By Hayley Robins, Senior Accountant at Hive Business
I’ve been spending more of my time on acquisitions and sales, learning to appreciate the dark art of dental practice valuations. There are many different ways to value a business. Here are two that seem to be prevalent with dental practices:
- a percentage of goodwill (turnover)
- a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation)
It’s interesting to watch people use them as a source of legitimacy, as if vendors and their brokers don’t want the price to be as high as possible. When I see EBITDA calculated by a broker it often looks strange to me.
What they are actually calculating is an adjusted profit that is supposed to equalise the personal circumstances of the owner, for instance if the owner pays for subscriptions out of the business, they should be taken out of the profit. If they pay a loan repayment out of the business, that should be taken out.
But because there are so many elements, so many potential adjustments, it’s usually far from clear what the number presented to a buyer actually represents. Look at the sale prospectus of a major broker and you might see that they don’t account for the principal’s time in the business.
Let’s say they are putting their adjusted profit calculation at £200k and multiplying by six to get an asking price of £1.2m. (Multiples depend on where you are and whether you fall in the £800k to £1.5m bracket). When you add up the value of the principal’s time and adjust EBITDA accordingly it doesn’t look so good: your EBITDA is £20k and your theoretical valuation is £120k.
Obviously you don’t want to fall for a bogus asking price, so be careful, and be cynical. On the flip side I have had discussions with clients about how much the corporate market has heated up recently. The corporates are in the mood to buy and the word is out, so some people who hadn’t been planning on selling are thinking about it.
In their head they have a value they think they can get (which for some reason is always £1m). When I analyse the figures it’s normally lower, and so they are confronted with a shocking question: what must I do to get the amount I need to retire?
Often the question is tackled with an alternative “owner occupier” valuation which is asserted to justify a larger valuation, much nearer original expectations. At the end of the day the true valuation is the one a willing buyer and a willing seller agree upon.
It’s no fun leaving this whole issue till the very end of your career when you’re already tired and want out. If you own a practice, ideally you want someone qualified like us to benchmark your business long before you have any concrete plans to sell. If you’re looking to buy, we could save you an awful lot of money right at the beginning of your career as a business owner.