Is The UK Dental Economy in Trouble?

Arun Mehra recently discussed two very important topics in his newsletter, so we thought you'd appreciate reading from them if you missed it. Take it away Arun…
 
Is the UK Dental Economy in Trouble?

This summer has not only been doom and gloom weather wise in the UK, but also economically challenging. We have seen much news coverage about “Sub-prime” debt exposure over the summer and the problems various US and some European financial institutions have taken on.

So what is all the fuss about?

In a nutshell, “sub-prime” mortgages are where the banks have slipped up. These “low documentation” mortgages, have usually taken the borrowers word for repaying the loans (commonly known as self certifying mortgages in the UK). With sometimes no solid incomes, nor real assets to wave as collateral, some borrowers had to embellish the truth a little bit.

Only now is the problem that the banks that caused themselves is coming home to roost. To date, most of the “sub prime” problems have been occurring in the US housing market, where we are now seeing a strong growth in house re-possessions, and a general weakness in the whole US housing market. This coupled with information just today of employment falls for the first time in 4 years in the US does not bode well for the general economic outlook.

Well this is going on in the US not the UK?

Well yes, to date most of the problems have been confined to the US market, but the Bank of England have been watching cautiously here too. The US housing and lending market is the largest market in the world, so when the US sneezes, we usually feel the affect over here too, albeit delayed.

So what is going to happen in the UK?

Honest answer is I don’t know. My discussions with friends of mine in the right places in the city tell me that this could be similar to the internet bubble we saw a few years back, and my experience and gut also tells me that what goes up must come down, basic principle of financial markets. The key is to time it right, basically, buy low, sell high, whether it be houses, shares or dental practices.

So ok, I am a dentist how does this affect me?

Well if this rocky market continues, I think it will affect not only those dentists with personal mortgages, but also business owners too. It is the same banks that have exposure to the “sub prime” market that are also actively lending to the UK dental sector. I think a degree of realism and caution will need to be taken by the banks especially when dealing with practice purchases (see next article) as they will want to be assured their unsecured lending for goodwill is safe as houses (excuse the pun). Then for those dentists dreaming of setting up their own private practice, I envisage the banks will have more questions and want more assurance the new practice will work. This means more homework and business acumen for dentists, something we have been working on for a long while now.

So is the UK Dental Economy in Trouble?

Not yet, but it could happen. Financial institutions are fickle beasts. Whatever happens to the general UK economy, the dental market will certainly experience it too. If we do experience some sort of downturn it may take 6-12 months before it affects the sector. There is no doubt growth in the private dental sector, and also a growth in the demand by patients for private treatment, but there will come a point when the demand slows down. When is that point? Who knows? But if we do experience economic uncertainty, be assured the private sector will potentially experience any downturn perhaps sooner that later.

This certainly doesn’t mean you should not proceed forward with your new practice, or converting to private, or even mean stay in the NHS if it isn’t working for you, it means be shrewd, understand the market issues, be aware of the market trends and respond to changes in demand, just like any other sound business would. It is in these times of uncertainty that the greatest opportunities will also present themselves….

Is the current price of Dental goodwill justified?

As we all know, UK dentistry, like the economy, is changing at a fast and furious rate. In particular, since the new NHS contract was introduced we have seen a major shift in the value of dental practice valuations.

Since April 2006 we have seen the values of dental practice goodwill shoot up as demand for practices has rocketed. The question we have to ask is, is there value in buying goodwill at current market values in the current economic climate? The answer is it depends.

Goodwill is an intangible asset and varies greatly from practice to practice. There can be no set rule for how much should be paid for goodwill as it varies so much and can only really be assessed on a case by case basis. In addition, there is no guarantee that a practice will retain any goodwill when it transfers hands.

In the south east, it has been commonplace to see practices have 20+ viewings in a day, which are then followed by a sealed bid process, with the highest bidder “winning” the opportunity to purchase the practice. The pressure on the market and the sense of panic buying reminds me of many boom and bust cycles we have seen previously in markets across the board…including property, the internet bubble, the bulb and tulip craze of the 1600’s……

Naturally a vendor wants to maximise the price of their practice sale, but all too often I am seeing dentists purchase practices that in my opinion do not warrant the value attributed to them. With money historically freely available from the main banks in the sector (this may change – see previous article), this has fuelled the price rise of goodwill. From my view point many young dentists are burdening themselves with huge debt at an early stage of their career, feeling that if they do not buy a practice now they will miss out later on. The simple principle of caveat emptor is rarely applied by the acquiring dentist, who is much of the time just focused on trying to buy a practice, without really understanding the responsibilities, obligations and perhaps burden they are taking on. Only 12-24 months down the line do they actually wake up and see if their acquisition has really been worth it. Many a time it hasn’t.

The valuers and the banks have to shoulder some of the responsibility here, and I understand from contacts in the sector all the main banks are reviewing each proposal they receive from interested buyers with greater caution now. Past performance of the acquiring dentist, business plans and forecasts are increasingly order of the day for the banks if they are going to make a sound investment into a practice acquisition. In addition the current uncertainty we are seeing in the financial markets will only make the banks more cautious in their lending policies, including to dentists. A few more burnt figures from loans going bad will certainly make the banks re-assess the credit worthiness of the dental sector.

If you are going to buy a practice, as a bare minimum you must do:

It is not all doom and gloom for buyers. There are some quality practices to buy, but before you even make an offer to purchase a practice, as a bare minimum, we suggest the following:

1.  Obtain annual accounts prepared by a third party accountant for at least 3 years to assess the financial performance of the practice.
 
2.  Think, plan, write a business plan of what you are intending to do with the practice when you buy it. This ESSENTIAL stage is all too easily left out by too many dentists, but in my opinion is the essential aspect to making a practice a success.

3.  Do your sums with some expert help. Work out using the historical accounting information how much you feel the practice is worth. Not what the valuer has valued it at (remember the valuer gets more money when they sell it at a high price!), but what would be a reasonable price for you to buy the practice to make it a viable profitable proposition for you.

4.  Review the practice set up to see how much you will need to spend on the practice to make it right for your needs e.g. equipment etc. Get quotes before buying.

5. Assess whether the patients really exist on the database. All too often many dentists are buying a large database of historic customers, but are these customers coming back? And are they the kind of customers you want to treat? Do your research, ask the vendors for information about the practice performance. If the information isn’t forthcoming shouldn’t you ask why?

6.  Read the financial press, make an assessment of what is going on in the economic climate, make rational decisions and not emotional decisions about your financial future.

Finally, I would urge a sense of caution when buying a practice. Don’t be a sheep and follow the crowds, do your homework, make your calculations, and only then make a sound decision.

Don’t let your decision be rushed, it could be the biggest financial decision you make in your life. Likewise, if you want to start a squat practice, plan, deliver and execute in a logical business like way. Remember the banks will only love you when you are repaying their loan, if servicing the debt becomes a problem, your best friend, the bank, could soon turn into your biggest headache (Apologies to any dental bankers out there, I know quite a few of you read this newsletter!)