Regardless of international uncertainty and the rising prices of operating a enterprise amid the UK’s hovering inflation, dealmaking within the UK dental sector has confirmed extraordinarily resilient over the previous 18 months. Document ranges of exercise had been recorded throughout 2021, a pattern that’s persevering with unabated in 2022, with robust income progress and a spread of various purchaser sorts serving to to drive a wave of consolidation and dealmaking.
Revenues are being pushed up amid rising consciousness of oral well being, a build-up of demand post-COVID-19 and the rising recognition of beauty and aesthetic procedures. These booming income are attracting varied consumers and buyers to the sector, with demand for dental practices spurred on by the massive diploma of fragmentation that persists within the UK market.
In keeping with figures from Christie & Co, rising demand noticed the worth of sale costs within the UK dental sector rise by 8.6 per cent final yr, exhibiting that there’s rising incentive for house owners to promote up. Progress in demand for acquisitions was even stronger, with Christie & Co reporting that 2021 noticed a 24 per cent improve in registered consumers saying they had been critically thinking about buying a dental apply.
What are the important thing progress drivers within the UK dental business?
Dentistry is a flourishing sector within the UK for quite a few causes, with one of many key elements (as in lots of different sectors) being pent up demand for companies that has been seen because the COVID-19 pandemic. With many not having seen a dentist since previous to COVID-19, there may be big ongoing demand for the complete vary of dental therapies, from check-ups to remedial procedures to beauty and aesthetic therapies.
Together with inflated post-COVID demand, there has additionally been extra natural progress in demand for dental companies, with rising consciousness among the many basic populace of the significance of fine oral well being and common dentist check-ups.
One other issue driving demand for beauty and aesthetic dental procedures, is the proliferation of content-driven social media websites resembling TikTok on Instagram and actuality TV reveals resembling Love Island, which business observers say have contributed to rising demand for procedures resembling veneers and whitening.
Revenues within the personal dental sector are additionally seeing vital progress because of issues that many sufferers are experiencing accessing NHS care. With a scarcity of staffing impacting NHS ready lists, some sufferers are in search of personal therapy (offering they’ll afford it), with many of those sufferers subsequently remaining on personal shopper lists.
Non-public practices are additionally experiencing income progress because of the rise in versatile pricing. This permits sufferers to pay decrease up-front prices, however in the end implies that practices can cost the next worth for therapy. Common therapies prices are additionally rising, attributable to rising demand for larger and costlier therapies. An element that, once more, could possibly be attributable to pent-up post-COVID demand.
Make-up of the UK dental sector
A key issue encouraging dealmaking throughout the UK dental business is its composition in line with proprietor kind. As with industries such because the veterinary sector and wealth administration that we’ve examined in current insights (each additionally sectors seeing robust dealmaking), the UK dental sector is very fragmented, with the majority of practices nonetheless independently owned.
In keeping with Christie & Co figures, of the 12,583 dental practices within the UK, 8,059 are owned by unbiased operators, in comparison with 2,384 owned by smaller companies (with lower than 22 websites) and simply 2,139 owned by larger companies resembling corporates and mid-sized teams (22 websites or extra).
General, simply 15 per cent of complete practices are owned by bigger teams. With the rise in sale values seen final yr possible encouraging extra house owners to promote, this excessive diploma of fragmentation implies that consumers seeking to consolidate at scale have ample alternative to make acquisitions.
Moreover, it seems that fragmentation is more likely to improve within the short-term. The comfort of planning legal guidelines in 2020 has led to a higher variety of so-called “squat practices” showing available on the market. Squat practices are dental companies began from scratch, normally from a single apply, with the goal of rising additional.
They’ve turn into a go-to possibility for a lot of dentists who’ve labored by the challenges of COVID-19 and are actually seeking to rapidly construct worthwhile practices. Given this goal (and the speed at which they’re showing), squat practices may supply glorious acquisition alternatives for consumers with the capital to assist finance these progress methods, doubtlessly by buy-and-build plans.
Who’re the primary consumers?
As we talked about on the outset, one of many principal elements spurring busy M&A exercise within the sector is the wide selection of purchaser sorts which might be energetic within the dental market. Christie & Co recognized 4 principal kinds of purchaser which have been making offers within the dental sector over the previous 18 months: company; first-time consumers; present house owners and small teams.
Non-public fairness
Maybe unsurprisingly, given the massive scope for consolidation throughout the dental market, probably the most energetic consumers have been firms backed by personal fairness companies. Non-public equity-backed plans have pushed appreciable exercise within the greater worth ranges, with a few of the most energetic personal equity-funded companies together with Portman (190 practices), Rodericks (148) and Dentex (129).
Some notable personal fairness offers throughout 2021 included Capvest’s acquisition of stakes in Rodericks and Dental Companions, which led to forecasts that the 2 companies can be merged to type one acquisitive group.
Non-public fairness companies have additionally sought to purchase into the dental sector (possible anticipating a wave of consolidation) by backing plenty of smaller teams, together with Riverdale Well being Care, Clyde Munro, Actual Good Dental Firm and Dental Magnificence Companions. These smaller companies are already increasing and, given market circumstances, are more likely to see additional progress over the approaching years.
As a result of scale of fragmentation that continues to be within the dental market, it’s extremely possible that extra personal fairness companies will start giving backing to small and mid-sized teams to allow them to construct acquisitively by buy-and-build progress methods.
Non-public fairness consumers may also be attracted by the varied progress avenues supplied throughout the dental sector, as an rising variety of sufferers go for personal dental companies and beauty and aesthetic procedures. Such traits may allow personal fairness consumers to both deal with amassing practices with explicit specialities, or to construct a various portfolio of websites providing a spread of companies.
Earlier this yr, DD Group, a UK and Eire-based dental and medical aesthetics agency, was acquired by personal fairness agency Solar European Companions from former house owners IDH Group and Palamon Capital Companions.
The acquisition got here after DD Group had skilled three years of speedy progress, underpinned by big and rising demand for dental and aesthetic therapies. Given the persevering with progress in demand for these companies, Solar’s funding can be important in enabling DD Group to pursue its bold progress plans.
DD Group Chief Government Paul Adams commented: “We now have bold plans at DD to consolidate our place because the main supplier of dental and medical aesthetics services within the UK and Eire.”
“This deal will assist us to understand these plans, turning into the primary alternative throughout each sectors for scientific therapy options. Beneath this new possession, we can have the financing and operational independence to proceed increasing, assist a rising variety of prospects, and pursue new markets throughout the UK, Eire and past.”
Impartial purchasers
Impartial consumers are amongst these with the strongest demand for dental practices. Nevertheless, in contrast to nearly all of company or group consumers, unbiased purchasers largely favour buying NHS practices, with greater than 75 per cent of unbiased consumers favouring acquisitions of practices with NHS contracts.
These consumers favour NHS acquisitions as a result of contracted revenue they provide and the actual fact NHS practices are sometimes run by an proprietor or Principal, making the recruitment of Associates extra easy.
Nevertheless, reflecting the pattern of sufferers shifting from NHS care to personal therapy, for a lot of unbiased consumers, there’s a “candy spot” of practices with a “decrease proportion” of NHS revenue that provide the capability to develop income from personal companies by buying new prospects and changing NHS sufferers.
As this pattern develops, it appears possible that unbiased consumers will proceed concentrating on NHS practices, maybe with the final word goal of including personal companies, upselling these to new and NHS sufferers and rising the income acquired practices can generate within the extra profitable personal market.
Bigger teams
Bigger teams have, total, prevented an excessive amount of M&A exercise, with the most important teams not actively buying throughout 2021. With personal fairness companies probably the most energetic consumers, bigger dental teams have saved to the sidelines, maybe cautious of getting into the market too quickly after COVID, or maybe (given their massive present portfolios) they’re content material to attend, make acquisitions extra selectively and focus as an alternative on natural progress inside their very own practices.
Neither of the 2 greatest dental teams within the UK – MyDentist and BUPA Dental – had been actively buying throughout 2021. Nevertheless, with 600 (MyDentist) and 484 practices (BUPA Dental), respectively, each teams are far larger than their nearest rival – personal equity-backed Portman Dental Care (190).
In keeping with the Christie & Co report, simply 65 websites had been acquired by bigger company teams throughout 2021. Nevertheless, having been so reticent through the dealmaking wave to date, most of the massive corporates within the dental sector have loads of capital to spend on acquisitions and it’s, maybe, a query of when and never if they are going to actively return to the market.
Deal buildings and timelines
There are appreciable variations in deal buildings throughout the UK dental sector, with personal sector acquisitions sometimes involving a deferred aspect, with a view to replicate the danger inherent in transferring goodwill from vendor to purchaser and to create a “hedge” towards potential income loss.
Deferred concerns are normally linked to the enterprise’ future efficiency within the years post-acquisition and can sometimes be accompanied by a tie-in for the previous proprietor, the size of which is normally linked to their contribution to the apply. Deferred concerns are usually curiosity free and paid in instalments.
Deferred acquisitions are way more widespread amongst company consumers than smaller teams and independents. Final yr, 64 per cent of acquisitions by company consumers had a deferred aspect, in comparison with simply 8 per cent of transactions involving a small group or unbiased purchaser.
Nevertheless, the construction of deferred consideration is altering, one thing that has turn into a big characteristic over the past yr or so. Adjustments to deal buildings are being pushed by: the requirement to compete with established partnership working modes; higher competitors for the perfect practices; the truth that aligning the pursuits of purchaser and retained precept can create further worth for each.
These ends are achieved by varied means: an fairness share in both a newly-created agency or the buying enterprise, which grows in step with the enterprise’ worth; funds based mostly on the expansion of both income and/or EBITDA over time.
In addition to the construction of offers, the timelines for various kinds of offers range drastically too. Usually, absolutely personal practices offered in share gross sales transact the quickest, whereas the asset-based transactions involving NHS contracts take longer. For asset offers, due diligence and CQC registration eat a big period of time, taking a minimal of three months.
General, nonetheless, information reveals that deal timeframes appear to be falling within the dental sector, doubtlessly as consumers turn into extra environment friendly and digitise components of their acquisition course of. In offers through which gives had been accepted previous to 2021, the common time to alternate was 233 days. For gives accepted within the yr 2021-2022, this had fallen to a mean of 188 days to alternate.
Pricing
In fact, one of many important elements that can spur any dealmaking wave is the form of worth that house owners can generate from promoting their enterprise, with greater costs naturally incentivising extra house owners to promote whereas valuations are stronger.
The dental market is not any completely different and figures counsel that costs are firmly on the rise. In 2021, common sale costs had been up 8.6 per cent in comparison with 2020. Whereas 2020’s market was, in fact, closely impacted by the COVID-19 pandemic, final yr’s progress additionally outstripped that seen pre-COVID in 2019 (5.4 per cent) and 2018 (5.2 per cent), exhibiting a transparent, and fairly sharp, upward pattern.
In relation to the sorts of valuations that various kinds of dental apply generate, EBITDA multiples are significantly greater in acquisitions of associate-led dental practices (these through which there isn’t a clinically dominant working precept main the apply, or through which the apply is sizeable sufficient to assist a group of associates) than in owner-operated practices (through which income is generated by a working precept working as a sole dealer, partnership or restricted firm).
Affiliate-led practices devoted to personal therapy generated common EBITDA multiples of seven.89x throughout 2021, whereas associate-led practices providing primarily personal with some NHS therapy (combined, personal led practices) generated EBITDA multiples of seven.13x. Throughout personal and combined, personal led practices, the common EBITDA a number of for 2021 was 7.4x, with a spread of 6x-9.4x.
In the meantime, for associate-led practices providing primarily NHS companies, with some personal therapy (combined, NHS led), the common EBITDA a number of was 7.2x, whereas practices solely providing therapy on the NHS generated a mean a number of of seven.25x. Throughout these two apply sorts, the common EBITDA a number of final yr was 7.2x with a spread of 6x-8.8x.
For owner-led practices, nonetheless, EBITDA multiples are considerably decrease throughout the board. Proprietor-operated personal practices generated a mean EBITDA a number of of three.35x, whereas combined private-led practices generated 4.11x. These two apply sorts had a mean EBITDA a number of of three.91x for 2021, with a spread of two.5x-5.5x. Proprietor-operated combined, NHS led practices generated a mean a number of of 4.18x, whereas owner-operated NHS practices generated 3.6x. The common a number of throughout these two apply sorts was 4.09x, with a spread of 2x-5.75x.
It needs to be identified that the price of revenue that owner-operated practices generate for the proprietor personally just isn’t mirrored of their buying and selling accounts, which means that they register the next EBITDA %, however a decrease valuation a number of. For associate-led practices, then again, revenue is absolutely costed, leading to a decrease EBITDA % and the next earnings a number of.
General, bigger personal practices generated the next charge of a number of progress than their NHS counterparts, with bigger, higher-quality practices (particularly these in fascinating areas) reaching document costs, with some approaching 10x EBITDA.
Future – What elements may threaten dealmaking
Given the continuing (doubtlessly rising) fragmentation of the dental market, the robust demand for acquisitions amongst a spread of consumers and the chance of bigger company teams returning to {the marketplace} within the medium-term, it appears pretty easy to foretell that dealmaking will proceed to develop within the dental sector, however there are potential headwinds that might threaten this.
Maybe most notably within the present financial system, there may be the distinct risk that the expansion in beauty and aesthetic therapies (one of many key drivers of accelerating dealmaking) could possibly be derailed or in any other case slowed by inflation and the cost-of-living disaster.
Widespread excessive avenue availability and the pop-culture affect of TV and social media have helped push beauty and aesthetic dentistry to the forefront of the market and prompted many high-profile M&A offers. Nevertheless, as decrease and middle-income households are more and more pressured to chop again on non-essential spending, it’s potential that the revenues generated from beauty and aesthetic procedures may decline.
One other potential headwind is the inevitable shrinkage of the pent-up demand that has pushed the business because the COVID-19 pandemic started to recede and sufferers began visiting the dentist in higher numbers.
Reflecting this concern, 50 per cent of personal suppliers have mentioned that their charge of income progress is declining. This means that, though spending stays robust and rising, the dimensions of pent-up demand within the wake of the pandemic is levelling off.
Moreover, there are issues for dentists when it comes to financing, which may derail progress plans (whether or not acquisitive or natural). Christie & Co report that 62 per cent of dentists have not too long ago been declined entry to finance by a financial institution, which it says “clearly reveals the necessity for proactive, various finance to bridge this hole, cut back cashflow strain, and allow bold operators to proceed on their progress trajectory.”
With the intention to preserve progress methods, house owners will want higher entry to unsecure loans, asset finance and short-term working capital. An absence of accessible financial institution financing may additionally lead many homeowners to contemplate personal fairness funding as doubtlessly providing the quickest path to progress.
Lastly, regardless of the massive diploma of fragmentation available on the market and amid hovering demand and valuations, restricted practices are literally available on the market, doubtlessly because of gross sales plans nonetheless being placed on maintain because of COVID-19 and different disruptive elements. Which means that quite a few various kinds of consumers are competing for a restricted variety of accessible practices, pushing valuations up.
Whereas the availability of latest practices might enhance as valuations rise and house owners search to take benefit, this additionally means that consumers seeking to make the most of fragmentation now might need to be inventive and doubtlessly study off-market alternatives as effectively.
Nevertheless, regardless of these headwinds, the trajectory of dealmaking within the dental sector appears clear. Having remained sturdy regardless of quite a few uncertainties, robust demand amongst a various vary of consumers, the sheer scale of fragmentation available on the market and better valuations encouraging extra house owners to promote whereas costs are excessive ought to assist to make sure that M&A within the dental sector continues to carry out strongly over the medium-term and doubtlessly even longer.
