By Ross Martin, Accountancy Director at Hive Business.

Not so long ago pubs were seen as a safe investment. It seemed obvious, people had been going to the boozer for generations and it was part of the fabric of society, particularly working class life. What could ever threaten that? As it happens the cumulative effect of Thatcher, cheap supermarket booze and giant pub groups did a pretty good job: we’re now on 27 pub closures a week.

The accountancy definition of an asset is “a resource from which future economic benefits are expected to flow”. This might be profits, but it could also simply be the future re-sale of the asset itself. Pub values, which like dental practices were calculated on turnover, slid and then took a dive when the future sale price didn’t look like a sure thing. Could this happen to dental practices?

People are certainly paying an awful lot of money for goodwill (five to 10 times profit) and yet goodwill is not a tangible asset; it goes away as soon as the punters stop coming, and they can stop coming for many reasons that aren’t your fault.

Moreover, people are paying the money in a context in which everyone is treating dentistry according to the old model: you graduate, work as an associate, buy the practice off your boss, sell it to your associate and retire on the money. It doesn’t quite work like that any more; there’s more risk at each stage and it’s more competitive. There’s no guarantee that people will keep coming through your door, all you can do is compete and beat your local rivals.

It sounds slightly loony but when you pay a million quid for a practice, therefore, you’re actually just buying the right to roll your sleeves up. You’re buying the current speed that the business is operating at. You’re buying conviction — would you have had the conviction to build a practice that big?

If you’re paying that much for these ephemeral things then you had better know what your margins are going to look like nine years down the road when you’re still paying off your loan and costs have soared. (To give you an idea of the trajectory, inflation is at 1.8 per cent and in March EDF is raising its standard electricity tariff by 8.4 per cent, Npower by 9.8 per cent.)

All I’m saying is have a proper think before leveraging yourself to the hilt because bubbles have a funny habit of bursting. If goodwill prices go down it’s entirely possible that you’ll end up in negative equity, which means you lose even if you’re business is successful in the conventional sense.

So how do you know what a practice is really worth? As the young entrepreneur Dev Patel told us, what you really want is a practice with headroom. He said: “You’re not going to make money for a very long time if you’re paying off bank loans for years and growth potential is limited.” How do you ascertain headroom? We use a rule of thumb that a practice has a minimum £250k per room in it. So if you’re looking at a three-surgery practice with only 200k turnover you could go in favourably over a squat that costs £250k to set up, and far better than a £1.2m practice that’s purring but has no headroom. Of course, the turnover won’t just grow because you put up a new sign saying “Under new management” and stick your photo on a cobbled-together website.

If you’re thinking about buying a practice, contact us on 01872 300232 or email us at hello@hivebusiness.co.uk.