Dental Mid-Year Review 2021

Supply and demand for dental businesses

In 2020, the dental market was remarkably resilient yet there was a pause in M&A activity as practices reopened and businesses found their feet again; this resulted in a striking shortage of practices entering the market for sale.

Though demand for dental businesses continues to outstrip supply, we are definitely seeing an improvement on the level of supply in the market, with a glut of deals carried forward into 2021 which completed in Q1 and the threat of a rise in Capital Gains Tax (CGT) in the Chancellor’s Spring Budget (which didn’t materialise) contributing to a record volume and value of deals completing.

Competition for practices on the market remains quick and fierce with the implementation of closing dates for offers and multiple offers on practices being commonplace. We agreed offers with an aggregate value of £200 million during Q4 2020 and Q1 this year and received an average of three offers per practice.

As we move through 2021, volumes are returning to pre-COVID levels, but the likelihood of CGT rises in the Autumn Budget could place another artificial deadline for completions leading to a spike in September and October.  

There is significant demand for all types of dental practices, with corporate buyers who were active pre-COVID now acquiring and trying to fulfil their ambitious buy and build targets to make up for lost time. Privately-owned dental groups are also acquiring again but are less active than they were pre-pandemic as they are focussing on consolidating and running their existing businesses. They are buying opportunistically as they appear under no real pressure to grow to a certain size by third party investors. We continue to see a reinvigorated appetite from independent buyers purchasing their own practices and expect this to continue in the long-term. As pricing and demand for urban locations increases, buyers are widening their search criteria, seeking out practices in more rural locations.

Deal structures briefly adjusted in mid-2020, with buyers looking to defer part of the proceeds as a result of the perceived increase in risk. However, the quick recovery in the income of most dental businesses has boosted confidence, and deal structures are now broadly similar to before the pandemic.

One noticeable trend however is that Corporate and Dental Group buyers in particular are becoming more entrepreneurial in how they treat ‘deferred consideration’ in the sale of larger private practices. This is aimed at aligning the financial interests of buyer and seller after completion for a defined period, not just to tie in the seller but to incentivise the business to grow under new ownership and to share in that upside. We are seeing a number of new buyers coming into the market offering such alternatives to the traditional structure. 

The private pay market has bounced back incredibly quickly, which is likely a result of a rise in cosmetic dentistry and due to changes in consumer spending habits as temporary and permanent business closures hit the high street throughout the pandemic.

Pricing trends

Pricing and deal terms have returned to pre-COVID levels, and multiple offers are coming in on higher-quality practices.

The trends identified in our Dental Market Review 2020/21 published in earlier this year – such as the migration of patients to private practices from NHS and average spend per patient increasing as patients are electing for multiple treatments rather than waiting - are really coming to the fore and have pushed the value of good-quality private practices up. The question is whether this increase in revenue is here for the long-term, or whether it will be short lived once consumers return to more ‘normal’, pre-pandemic spending habits.

There is limited evidence of distress in the dental sector despite the pandemic, however, smaller practices have inevitably found it more difficult to adapt to the new operating procedures. There is evidence of price inflation for larger practices, and we expect that corporate buyers will continue to bid aggressively for such businesses.

Despite a prior nervousness to lend to first-time buyers, banks in England are generally supportive of the dental market - which has fared well through the pandemic - and a number of challenger banks are coming into the market which is positive for those wanting to acquire. 

Banks in Scotland are also very keen to lend, which is encouraging for those wanting to dip their toe in practice ownership.

Changes to look out for in the year ahead…

NHS reforms are on the horizon. It seems increasingly likely that NHS dentistry in England will see a permanent change to the way it is delivered. The contract reform programme in Wales might point the way to a capitation-based system, as Scotland has been for years, however, whether these are workable in England given the access issues experienced through the pilots and prototypes, is another question.

Average Earning Payments from NHS Scotland are due to end in July which, due to fewer rules and restrictions, will make it easier for our clients to transact.

  
  Head of Dental
  M: 07739 876 621
  E: paul.graham@christie.com

  
  Managing Director - Medical
  M: 0776 8646 983
  E: simon.hughes@christie.com