Unless you already own a practice and have prior experience with the process, you may be wondering how to buy a dental practice. From finding the right practice and evaluating its profit potential to financing your purchase and submitting the relevant applications in a timely manner, the process of buying a dental practice is fraught with complications that could jeopardise the sale or put your financial future at risk. In this article, we will offer our insights into the dental practice purchasing process, outlining what you need to consider before starting your search, how to find a dental practice to buy, and our step-by-step guide to buying a dental practice.
Am I Ready to Buy a Dental Practice?
There are several requirements that any aspiring dental practice owner needs to meet before trying to find a dental practice to buy. While having enough money to finance the sale is an obvious essential, sellers and lenders alike expect to see evidence of prior experience, as well as plans for future growth and development.
Before you start searching for your dental practice, we recommend that you review your position against the following criteria:
- Clinical and Management Experience
Owning and running a successful dental practice requires good dentistry and even better management skills. For sellers or money lenders to look at your application, you need to have at least 3-5 years of experience following your qualification to prove you would be suitable as a practice owner. In addition to clinical experience, you need evidence of your team management and treatment planning skills to demonstrate that you are capable of overseeing every aspect of daily operations.
- Financial Record
Much like financing commercial property, you will need to put down a deposit equal to 10-20% of the practice value in order to secure further financing. Putting down a larger deposit could give you more borrowing options and increase the confidence of your lender; however, we would not recommend doing this at the expense of your professional or personal financial health.
Speaking of which, your lender will request records of your professional and personal finances, which they will examine for evidence of consistent revenue, good savings, minimal debts, and an excellent credit score. We recommend that any outstanding debts or issues with your credit score should be resolved long before you plan to buy a dental practice.
- Business Plan
Submitting a comprehensive business plan alongside your loan application or offer is an effective way to earn the trust of your lenders and sellers. While you should customise your business plan to reflect each lender you apply to and practice you put an offer on, we recommend preparing a template that outlines your vision for the future, your financial projections, and the operational strategies you will use to achieve them.
In addition to highlighting your clinical, financial and management experience through an interconnected plan for enhancing patient care, increasing revenue and improving organisational approaches, making reference to market research will additionally demonstrate your business acumen.
- CQC Applications
While your application to the Care Quality Commission (CQC) is not submitted until after your offer has been accepted, CQC applications are complicated and time-consuming documents that can impede the purchasing process. Submitting your CQC application at the right time is crucial, especially when purchasing an NHS practice, so having them prepared in advance should be a priority to avoid this part of the process being the cause of delay to any proposed completion date.
How Much Does It Cost to Buy a Dental Practice?
The cost of buying a dental practice will vary depending on various factors, including its location, its patient base, the nature of its contracts, as well as the premises themselves. When you are making an offer on a practice, we recommend that you assess its value relative to the following criteria:
- Patient Base: While the number of patients registered with a practice should influence your valuation, the length of time its patients have been with the practice, the consistency of their appointments, and their average spend on treatments offer more insight into the strength of its patient base.
- Premises and Equipment: In addition to the condition of the premises and the quality of its equipment, you should ascertain whether the property is freehold or leasehold.
- Goodwill Percentage: This is calculated relative to the patient base and the reputation of the practice.
- EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation): This estimates the profitability of a practice, which makes it an especially important factor in the eyes of your lender.
- UDA (Unit of Dental Activity) Rate: Each time an NHS dental practice sees one of its patients, it uses a higher or lower amount of UDA depending on the UDA rate of the practice. As an NHS dental practice needs to use at least 96% of its UDA to fulfil its contract, it is in your best interest to find a dental practice to buy with a higher UDA rate to minimise the amount of work necessary to generate income.
Whatever the value of your offer, you will be expected to put down a deposit of at least 10-20%, while your lender will cover the remaining amount. Keep in mind that most lenders calculate their valuation based on the goodwill of the practice, which excludes the cost of any equipment included in the sale. This means that you will likely have to pay for the equipment out of your own pocket, which can drastically increase the size of your initial investment.
When your lender assesses your loan application, there are various factors pertaining to your professional and personal finances that will influence the amount they are willing to lend you, not to mention whether or not they accept your application at all. These factors include:
- Your earning history as an Associate Dentist.
- Your management experience and the length of time since you qualified.
- Your financial track record and how you manage your personal finances.
- Your current living situation.
- Your capacity to repay the loan if interest rates increase.
How Long Does It Take to Buy a Dental Practice?
When you are buying a business, the length of the process is ultimately decided by how long it takes the buyer and seller to agree on a price. Depending on whether you want to negotiate for the best price or you want to prioritise a faster purchase, it can take as long or as short as you want to buy a dental practice.
However, in light of the external factors at play in any business purchase, it is usually in your best interest to shorten negotiations rather than lengthen them. Delaying the process puts you at risk of interest rates rising, loan offers expiring, and time limits for crucial applications being missed, all of which could potentially jeopardise your purchase.
How to Find a Dental Practice to Buy
When you are ready to start searching for a dental practice to buy, you need to ensure that the practice you pick not only has good earning potential but also aligns with your professional goals and personal life commitments. Therefore, it is important that you understand the different types of dental practices, how they operate and whether they are a good fit with your clinical expertise, career goals and lifestyle outside work.
The different types of dental practices include:
- NHS Practices
These practices operate in compliance with and receive income relative to their UDA rates. While NHS practices provide a reliable source of income, their owners must manage their Unit of Dental Activity efficiently to maintain profitability while ensuring their treatment and services adhere to the terms of their NHS contract.
- Private Practices
These practices operate independently, giving you the freedom to offer a wider range of treatments while setting your own prices. While private practices have much greater earning potential than NHS practices, their continued profitability relies on a solid marketing strategy and maintaining patient relationships through consistent service quality.
- Mixed Practices
As their name would suggest, these practices provide NHS and private services. While mixed practices allow their owners to reap the benefits of consistent income and higher earning potential, finding the balance between meeting contractual obligations and maintaining profitability requires an intense level of oversight.
- Squat Practices
These practices require the owner to build their business from the ground up, acquiring the premises, equipment and staff and beginning to accumulate their own patient base. While this approach to buying a dental practice requires more time and financial investment, it gives owners more autonomy over their business and can be very profitable with the right plan in place.
- Dental Group
When two or more practices operate under the same name or branding, this is known as a dental group. While the amount of oversight increases with each additional practice, dental groups give you the opportunity to accumulate larger patient bases while diversifying your services across multiple locations, resulting in higher profits and increased assets.
Guide to Buying a Dental Practice
- Step One: Decide What Type of Dental Practice to Buy
Once you have decided that you want to buy a dental practice, it is important to consider what kind of practice would be best suited to your clinical expertise, plans for career progression, and personal circumstances. In addition to choosing the type of practice that aligns with your personal and professional life, you should consider what size of practice you want to run, how many patients you can manage and how many staff you can afford to employ.
Depending on your living situation and family life, you should decide whether you are willing to relocate for the perfect practice, how far you are willing to commute, or whether you need to find a practice closer to home. Wherever you decide to focus your search, it is important to conduct some competitor research to see what dental services are currently on offer and how you can distinguish your practice from the crowd.
- Step Two: Review Your Finances
When you are clearer on the type, size and location of the practice you want to purchase, you need to review your financial situation to determine how much you can afford to spend on a practice. Creating a financial summary of your earnings, savings, assets and credit history is an excellent place to start, as your lender will expect to see this information when you make your loan application.
By contacting a dental finance broker, you should be able to clarify how much you could be entitled to borrow, which will make it easier to start putting together a business plan for sellers and lenders. Furthermore, obtaining an Agreement in Principle from a lender is an excellent way to get ahead of the process, while demonstrating to the seller that you mean business.
- Step Three: Start Your Search
Once you have your finances in order, it is time to start searching for potential dental practices to buy. Dental brokers regularly receive listings for new practices on the market, while speaking to medical suppliers, laboratories, and other dentists could alert you to some lesser-known opportunities or a desirable practice that is about to come onto the market.
Rather than rush into a deal without adequate information, you should sign NDAs with any practices that take your interest, such that you can review their financial records without breaking confidentiality. We recommend visiting practices in person whenever you can, preparing a checklist of desirable features as well as questions to put to the current owners.
- Step Four: Make an Offer
When you have found the dental practice you want to buy, place an offer that takes into account its valuation, the goodwill percentage, and the price of any assets. Make sure to include any conditions of purchase in your initial offer, such as requiring CQC approval before completion or asking the seller to stay with the practice for a handover period, to set expectations from the start.
If the seller accepts your offer, your respective legal teams can draft a document known as the ‘Head of Terms’, which outlines the details of the purchase before the official contracts have been arranged. Once these terms have been agreed and the document has been signed by both parties, proper due diligence can begin.
- Step Five: Due Diligence
Before you commit to buying a dental practice, it is important to conduct a thorough investigation into the practice in question to ensure you are in no doubt about the business you are about to buy. In addition to examining the accounts, income, expenses and tax returns of your chosen practice, it is advisable to review their existing employment contracts, Associate/Hygienist Agreements, commercial lease agreements, commercial contracts, equipment maintenance reports, regulatory compliance paperwork and the NHS contract if it is an NHS practice.
- Step Six: Secure Your Loan
Once you are happy with the financial and legal standing of the dental practice you want to buy, it is time to secure your loan with your lender. In addition to submitting the relevant financial documents and your business plan, you may need to include profit projections and cash flow forecasts as evidence of your ability to repay the loan.
Assuming your lender is satisfied with the information provided, they will send you a formal offer detailing the terms of your loan.
- Step Seven: Submit the Relevant Applications
With your finances secured, you need to turn your attention to the various legal arrangements that are necessary to complete the purchase. In addition to drafting a sale agreement for the practice, if the business operates out of a leased commercial property, your legal representatives will need to review and transfer the lease agreement to you or negotiate a new lease with the landlord of the property if there is not long left on the current lease.
Any NHS contracts will need to be transferred and the process needs to be followed properly, plus your CQC application will need to be submitted in plenty of time. CQC applications typically take between 10-12 weeks to process, so it is vital that you do not delay in completing and submitting the relevant applications.
- Step Eight: Exchange of Contracts
When the sale agreement and due diligence process have been finalised, CQC registration is ready to go and your lender has confirmed that your funds are ready to be released, both parties can sign the contract and set a date for completion. If the practice is an NHS practice, this is usually 28 days following exchange to tie in with the notice served on the NHS to transfer the NHS Contract and should be set for the 1st of the month as required by the NHS.
- Step Nine: Completion
When the completion date arrives, your legal team transfers the payment to the seller, and the dental practice officially becomes yours. Before you celebrate, it is important to inform your new patients, staff, suppliers and regulators about the change in ownership, as well as review the payroll, insurance and software access for the practice to make sure the handover is as smooth as possible.
Best Practices when Buying a Dental Practice
- Evaluate Profit Potential
Before you place an offer on the dental practice you want to buy, we recommend asking several questions of the seller in order to form an assessment of its profit potential. For an overview of the revenue stream you can expect to inherit from any given practice, ask the seller how many active patients they have (those seen in the last 10 months) and what ratio of these patients were check-ups versus treatments.
There are several other Key Performance Indicators (KPIs) that you would be wise to clarify with sellers, including:
- How many new patients have they gained in the last 12 months?
- How many patients have they lost in the last 12 months?
- How many new patients has the practice received from direct referrals?
- What type of marketing is currently working for the practice?
- Retain Dental Team
The clerical and clinical teams attached to your new practice are as essential an asset as any of the equipment included in your purchase. In addition to possessing knowledge of the business and its particular processes, their loyalty to your practice, its patients and to each other cannot be easily replaced.
While you likely have plans to innovate the way in which the practice operates under your leadership, the experience of the existing team could prove invaluable during handover and the early stages of your ownership.
- Digital Marketing
While most modern practices already implement marketing strategies to build and maintain their patient bases, if your intention is to buy a struggling dental practice or to build your own from the ground up, you should prioritise developing a digital marketing strategy. We recommend speaking to your existing team to understand what strategies have been tried in the past, successful and unsuccessful, as well as speaking to your patients to find out what keeps them coming back.
Common Mistakes when Buying a Dental Practice
- Overpaying for Goodwill
When you find the dental practice you want to buy, it is tempting to overinflate the goodwill percentage in the hope of securing the purchase. However, without performing the necessary due diligence, you could be throwing away money that would be better spent updating dental equipment or optimising your marketing strategy to improve dwindling patient retention.
Before you place your offer, we recommend seeking an independent valuation from a reliable dental broker to ensure you are paying what the practice is worth, rather than what you might be able to afford.
- Skipping Due Diligence
While the process can seem slow at times, allowing your eagerness to drive the process forwards often results in nasty surprises soon after contracts have been signed. Failing to perform the necessary due diligence could hide any number of issues with the dental practice you want to buy, from outdated staff contracts and equipment leases to past problems with the CQC and NHS clawbacks that could seriously impact your income.
- Not Having a Financial Plan
Even when you have properly performed due diligence and are aware of any issues that need addressing, unforeseen financial issues are likely to arise in the early stages of your ownership, which could jeopardise the stability of your practice unless you take the necessary precautions. From property damage and broken equipment needing repairs, private payment plans leaving gaps in your income, to delays in NHS payments threatening staff wages, it is important to be prepared for any financial pitfalls.
In addition to the 10-20% deposit required for your purchase, we recommend setting aside around 3-6 months’ worth of running costs to ensure your practice is safeguarded at the start of your ownership.
How Can Newtons Help Me Buy a Dental Practice?
We hope this article has improved your understanding of the dental practice purchase process. Our team of specialist dental solicitors have supported numerous clients with the purchase and sale of dental practices, as well as the submission of accurate CQC applications and transfer of NHS contracts.
If you are ready to buy a dental practice and would appreciate our insight and assistance, please contact us today, and a member of our team would be happy to talk you through our services.