How to Start, Scale and Sell a Dental Group – Webinar
Across the UK an interesting phenomenon is occurring in the UK Dental landscape, more and more dental groups are emerging all in search of quality dental practices to purchase.
They are searching high and low for quality dental practices that will contribute to the group’s EBITDA.
Increasingly, we are hearing from clients stating that their turnover is around £2m and they would like to build over the next few years to sell it for £20m!
Sounds great. However, the key factor some of the groups have not thought about is the debt-level funding they require. If you need to borrow £19m in order to sell it for £20m, I don’t think you would be so inclined to build a dental group.
Click here to listen to our podcast episode on whether now is the time to grow a dental business.
How Easy is it to Build a Dental Group?
It’s Not About How Much You Sell For
The thing you need to really care about is not the total amount group sells for, but ultimately what you actually receive into your bank account after paying off all the debt and taxes.
In other words, if you worked that hard over five years to build your business and sold it for £20m, but only put £1m into your bank account, would it have all been worth it? Probably not.
In simple terms – it’s the net figure you are interested in, not the headline figure.
This is actually the number you need to start with. So, instead of saying you want to sell your business for £20m, it’s essential to state what you want to receive net of debt and taxes.
Click here to read our guide on How to Sell a Dental Practice.
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So how do you plan to achieve your net goal? Is it via acquisition, start-up or a combination of the two?
If you’re going to make acquisitions over the next five years, do you know:
- how much revenue on average they should each be generating?
- how much you’re going to pay for a typical acquisition?
- how many acquisitions you’ll have to make each year?
- how much you’ll need each of those practices to grow after you’ve acquired them?
Click here to read more about choosing between starting and buying a dental practice.
Growing The EBITDA Is Essential
If you haven’t really thought about the answers to those questions, in other words: if your business is generating £2m in revenue today at an EBITDA margin of 20% and you want to sell it for a net £5m in five years, you’re probably going to have to grow your business at a rate of around 40% annually.
Is that really achievable in the current market? Especially as there are many more buyers than sellers currently in the UK market for quality dental practices- some of whom are willing to pay over the odds for them?
On exit, the net amount you will receive will ultimately be determined on the EBITDA being generated, and the real key is to grow the EBITDA faster than the revenues of the group. Through margin expansion is where groups can achieve a higher multiple and, hence, a higher valuation on exit.
This will mean centralising many costs as the group scales and keeping a close eye on keeping costs tight, whilst still delivering a quality service.
Click here to read our guide on How to Grow a Dental Practice.
Where Some Dental Groups go Wrong
Buying Multiple Dental Practices – What To Consider
Expanding your current dental practices is not the only way of building a dental group. I have worked with many clients who found that the best option for them was, instead, to buy more dental practices.
The one thing I will say is that this can be a complex process and it’s one which is not always easy to get right. No one wants to put an already successful business at risk, so considering mergers and acquisitions carefully is important.
Click here to read our guide on How to Buy a Dental Practice.
Have The Right Team In Place
No matter how long a dental professional has been in business, they are not best placed to make the most well-informed choices when it comes to legal and financial implications.
It’s important to put a professional team in place, before entering into a deal to buy further practices and merge them with the current one.
The team should include dental solicitors and dental accountants who can make sure that the deal is a solid one, that all relevant information is disclosed and that contracts include all agreed aspects of the deal.
Click here to read about the 10 things to look for in a dental accountant.
How To Ensure A Successful Merger Or Acquisition
There are several tasks that should always be completed, if an acquisition or merger is to be completed successfully and you want to build a dental group.
- A plan should be created that helps with the purchase of further surgeries and deals with the structure of the business after the acquisition.
- An analysis should be completed of the services currently being carried out at the surgery that is to be acquired. Is it a good fit in the current plan for the business?
- A detailed review of the proposition should be drawn up, so that any potential issues can be identified.
- An implementation plan should be drawn up, so that any acquisition or merger can happen without any significant negative impact on the business as a whole.
Over the years, I have seen the value of this work first-hand, working with clients to ensure that building a dental group is the positive experience that it should be.
Action Plans
- Evaluate Financial Goals: Focus on the net amount you wish to receive after all debts and taxes, rather than the gross sale price of the dental practice. Plan your financial goals with this net figure in mind.
- Strategize Growth: Decide whether acquisitions, start-ups, or a combination of both are the best path to achieve your net financial goals. Understand the implications of each approach on your business’s growth.
- Focus on EBITDA Growth: Prioritize growing your EBITDA faster than your revenues. Implement strategies for margin expansion and cost management to enhance valuation multiples at the time of exit.
- Plan for Mergers or Acquisitions: Develop a comprehensive strategy that includes the evaluation of potential practices for acquisition, integration plans, service fit analysis, potential issue identification, and implementation planning.
- Assemble a Professional Team: Before embarking on acquisitions or mergers, gather a team of specialists, including dental solicitors and accountants, to navigate the complexities of legal and financial aspects, ensure thorough due diligence, and secure favorable terms.
- Conduct Due Diligence: Perform detailed due diligence on potential acquisitions to ensure they fit within your strategic plan and do not pose unforeseen risks to your business.
- Implement Effective Integration: Develop and follow a clear implementation plan to ensure that any acquired practices or mergers are seamlessly integrated into your business operations, minimizing disruption and maximizing value.
- Monitor and Adjust Strategy: Regularly review your growth strategy and financial performance, adjusting your approach as necessary to meet your net financial goals and respond to market changes.
- Evaluate Financial Goals: Focus on the net amount you wish to receive after all debts and taxes, rather than the gross sale price of the dental practice. Plan your financial goals with this net figure in mind.
- Strategize Growth: Decide whether acquisitions, start-ups, or a combination of both are the best path to achieve your net financial goals. Understand the implications of each approach on your business’s growth.
- Focus on EBITDA Growth: Prioritize growing your EBITDA faster than your revenues. Implement strategies for margin expansion and cost management to enhance valuation multiples at the time of exit.
- Plan for Mergers or Acquisitions: Develop a comprehensive strategy that includes the evaluation of potential practices for acquisition, integration plans, service fit analysis, potential issue identification, and implementation planning.
- Assemble a Professional Team: Before embarking on acquisitions or mergers, gather a team of specialists, including dental solicitors and accountants, to navigate the complexities of legal and financial aspects, ensure thorough due diligence, and secure favorable terms.
- Conduct Due Diligence: Perform detailed due diligence on potential acquisitions to ensure they fit within your strategic plan and do not pose unforeseen risks to your business.
- Implement Effective Integration: Develop and follow a clear implementation plan to ensure that any acquired practices or mergers are seamlessly integrated into your business operations, minimizing disruption and maximizing value.
- Monitor and Adjust Strategy: Regularly review your growth strategy and financial performance, adjusting your approach as necessary to meet your net financial goals and respond to market changes.
Click here to find out more about acquisition finance.
Structuring a Dental Group for Optimal Tax Benefits
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As you may have seen in some of our previous blog posts, the last few years have seen the rise of many dental groups throughout the UK.
With practices across the country facing financial difficulty, we have seen even more dental groups either spring up or continue to grow as practices are snapped up at lower-than-expected prices.
Whether the groups consist of just a couple of practices or even a dozen, dental groups are becoming more common and are growing all the time.
Click here to read our article on Dentist and Dental Associate Expenses Guide
Importance of Structuring Your Dental Group
Always start with the end in mind. What do we mean by this? We mean your tax planning needs to fit around and compliment your ultimate goal or plan for your business. And your life!
It is important to note that dental groups come in all shapes and sizes, there is not a one-size-fits-all solution.
One of the problems we’ve seen dental groups making is primarily with how they are structured.
The problem is that many groups simply grow by raising the finance the purchase new practices, surgeries and equipment and they give no thought to how the businesses are structured.
In other words, they haven’t considered the tax consequences of how their group should be structured.
For instance, if you own several dental practices but some are held under your own name, while others are held as limited companies, this can have real consequences to your accounts and tax later on.
This is especially true once you start to grow your group further.
Click here to avail our service on acquisition finance.
Taxes to Consider for Dental Groups
Possible dental group structures
We are often asked ‘am I better off as a sole trader or forming a limited company?’. Unfortunately, the answer is pretty much always ‘it depends’.
It depends on your earnings, your losses, your assets, your personal situation and so much more.
The UK’s tax regulations are not straight forward, what works best for you is often a complex question.
If you want to find out more, we would strongly recommend you get in touch with us.
Most dental groups will fit into one of these 4 categories. However, this is not an exhaustive list by any means.
Structure 1: Sole trader with sub trades.
In this structure, you will typically have a sole trader (the dentist), who owns a number of practices. These practices exist as trades, they are not incorporated entities and they are connected by reference to that own person who is the business owner.
For income tax purposes, all of the practices can exist as one trade. So, if one practice is making a lot of profit, and another is making a loss (perhaps a squat you have just started), you can get loss relief between the practices. You can transfer the losses from the loss-making practice to the profit-making practice.
Business Asset Disposal Relief will also most likely be available, if the criteria are met (more below).
It is also important to note that with an unincorporated business structure, you are taxed on all profits earned, whether or not you draw that money.
Structure 2: Dentist owns practices as limited companies.
In this example, the dentist has incorporated each practice as individual companies and owns 100% of the shares in those companies.
This tends to happen when dentists set up or buy new practices organically, one after the other. But the time will come when you have to ask yourself if it is the correct structure.
One benefit of having limited companies is that it is possible to pay tax at a lower rate on dividends.
However, you will most likely not be able to benefit from loss relief in this structure. If one practice is making a loss you will not be able to use that loss within the other practices.
It doesn’t mean you lose that loss, it is still available for future profits. However, that is not ideal from a cash flow point of view.
Business Asset Disposal Relief will also most likely be available, if the criteria are met (more below).
Structure 3: Dentist owns holding company which owns practices as limited companies.
In this structure, you have an intermediate layer between the dentist and the limited companies (practices), a holding company. The holding company owns 100% of the shares in the dental practices and the dentist owns 100% of the shares in the holding company.
As with structure 2, it may be possible to pay tax at a lower rate on dividends. You will also not be taxed on the profits that you don’t draw.
When structured correctly, this qualifies as a group of companies. Loss relief may therefore be available, since your practices exist as a group of companies.
Substantial shareholding exemption (SSE) is also available if the criteria are met. This means it you may be able to sell one of those practices and pay 0% tax on the shares.
Structure 4: Dentist owns mixed group structure.
In a mixed group structure, you have a holding company which owns some of the practices and the dentist owns some practices separately. These separate practices can either be held as limited companies or as unincorporated entities.
Loss relief is available to practices within the group.
Whether this is the right structure for you will depend on several things. For instance, what you intend to do with the money if you sell one of the practices.
Say you sell one of the practices owned by the holding company. You can sell it for £1million and pay 0% tax on the sale (via SSE), which is then paid into the holding company. However, if you want to draw that money down then it must be distributed as dividend, which will be taxed at a higher rate than Business Asset Disposal Relief (BADF).
So, that might not be the right route for that specific practice.
However, you could sell that practice and keep that money within the group by reinvesting it in one of the other practices within the group. You could also buy another practice, meaning you pay 0% tax and also do not have to pay interest on a bank loan, since you’ve funded it yourself.
Keeping practices outside of the group as separate entities may be right for you if you want to pay the BADF 10% tax, rather than the dividend tax.
Action Plan
- Evaluate Business Structure: Choose between a sole trader, individual limited companies, a holding company, or a mixed structure based on tax efficiency, loss relief, and sale intentions.
- Maximize Tax Relief: Use loss relief within your chosen structure to offset profits and losses. Consider the tax implications on dividends and the availability of Business Asset Disposal Relief or Substantial Shareholding Exemption for sales.
- Strategic Planning for Sales: Decide on the structure that best suits your plans for selling practices, focusing on minimizing tax liabilities and maximizing net proceeds.
- Consult Experts: Work with dental finance professionals to navigate tax benefits and ensure compliance with your business growth or restructuring.
- Reinvest Wisely: Reinvest sale proceeds within the group to avoid high taxes on distributions and support business expansion or improvements.
Contact us to find out more
Selling Your Dental Group
One of the reasons that the way your dental group is structured is so important is the price you’ll get when you come to the exit.
After all that hard work building your dental group, you want to make sure you get the best price possible, as well as a clean and smooth break.
A clear structure to your business holdings makes this much easier. Below are examples of the kind of benefits you can get when you structure your dental group correctly.
Business Asset Disposal Relief
When you sell a qualifying business asset you will be taxed at 10% on the gains.
If at some point in the future you want to sell all or part of the business as an unincorporated entity, the following points must apply to qualify for the 10% BADF (previously known as Entrepreneurs’ Relief).
- You are a sole trader or business partner.
- You have owned the business for at least two years before the date you sell it.
If both of these apply, then the gains will be taxed at 10%.
If you have incorporated your practices into companies and you are selling shares or securities, different criteria must be met.
- You have at least 5% of shares and voting rights in the company – if they are not EMI shares.
- You are an employee or office holder of the company (or one in the same group).
Substantial shareholding exemption.
This is an exemption which gives UK-based companies exemptions on corporation tax on the gain of the sale of shares, when certain criteria are met.
For at least a continuous 12 month period, beginning no more than 6 years before disposal:
The company disposing of shares must hold an interest of at least 10% of the ordinary share capital of the other company.
The company must be a sole trader or member of a trading group.
The company holding the shares must be a trading company or holding company of a trading group.
With these points in mind, it is easy to see why it is so important to structure your tax affairs with the future in mind.
Consider where you want to be in 5-10 years and then work backwards accordingly.
Restructuring a Dental Group With Samera
If you’re in a situation where your dental group is growing, but needs a little bit more structure, or if you’re thinking about starting your own dental group – we are here to help.
Not only are we experienced business advisors, we are also dental group owners ourselves. We know exactly how to build your dental group so that it is structured in a way that helps you build the most value and get the best price when you sell.
Contact us today to find out more about structuring your dental group.
Our Expert Opinion
“I have been in the fortunate enough position to set up, run and own a dental group. Albeit a little smaller than previously, my experience is built on having done it. Many people think it is easy to borrow money and to then buy and build.
This was certainly true when interest rates were much lower, but now in a higher interest rate environment things are more challenging. The key is to identify the right practice to purchase at the right price, whilst your borrowing costs are managed carefully. Then, the next step is to identify how can you add value to the purchase – what could you do to the practice to improve EBITDA?
Remember – a small improvement in EBITDA in multiple practices can have a significant effect. But if you buy the wrong practice at the wrong price, this can be a massive problem and, unfortunately, I have seen this on many occasions, where a group has purchased a few lemons, which has had a significant impact on the wider group, making it less attractive to any potential group buyers down the line.
Currently, the valuations in the market are lower than what they have been in the past, but for the savvy buyer, now is a great time to build a group. Get in touch if you need help!”
Dental Accounts & Tax Specialists
As dental practice owners ourselves, we know what makes a clinic tick. We have been working with dentists for over 20 years to help manage their accounts and tax.
Whether you’re a dental associate, run your own practice or own a dental group and are looking to save time, money and effort on your accounts and tax then we want to hear from you. Our digital platform takes the hassle and the paperwork out of accounts.
To find out more about how you can save time, money and effort on your accounts and tax when you automate your finances with Samera, book a free consultation with one of our accounting team today.
Dental Accounts & Tax: Further Information
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Reviewed By:
Nigel Crossman
Head of Commercial Finance
Nigel is a former banker and head of commercial finance at Samera. He specialises in raising finance, negotiating deals and structuring finance applications for healthcare businesses.
Arun Mehra
Samera CEO
Arun, CEO of Samera, is an experienced accountant and dental practice owner. He specialises in accountancy, financial directorship, squat practices and practice management.
