Current Market Conditions for Dental Clinics
Current Market Conditions for Dental Clinics
Despite ongoing entry of corporates into ownership of dental practices, this is at a relatively slow pace. The industry remains dominated by small scale businesses, typically owned by the dentists working in them. Australia’s ageing and growing population has supported solid revenue growth of around 3% per annum over the past 5 years. However, IBISWorld forecasts this to moderate to around 1.9% pa for the next 5 years. Even in light of lower revenue growth going forward, there currently remains a strong marketplace for purchase of dental practices. The strength in the marketplace will be detailed later in the article, through consultation with specialist health care broker, Brad Potter from Health Linc.
Current Industry Performance
Over the past 5 years, industry revenue has grown at a robust 3% per annum. This is supported by Australia’s growing and ageing population as well as a “catch up” boost after the Covid-19 social distancing which delayed visiting dentist in 2020 and 2021.
Patients typically fund most payments to the dentist themselves unless they have private health care insurance to cover part of the cost. As such the industry revenue is more sensitive to cost of living pressures compared to general practitioner health care, which benefits from more government subsidy.
Given pressure on household budgets, a growing number of patients are now accessing superannuation policies for Dental treatment. Funds are credited to the patient who then pass payment onto the dentist to complete the treatment. Patients have to be aware that the use of superannuation funds in this way incurs additional tax.
Current Market for Practice Sales
Brad Potter from Health Linc advises that the current marketplace for dental practices is strong, with purchaser demand in excess of available businesses for sale.
Some trends in the marketplace over recent years include:
- Market is dominated by dental practitioners looking to buy their own business.
- This means that the strongest demand is actually for smaller 1-2 dentist practices.
- Less than 10% of sales are to corporate buyers. These sales can achieve higher multiples of profit though are also typically subject to transaction terms locking dentists in for several years. Corporate transactions can also include less than 100% paid at settlement with the remaining payment subject to completion of hand over terms and/or reaching financial performance targets (i.e. earn out payments).
The standard of profit used in the dental practice business market is based on EBITDA, being an under-management profit. The main multiple range paid in the marketplace is in the order of 2.50-4.50 x EBITDA profit. Most sales are close to a multiple of 3.00.
A ballpark rule of thumb for small practice sales, is that the sale prices can typically reflect around 40% of gross fees for the goodwill component value, plus plant and equipment and stock.
Given the relatively strong demand for smaller practices, this industry does not follow the normal trend of larger businesses with higher profits achieving higher profit multiples when sold. In fact, multiples paid are fairly consistent from small businesses to large ones.
Characteristics of practices which sell toward the higher end of the multiple range include:
- Increasing revenue and profit trends.
- Value / quality of plant and equipment.
- Percentage of revenue reliant on an owner dentist or other senior dentist.
- Room for expansion – there is a preference for at least 2-3 surgery rooms (chairs) – as long as rent is not too high.
- Location / demographic – given there is typically an ability to charge higher fees in wealthy demographic areas.
- Transaction terms – inclusion of clauses to lock in dentists for several years.
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