Goodwill Hunting
A lot is written and spoken about goodwill in a business, but in its simplest terms it refers to the value of a business over and above its tangible assets. It’s easy enough to understand the value to physical (i.e., tangible) assets like equipment, chairs, or computers, it’s harder to put a monetary price on a loyal client base and respected and/or well-known brand. Nevertheless, the value of goodwill is hugely important to any business, certainly when it comes to achieving the best possible price in a sale, but even when running a business day to day, it makes sense to maximise its potential.
Lis Hughes of Frank Taylor & Associates discusses some of the levers which can be used to increase the goodwill in your practice, either ahead of a sale, or just operating as an ongoing concern.
“The outstanding period on a lease can have a big impact on a practice’s valuation” explains Lis. “Most purchases are funded, on average to the tune of 80%, by a bank loan. The duration or term of that loan will not exceed the remaining lease on the property. Therefore, if you aim to fund a purchase of £1,000,000 with a loan of £800,000, the monthly repayment will be considerably more if you need to repay over, say, five years, than 15. In this example the monthly repayments could be anywhere from £8,000 to £10,000 less for a practice with the longer lease, which for many may be a game changing figure. If you are thinking of selling, it may benefit you to extend the lease, and as a rule of thumb, it was worthwhile investigating a lease extension for any lease with under 10 years remaining. It is also vital to ensure you set the right context for your request with the landlord. We have heard horror stories of large payments to landlords (up to £50,000) for help with lease extensions. Explaining that you are looking for more security and stability for the business to aid your long-term planning should help you avoid being caught like this.
“A second tactic”, continues Lis, “is to review the number of referrals you make and to question whether you could take that work ‘in house’. Valuations are based on multiples of earnings, so even referring on what, on the face of it, may seem a small piece of business, can have a bigger impact when the multiplier is applied. For example, two implant treatments per month, with a margin of 30% may equate to around £1,500 of potential profit referred on each month. Annually this is around £18,000 and with a typical multiplier of five, this is £90,000 of avoidably lost goodwill. In short, think carefully about referring work on, and if in doubt, don’t. On top of this, and probably harder to quantify, are the added benefits of developing deeper relationships with your patients, who will spend more time with you, and of establishing your practice as a centre of excellence for a wider range of treatments.
Next month we will explore further tactics around efficiency and stability that can also work to boost your practice’s goodwill.
For more information on how Frank Taylor and Associates could help your business, please contact us on 0330 088 1156.
Practice - London
Practice location: This practice is located in a region of South London on a busy high street with a lively mix of shops and independent cafes and restaurants. There are great transport links and commuters regularly walk past the practice to and from work.
Practice type: This is a two-surgery mixed practice and is being sold to facilitate the retirement of the current principal. The practice is housed in a two-story semi-detached property purpose-built building and has been very well maintained. There is an added benefit of parking for two cars and on-street parking at certain hours. The current principal is retaining the freehold and will create a new 15-year lease.
Practice financials: The gross fee income from management information for the past 12 months is in the region of £375,000 per annum and the NHS-GDS contract has a UDA rate of just over £30.00 per UDA, 37% of the income is generated from private work. The income is generated by the principal working five days a week, and an associate working two days a week. They are supported by a full-time nurse/receptionist and two full-time nurses.
Price achieved: A price of £825,000 was achieved which was slightly in excess of the asking price.
Agent's comments: This practice has been in the current ownership for over 20 years and established for more than 50 years. The current principal started his succession planning before the pandemic, so it has been quite a journey to reach this point. The practice is in need of some capex on the interior and the new buyer is excited to develop the private element whilst maintaining the NHS contract.
Number of people looking in the area: 2,979
Practice - Surrey
Practice location: This practice is situated in Surrey and is located in a popular large town and within a predominantly residential area. The practice is within walking distance to local shops and amenities.
Practice type: This is a well-established mixed three-surgery practice that is being sold to facilitate the retirement of the existing principal. The practice occupies a well-thought-out, two-storey, previously residential property and is being sold as a leasehold with a new 15 year lease being created.
Practice financials: The gross fee income from management information for the past 12 months is in the region of £750,000 per annum. The gross has been generated by the principal working four days a week, two associates who work a combined 7.5 days a week, and an hygienist working 1.5 days a week. They are supported by a part-time practice manager, two full-time receptionists and six part-time nurses. The last set of accounts showed staff costs in the region of £170,000 per annum.
Price achieved: A price of £1,100,000 was achieved which was slightly higher than the asking price.
Agent's comments: This principal has so enjoyed running his practice and is more than happy to stay on as an associate post completion as it is not the clinical side he has lost joy in, but the pressure of the NHS and general management concerns. He is not alone in this and is part of a trend we continue to witness.
Number of people looking in the area: 2,226
Practice - Lancashire
Practice location: The practice has been established for over 60 years and is situated in a busy town with excellent footfall. It is a lively area benefitting from urban regeneration. It is being sold as leasehold with a new 15-year lease in place.
Practice type: This is a two surgery mainly NHS practice, and is located in a former residential, semi-detached property and is very well presented. The sale is to facilitate the retirement of the principal.
Practice financials: The gross fee income is in the region of £360,000 and 98% of the income is generated by a NHS-GDS with just over £31.00 per UDA. The income is generated by the principal working five days a week, and three part-time associates. The team are supported by a part-time practice manager and three full-time nurses/receptionists. The staff costs in the last set of accounts are in the region of £75,000 per annum.
Price achieved: A price of £500,000 was achieved which was slightly less than the asking price.
Agent's comments: This practice was tired, as was the principal who had spent his entire career working in the NHS and had felt he had run out of steam. His associates were not inclined to buy the practice as they have ambition to work purely in the private sector and this is a trend we are seeing more of in the current environment.
Number of people looking in the area: 833
Practice - Staffordshire
Practice location: The practice is based in one of the larger towns in Staffordshire and benefits from a wealth of local businesses and several new housing developments which include schools and medical centres.
Practice type: This is a two surgery, mixed practice which occupies the ground floor of a commercial building, kitted out to a very high standard. A new 15-year lease is being created and the principal is happy to stay on post-completion.
Practice financials: The gross fee income from management information for the past 12 months is in the region of £350,000 of which 40% is private and 60% is NHS with a UDA rate of just above £35 per UDA. The income has been generated by the principal working five days a week and one part-time associate. The team are supported by three full-time nurse/receptionist. The staff costs are in the region of £65,000 per annum.
Price achieved: A price of £675,000 was achieved and was in line with the asking price.
Agent's comments: This practice owner just loves dentistry and wanted to relieve himself of the burden of practice ownership so he could enjoy clinical work and he is more than happy to undertake the NHS work leaving the incoming principal to work and develop the private side. This is what is known as a win-win situation!
Number of people looking in the area: 812
