Location, location, location?
Martyn Bradshaw explains why location is important but not everything when it comes to practice values
Our national press love a headline quoting a statistic on the average house price or the average wage. Statistics containing an ‘average’ often make a good story because they divide opinion. However, some should be treated with caution.
Practice values are often subject to similar treatment and while surveys might contain some useful guidelines on the general state of the market, they often fail to uncover the finer points of valuing the goodwill of your dental practice.
There is no doubt that there is a significant variance in the values of practices in the south east of England, the major English cities and more remote locations. The same can be said of Scotland, with practices commanding higher prices if they are in or close to Glasgow, Edinburgh or Aberdeen.
Hotspots by location tend to be town centres/highly populated areas. This is simply because these areas enjoy a higher concentration of dentists seeking to buy a practice. In these locations the majority of sales are likely to be to dentists wanting to be ‘owner occupiers’ as they are the largest group of interested buyers. Typically these hotspots are (but not restricted to):
When hotspots are less important
Body corporates are as active as ever and are seeking to purchase across the country. Do they pay different values dependent on the areas? Not generally. Their assessment of goodwill value relies on the ‘super profit’ that the practice generates (a multiple of the earnings before interest, tax, depreciation and amortisation – known as EBITDA). This calculates a value, regardless of where the practice is.
It would be wrong to say that location doesn’t influence the price a corporate will pay for your practice. Location becomes important if a corporate has a foothold in a particular area. Running a group of practices in proximity will bring economies of scale, which is a key mantra to the investors behind corporate dentistry. Therefore, the location factor on price in this case is more regional than national.
What impacts on price other than location?
Obviously, the location of a practice isn’t something practice owners can change so if yours is not in a price hotspot, what can you do to increase its value? Most patients will come from the locality – which can sometimes be quite a small area depending on the transport infrastructure and other factors. There are exceptions, but few general dentistry practices find it possible, despite good marketing campaigns, to broaden the area from which patients attend. Offering specialised services (cosmetic dentistry being an obvious one) can, however, be effective in drawing patients from further afield.
The biggest single factor affecting values is probably the basis of the treatment provided. Some practices sell for significantly over the asking price due to the high volume of offers at the closing date for sealed bids. These tend to be NHS practices. The banks see strength in an NHS income stream and will lend readily as such, hence the high number of finance-ready buyers available. An NHS practice in a northern city or even a more remote location is very likely to command a higher price than a private practice in the south east.
While private practice values may be enjoying a value resurgence due to the improving economy, buyers are more likely to pay 'top dollar' for those practices where capitation scheme income is greater than Fee Per Item income. Again, banks are more comfortable lending on this proposition as they perceive the income stream to be more secure.
Turnover is vanity, profit is what matters
To understand how we might break a value assessment down even further, let’s consider two similarly-equipped NHS practices with the same turnover, in the same city, in the same street. One has a consistently higher level of profit than the other due to lower staffing costs or better cost control. I know which would command the higher price.
Martyn Bradshaw is a practice valuer and sales agent with PFM Dental. For further information on PFM Dental visit pfmdental.co.uk