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Connell C - LB Mar 2022

Private dental market shows resilience

dentist

Business property advisor, Christie & Co, has released its annual ‘Dental market review’ report, which evaluates the UK dental market in 2021 and the first half of 2022. Christie & Co advised on, valued or sold more than £925 million in dental practice value last year.

The report focuses on pricing trends and funding, private sector performance, the NHS market in England, Scotland, and Wales, and publishes market sentiment from some of the sector’s operators.

The report notes the resilience of the dental sector and the rapid recovery of the transactional market over the past 12 months.

Demand

Christie & Co stated that there are 1,300 dental practices marketed each year, and approximately 520 sold in a given 12-month period. Demand still outstrips supply with a vibrant market reported across all price ranges.

Appetite continues from a range of buyer types, with Christie & Co selling 33% of practices to corporate buyers between 2021 and H1 2022, 32% to first-time buyers, 24% to existing owners, and 11% to small groups.

Despite more than 75% of independent purchasers still favouring a practice with an NHS contract, there was a notable increase in the number of groups, which previously favoured NHS-led practices, now focusing solely on the private sector. The ‘sweet spot’ for independent and group buyers are practices with a lower proportion of NHS income which have capacity to grow private income from new patients and the NHS patient base.

Appetite for the new orthodontic contracts has been strong, particularly among corporate operators. Limited supply of these opportunities has resulted in competitive bidding, with the same corporate buyers looking further afield, particularly in Scotland where there are no time limited contracts, but opportunities remain as valuable. Values per unit of activity are lower in Scotland, but contracts are longer and so provide a greater degree of security.

Pricing

The report also includes detailed analysis of average prices achieved for different types of dental practices across the UK’s regions. Overall, average prices paid increased, and dentistry fared very well compared to many other business sectors in the UK.

There has been a definite shift in demand towards the private sector as uncertainty in the reform of the NHS system has increased. This, together with workforce challenges, has led to a scarcity of dentists and has forced costs up. While the recruitment of clinicians is also tough in the private sector, the boom in demand for private dental services means that private or ‘mixed’ practices are better placed to attract dentists.

Transaction timelines

Before 2021, the average time from offer accepted to exchange was 233 days. This decreased by 19% to an average of 188 days in 2021 and H1 2022. In England, fully private practices which are share sales typically transact the quickest, while asset transactions involving the transfer on an NHS contract take the longest.

Deal structures

The treatment of deferred considerations is changing, and this has been a significant feature of the market over the past 12 to 15 months. It is driven by the need to compete with established partnership models, greater competition for prime dental practices, and the realisation that aligning the retained principal’s interests with the buyer’s interests can be a powerful creator of additional value for both parties.

With corporate transactions, 64% have a deferred element. In contrast, with small group and independent transactions, just 8% have a deferred element, while 92% are without a deferred element, which confirms that the corporate and larger group operators are more likely to defer part of the sale price to ‘lock in’ the ex-principal’s clinical commitment.

Operational review and sentiment

Christie & Co interviewed a cross-section of corporate and independent operators to gain insight into how their businesses have fared and their sentiment for the year ahead. The company witnessed extreme frustration around the current state of NHS dentistry, particularly in England. All operators passionately agreed that the service is critical for patient health, that urgent reform is needed, but that this reform seems as far away as ever.

Corporates and mid-sized groups are generally moving away from larger NHS practices due to the shortage of dentists in the NHS sector. Smaller NHS groups and independents are typically more speculative and often have working partners, so recruitment is less challenging for them.

100% of operators questioned felt that the environment for recruitment had deteriorated for clinical and non-clinical staff over the past 12 months. However, a number agreed that the relaxation and now removal of revised standard operating procedures within a practice can now return working conditions to how they were pre-pandemic. This may reverse the number of dental nurses leaving the profession and begin to ease recruitment pressures and cost increases.

65% of NHS providers said they are likely to increase associate unit of dental activity rates in the coming months, whereas only 10% of those operating private practices are considering increasing associate percentages.

When asked “What has the rate of like-for-like growth been in private revenue over the last 12 months?”, 45% said more than 10%, 40% said between 5-10%, and 15% said less than 5%. Key growth drivers include the continued high demand for cosmetic and aesthetic treatments, patients being more aware of oral health, the access crisis in NHS dentistry, the increase in demand for bigger treatments, digital workflows which are driving efficiencies and better results, and more flexible pricing which enables an increase in fees.

About 50% of those questioned felt the rate of revenue growth was declining, which suggests that, overall, dental spend is greater but pent-up demand might be levelling off. 

Funding

The report concludes with the analysis of the dental market funding landscape by Christie & Co’s sister company, Christie Finance. It notes that the dental sector continues to receive encouraging support from lenders, with banks looking positively at NHS, mixed, and purely private practices. Historic performance of the practice, together with the experience of the buyer, continue to be the main driving factors for lenders, with the availability of associates remaining a key concern.

Paul Graham, head of Dental at Christie & Co, said: “So far in 2022, dentistry continues to be a highly attractive sector for investors, helped by the increased awareness of oral health and the boom in cosmetic and aesthetic treatments. Despite some significant headwinds – not least rising interest rates, geopolitical and economic uncertainty and increasing workforce challenges within the profession – the market has remained robust.”

To read the full ‘Dental market review’ report click here

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