeth whining, you don't promote it, then not the point of saying this is not what we're doing and we're not asking those kind of questions. Likewise, with regard to a price increase, you know, obviously, we're going into a situation where, at the beginning of the year where most people are thinking about, if they haven't done already at the beginning of january, how are they reviewing their prices coming into the next year? If you've only just done that, then it's worthwhile having that conversation but obviously presenting to people with the reality of saying, well, look, you know, the account said I did 600 grand, but the reality is, if I stood still last year and what I've just done is I've just implemented the 7% rise on my down plan fees and I've just cut all my future item rates up by eight percent. So already, given the fact I'm still seeing, you know, working just as many sessions as I was before, you're all you're already probably going to be the best part of 40 or 50 grand after my revenue. Just on the reality of me doing exactly what I did last year because of the changes I've just made to the business there we are, so some pertinent ones, and listen.

Dr James, 18m 1s:

It's worth reiterating that, obviously, this is the stuff that you see day in, day out through running dental leads, so these will be the most common ones that you see pop up as well. Therefore, coming from a place of experience which is amazing any more on the front that we just mentioned which is things that we can shift around in the immediate term whenever we're coming to the sale or we're doing the biggies it comes to that point about perception as well so one thing that a lot of people look at is the average patient's paying for head.

Luke, 18m 26s:

So I have a lot of places to be having the practice in the last 12 to 18 months and then what is your income? And then, if you divide one by the other, what does that mean your average patient is spending in the practice? Now, um, it almost is paradoxical, but the lower that amount is the better, because the lower the risk is of the business. So what you want to do before you sort of if you put your practice in the market, is wake up as many of your kind of your kind of lay patients as possible. You know, do a big e-shot on malching or similar products or you know whatever product you're using on the xms side and get any kind of patients who blast through the doors, because then you could demonstrate to a patient person. I might pray my practice create my practice has got, if I would say 3,000 active patients as opposed to saying my practice has got 2,500 active patients, because when you do that calculation again, that perception of risk becomes a lot better if that amount is lower, even if those 3,000 patients in reality haven't come three years before and they're only just starting to come back through the doors now, but acting on one thing at a time is a really good thing to do just before you put the prices on the market computation.

Dr James, 19m 30s:

You know I'm gonna ask something and this just popped in my head when you were talking just then. It's somewhat relevant to the topic of this podcast, but regardless, I still feel it'll be super useful overall to the dentist listening. I was talking about this to a dentist of the day and we were discussing is there a sort of rule of thumb in terms of surgeries in a practice ratio of surgeries versus active patients that one might expect or look for whenever they're purchasing a practice?

Luke, 19m 57s:

yeah, I mean it gives. Again, it depends on the kind of practice. So if your practice is doing those high inspections well, then naturally you're going to see less patients per day. You need less patients to deliver your income. But if you're a routine general practice then for a full-time list I you've got 10 sessions in a given week. You generally expect somewhere between about 1800 and 2000 patients per chair. So if you're looking at a routine pre-surgery practice, not doing big ticket stuff, then I would expect to see give or take about five and a half to six thousand patients fascinating.

Dr James, 20m 26s:

And is that for a mixed practice?

Luke, 20m 28s:

I'm guessing yeah, that's all getting a mixed practice, so again some of those kind of doing the more sort of bread and butter stuff. I mean, obviously, if you've got a big nhs contract, um, then the reality is you're probably getting any slightly more patients than that to make sure you're hitting your udass, but it all depends on how well maintaining that patient is as well. So you know for all I'm saying you may need a practice in and then it's not a priority. You need lots of patients because they're having to do more work on the treatment, whereas you know we work a lot of practices in the South East where actually it doesn't look like they're doing a lot of practice contract because it's all checkups and then the materials are really low and the lab fees are low. But the reality is it's a list and where the pages are routinely coming every sort of six to twelve months and they don't need a lot of work and the oral health's really strong. But obviously to maintain that income they do need more patients to come through the door. If not at one in the eight times someone comes through, they're not going to achieve what they need to achieve.