Acquisitions in the dental market: what you need to know as a practice owner

A market full of buyers

The fact that most practices are still standing on their own two feet, while the acquisition market is so active, has a simple explanation. Consolidating parties are not looking for the sole trader with a single treatment room. They prefer practices with two or three locations, multiple rooms and several dentists on the payroll. Ideally with a dental hygienist and orthodontist under the same roof.

For a large part of the market, the solo practitioner with a loyal patient base, consolidation is therefore not an immediate issue. For the dentist with a certain scale, it is. That dentist operates in a market with both private equity firms and strategic buyers actively building dental groups. These two types of buyers look at your practice in a fundamentally different way.

How different types of buyers look at your practice differently

A private equity firm has financial firepower and wants to move at pace. It buys practices in order to combine them into a larger group and generally pays a higher multiple for them. Region plays an important role in this: if a party already has practices in Noord-Holland, it is unlikely to move to Limburg. Private equity firms think in terms of creating expanding footprints.

A strategic buyer, for example a dentist-entrepreneur who is building a group of their own, takes a similar view. Even so, this type of buyer is often more selective in its pace and has to weigh up each acquisition more carefully. We have advised entrepreneurs who decided at the last moment not to sell to a private equity firm, but to build a group themselves. With sound financing and the right legal structure, that is a serious alternative.

The difference for you as a seller is that with a strategic buyer, your involvement after the acquisition carries more weight. They want to know whether you will stay on. With a private equity firm this is less decisive, provided there are enough other dentists who can take over your work.

The key value-determining elements

Buyers look at a handful of factors that together determine the value of your practice. Size is the first: multiple rooms, multiple locations or one large location in which several dentists work. The less the practice depends on you as the owner-dentist, the more attractive it is.

The range of treatments also counts. A practice in which, alongside dentists, a dental hygienist and an orthodontist also work is more interesting than a practice with a single discipline. Region continues to be a factor, and so does the state of the equipment and systems. A digitalised practice with modern equipment is worth more than a practice that has been running on the same chairs for thirty years. That sounds obvious, but we regularly see the difference reflected in the bids.

On the other hand, there are factors that make a sale more difficult or even impossible. The strongest is owner dependency. Are you the only dentist, do you run the practice from your own home and do you want to stop, as it were, tomorrow? Then the chance of a successful sale is small. We are honest about that. We recently advised an entrepreneur in that situation not to try it through us, but to look in his immediate surroundings for a colleague or employee who would like to take over the client base or practice. That does not require an extensive valuation. It then comes down to the question: are both parties satisfied?

Anyone who wants to sell in three to five years' time and currently still falls into that category can work on a number of these points. Taking on a second dentist reduces the dependency. Investing in systems and equipment increases the appeal. These are not major strategic operations; they are choices you are already considering anyway, but which yield extra returns in the light of a future sale. Naturally, we are happy to think along with you on this in advance.

The valuation logic

The value of a dental practice is usually expressed as a multiple of EBITDA. For an individual practice of a certain size, that multiple is around four to five times. For a larger practice with multiple locations, disciplines and dentists on the payroll, that can rise to seven or eight times. Towards ten is exceptional, but it does occur.

Behind those ranges lies a logic that drives the market. A consolidating party buys individual practices and combines them. Smaller practices are often more efficiently organised, which means higher margins are achieved. Buyers generally realise lower margins and take this into account in their bid.

By achieving efficiency benefits, the consolidating group as a whole becomes more valuable and the practices can benefit from each other (a central organisation in which staff can be exchanged if necessary).

Normalisations play an important role in that valuation. Buyers look critically at what the owner-dentist actually works and earns. If you work sixty hours a week for a salary based on forty hours, a buyer will wonder whether he will have to take on one and a half people to cover your work. The reverse also applies; if you pay yourself a higher salary than a replacement dentist would earn, you can normalise these costs, which increases your EBITDA. This is positive for the value.

Two normalisations deserve extra attention. The first is the position of self-employed contractors in your practice. If there are risks around false self-employment, you will be given an indemnity for this in the purchase agreement. That means you can still be held liable after the sale if the Belastingdienst (Dutch Tax Administration) comes knocking. Our advice: arrange it in advance, not during the process.

The second is the premises. Buyers almost always want to lease your practice premises back rather than take them over, at a market-based rent for five plus five or ten years. We often do not yet see a market-based rent reflected in the annual figures. We then adjust this when carrying out the valuation.

It also pays to compare several buyers side by side. We once spoke to a dentist who had sold his practice directly to a chain. The buyer had taken the owner-dentist's turnover out of the figures and determined the value on that basis. That had been presented as the standard method. Our assessment, however, was that he sold his practice for a considerably lower amount than was necessary. That is the risk of a one-to-one conversation with a professional buyer. They know exactly how it works; you probably only do this once in your lifetime.

The preparation determines the outcome

The most important lesson from the transactions we support in this sector is that timing determines everything. A dentist who starts thinking about a sale at the age of fifty still has room to get the practice ready for sale, to take on a second dentist, to get systems in order and to enter the process with energy. Buyers sense that energy. In practice, it does sometimes happen that personal circumstances mean a sale has to take place under time pressure. That is something you want to avoid.

Then there are two more practical matters to take into account. In an acquisition in healthcare, the Nederlandse Zorgautoriteit (Dutch Healthcare Authority) must give its approval, which takes four to a maximum of eight weeks between signing and the actual transfer. And after the sale you will almost always be given a non-compete clause of two to three years, which means you cannot start a new practice in your region. These are not obstacles, but they are points to factor in beforehand.

When you enter into discussions with a buyer, ask the question: how exactly will you deal with my practice after the acquisition? Not in general terms, but with examples from earlier acquisitions. How does the buyer deal with the staff and with the patients? The difference between a good and a wrong buyer does not lie in the price alone. It also lies in the answer to that question.

Would you like to know how your practice is doing? Request our exit-readiness checklist without obligation or get in touch for an initial, no-obligation conversation.

About the author

Kiki Jacobs is Senior Manager at Rembrandt M&A and sector specialist Healthcare & Education. She has worked at Rembrandt M&A since 2017 and has gradually specialised in acquisitions within the healthcare sector. She supports entrepreneurs in, among others, oral care, physiotherapy, childcare, occupational health services and elderly care with the sale of their practice or organisation. What drives her in this sector is that for healthcare entrepreneurs it is not only about the transaction, but also about the question: what will happen to my staff and my patients after the acquisition?