By Ross Martin, Accountancy Director, at Hive Business
Noticed how the price of dental practices keeps going up? Things seem to be going the way of the housing market, but then things are a tad more serious if you’re in this game. For starters, you can probably borrow more than you can afford. And buying goodwill isn’t the same as bricks and mortar: there is only real value in it if the existing patients keep coming through the door.
If you want to buy and have access to cash there are some good reasons to proceed with caution:
- You now have to pay an invisible 20% to the vendor. No, I haven’t gone mad, it’s true: tax relief on goodwill purchases has been abolished. I’m not sure how many buyers out there realise it but, sadly, if you’re about to make a £1m purchase you’ll no longer get that handy £200k reduction in tax. This significant development happened in July 2015 but somehow hasn’t deflated prices.
- In fact, the opposite has happened: average goodwill for mixed practices has jumped nearly 20% in the past quarter alone (from 104% to 123% of turnover).
- It’s a tough time to be an associate and many are rushing into practice ownership, with extra pressure from the increasing volume of inflated corporate purchases. Demand massively exceeds supply.
- The banks have a renewed appetite for lending and there’s still a lot of family money in the marketplace.
Taken together these four points mean you’re going to be stretching. That in itself isn’t a problem, so long as you know what you’re getting into.
I was speaking to two guys who were buying about 18 months ago when the tax relief was restricted. Nonetheless, they ploughed on with enthusiasm. Recently I caught up with them. We went for dinner and it became apparent rather quickly that the numbers didn’t really stack up. They weren’t going to be earning very much for three years, and they were shocked. I had shown them these numbers first time around but the family accountant seemed to assume that even if they bought for 150% of turnover they couldn’t fail, and that all they would have to do was keep the engine running.
The opposite is actually true: if you pay a premium for a practice then you’d better have a growth plan because growth is the only way you’ll get clear of your debt burden. Just take a look at some example numbers:
As a fairly standard metric, if a practice costs £1m the buyer will put in 15% and borrow 85%. The bank may lend over say 12 years and charge interest, and so the buyer will see 8-10% of turnover sucked out on loan repayments.
In an undeveloped practice the profit margin will be around 20% to 25% profit. After tax it may be 15% (if your tax structure was a boring afterthought during the purchase). And the bank is taking that 10%. If you were hoping to work like a dog for free and pay HMRC and bankers for the privilege, you’re in business…
Sorry. There is hope for buyers with a growth plan and I’ll be seeing how it looks in one of my next blogs.
Ross
Call us on 01872 300232 or email us at hello@hivebusiness.co.uk.
