UK Snapshot: Dental Industry M&A

Article reprinted with permission from UK’s Business Sale Report.

Despite global uncertainty and the rising costs of running a business amid the UK’s soaring inflation, dealmaking in the UK dental sector has proven extremely resilient over the past 18 months. Record levels of activity were recorded during 2021, a trend that is continuing unabated in 2022, with strong revenue growth and a range of different buyer types helping to drive a wave of consolidation and dealmaking.

Revenues are being driven up amid growing awareness of oral health, a build-up of demand post-COVID-19 and the increasing popularity of cosmetic and aesthetic procedures. These booming profits are attracting various buyers and investors to the sector, with demand for dental practices spurred on by the huge degree of fragmentation that persists in the UK market.

According to figures from Christie & Co, rising demand saw the value of sale prices in the UK dental sector rise by 8.6 per cent last year, showing that there is growing incentive for owners to sell up. Growth in demand for acquisitions was even stronger, with Christie & Co reporting that 2021 saw a 24 per cent increase in registered buyers saying they were seriously interested in acquiring a dental practice.

What are the key growth drivers in the UK dental industry?
Dentistry is a flourishing sector in the UK for numerous reasons, with one of the key factors (as in many other sectors) being pent up demand for services that has been seen since the COVID-19 pandemic. With many not having seen a dentist since prior to COVID-19, there is huge ongoing demand for the full range of dental treatments, from check-ups to remedial procedures to cosmetic and aesthetic treatments.

Along with inflated post-COVID demand, there has also been more organic growth in demand for dental services, with increasing awareness among the general populace of the importance of good oral health and regular dentist check-ups.

Another factor driving demand for cosmetic and aesthetic dental procedures, is the proliferation of content-driven social media sites such as TikTok on Instagram and reality TV shows such as Love Island, which industry observers say have contributed to growing demand for procedures such as veneers and whitening.

Revenues in the private dental sector are also seeing significant growth as a result of problems that many patients are experiencing accessing NHS care. With a lack of staffing impacting NHS waiting lists, some patients are seeking private treatment (providing they can afford it), with many of these patients subsequently remaining on private client lists.

Private practices are also experiencing revenue growth as a result of the increase in flexible pricing. This enables patients to pay lower up-front costs, but ultimately means that practices can charge a higher price for treatment. Average treatments costs are also growing, due to rising demand for bigger and more expensive treatments. A factor that, again, could be attributable to pent-up post-COVID demand.

Make-up of the UK dental sector
A key factor encouraging dealmaking within the UK dental industry is its composition according to owner type. As with industries such as the veterinary sector and wealth management that we’ve examined in recent insights (both also sectors seeing strong dealmaking), the UK dental sector is highly fragmented, with the bulk of practices still independently owned.

According to Christie & Co figures, of the 12,583 dental practices in the UK, 8,059 are owned by independent operators, compared to 2,384 owned by smaller firms (with less than 22 sites) and just 2,139 owned by bigger firms such as corporates and mid-sized groups (22 sites or more).

Overall, just 15 per cent of total practices are owned by larger groups. With the increase in sale values seen last year likely encouraging more owners to sell, this high degree of fragmentation means that buyers looking to consolidate at scale have ample opportunity to make acquisitions.

Furthermore, it appears that fragmentation is likely to increase in the short-term. The relaxation of planning laws in 2020 has led to a greater number of so-called “squat practices” appearing on the market. Squat practices are dental businesses started from scratch, usually from a single practice, with the aim of growing further.

They have become a go-to option for many dentists who have worked through the challenges of COVID-19 and are now looking to quickly build profitable practices. Given this aim (and the rate at which they are appearing), squat practices could offer excellent acquisition opportunities for buyers with the capital to help finance these growth strategies, potentially through buy-and-build plans.

Who are the main buyers?
As we mentioned at the outset, one of the main factors spurring busy M&A activity in the sector is the wide range of buyer types that are active in the dental market. Christie & Co identified four main types of buyer that have been making deals in the dental sector over the past 18 months: corporate; first-time buyers; existing owners and small groups.

Private equity
Perhaps unsurprisingly, given the huge scope for consolidation within the dental market, the most active buyers have been companies backed by private equity firms. Private equity-backed plans have driven considerable activity in the higher price ranges, with some of the most active private equity-funded firms including Portman (190 practices), Rodericks (148) and Dentex (129).

Some notable private equity deals during 2021 included Capvest’s acquisition of stakes in Rodericks and Dental Partners, which led to forecasts that the two firms would be merged to form one acquisitive group.

Private equity firms have also sought to buy into the dental sector (likely anticipating a wave of consolidation) by backing a number of smaller groups, including Riverdale Health Care, Clyde Munro, Real Good Dental Company and Dental Beauty Partners. These smaller firms are already expanding and, given market conditions, are likely to see further growth over the coming years.

Due to the scale of fragmentation that remains in the dental market, it is highly likely that more private equity firms will begin giving backing to small and mid-sized groups to enable them to build acquisitively through buy-and-build growth strategies.

Private equity buyers will also be attracted by the diverse growth avenues offered within the dental sector, as an increasing number of patients opt for private dental services and cosmetic and aesthetic procedures. Such trends could enable private equity buyers to either focus on amassing practices with particular specialities, or to build a diverse portfolio of sites offering a range of services.

Earlier this year, DD Group, a UK and Ireland-based dental and medical aesthetics firm, was acquired by private equity firm Sun European Partners from former owners IDH Group and Palamon Capital Partners.

The acquisition came after DD Group had experienced three years of rapid growth, underpinned by huge and rising demand for dental and aesthetic treatments. Given the continuing growth in demand for these services, Sun’s investment will be vital in enabling DD Group to pursue its ambitious growth plans.

DD Group Chief Executive Paul Adams commented: “We have ambitious plans at DD to consolidate our position as the leading provider of dental and medical aesthetics products and services in the UK and Ireland.”

“This deal will help us to realise those plans, becoming the first choice across both sectors for clinical treatment solutions. Under this new ownership, we will have the financing and operational independence to continue expanding, support a growing number of customers, and pursue new markets across the UK, Ireland and beyond.”

Independent purchasers
Independent buyers are among those with the strongest demand for dental practices. However, unlike the majority of corporate or group buyers, independent purchasers largely favour acquiring NHS practices, with more than 75 per cent of independent buyers favouring acquisitions of practices with NHS contracts.

These buyers favour NHS acquisitions due to the contracted income they offer and the fact NHS practices are typically run by an owner or Principal, making the recruitment of Associates more straightforward.

However, reflecting the trend of patients moving from NHS care to private treatment, for many independent buyers, there is a “sweet spot” of practices with a “lower proportion” of NHS income that offer the capacity to grow revenue from private services through acquiring new customers and converting NHS patients.

As this trend develops, it seems likely that independent buyers will continue targeting NHS practices, perhaps with the ultimate aim of adding private services, upselling these to new and NHS patients and growing the revenue acquired practices can generate in the more lucrative private market.

Larger groups
Larger groups have, overall, avoided too much M&A activity, with the largest groups not actively acquiring during 2021. With private equity firms the most active buyers, larger dental groups have kept to the sidelines, perhaps wary of entering the market too soon after COVID, or perhaps (given their large existing portfolios) they are content to wait, make acquisitions more selectively and focus instead on organic growth within their own practices.

Neither of the two biggest dental groups in the UK – MyDentist and BUPA Dental – were actively acquiring during 2021. However, with 600 (MyDentist) and 484 practices (BUPA Dental), respectively, both groups are far bigger than their nearest rival – private equity-backed Portman Dental Care (190).

According to the Christie & Co report, just 65 sites were acquired by larger corporate groups during 2021. However, having been so reticent during the dealmaking wave so far, many of the large corporates in the dental sector have plenty of capital to spend on acquisitions and it is, perhaps, a question of when and not if they will actively return to the market.

Deal structures and timelines
There are considerable differences in deal structures across the UK dental sector, with private sector acquisitions typically involving a deferred element, in order to reflect the risk inherent in transferring goodwill from seller to buyer and to create a “hedge” against potential revenue loss.

Deferred considerations are usually linked to the business’ future performance in the years post-acquisition and will typically be accompanied by a tie-in for the former owner, the length of which is usually linked to their contribution to the practice. Deferred considerations are generally interest free and paid in instalments.

Deferred acquisitions are far more common among corporate buyers than smaller groups and independents. Last year, 64 per cent of acquisitions by corporate buyers had a deferred element, compared to just 8 per cent of transactions involving a small group or independent buyer.

However, the structure of deferred consideration is changing, something that has become a significant feature over the last year or so. Changes to deal structures are being driven by: the requirement to compete with established partnership operating modes; greater competition for the best practices; the fact that aligning the interests of buyer and retained principle can create additional value for both.

These ends are achieved through various means: an equity share in either a newly-created firm or the acquiring business, which grows in line with the business’ value; payments based on the growth of either revenue and/or EBITDA over time.

As well as the structure of deals, the timelines for different types of deals vary greatly too. Typically, fully private practices sold in share sales transact the quickest, while the asset-based transactions involving NHS contracts take longer. For asset deals, due diligence and CQC registration consume a significant amount of time, taking a minimum of 3 months.

Overall, however, data shows that deal timeframes seem to be falling in the dental sector, potentially as buyers become more efficient and digitise elements of their acquisition process. In deals in which offers were accepted prior to 2021, the average time to exchange was 233 days. For offers accepted in the year 2021-2022, this had fallen to an average of 188 days to exchange.

Pricing
Of course, one of the vital factors that will spur any dealmaking wave is the kind of price that owners can generate from selling their business, with higher prices naturally incentivising more owners to sell while valuations are stronger.

The dental market is no different and figures suggest that prices are firmly on the rise. In 2021, average sale prices were up 8.6 per cent compared to 2020. While 2020’s market was, of course, heavily impacted by the COVID-19 pandemic, last year’s growth also outstripped that seen pre-COVID in 2019 (5.4 per cent) and 2018 (5.2 per cent), showing a clear, and rather sharp, upward trend.

When it comes to the kinds of valuations that different types of dental practice generate, EBITDA multiples are considerably higher in acquisitions of associate-led dental practices (those in which there isn’t a clinically dominant working principle leading the practice, or in which the practice is sizeable enough to support a team of associates) than in owner-operated practices (in which revenue is generated by a working principle operating as a sole trader, partnership or limited company).

Associate-led practices dedicated to private treatment generated average EBITDA multiples of 7.89x during 2021, while associate-led practices offering mainly private with some NHS treatment (mixed, private led practices) generated EBITDA multiples of 7.13x. Across private and mixed, private led practices, the average EBITDA multiple for 2021 was 7.4x, with a range of 6x-9.4x.

Meanwhile, for associate-led practices offering mainly NHS services, with some private treatment (mixed, NHS led), the average EBITDA multiple was 7.2x, while practices exclusively offering treatment on the NHS generated an average multiple of 7.25x. Across these two practice types, the average EBITDA multiple last year was 7.2x with a range of 6x-8.8x.

For owner-led practices, however, EBITDA multiples are significantly lower across the board. Owner-operated private practices generated an average EBITDA multiple of 3.35x, while mixed private-led practices generated 4.11x. These two practice types had an average EBITDA multiple of 3.91x for 2021, with a range of 2.5x-5.5x. Owner-operated mixed, NHS led practices generated an average multiple of 4.18x, while owner-operated NHS practices generated 3.6x. The average multiple across these two practice types was 4.09x, with a range of 2x-5.75x.

It should be pointed out that the cost of income that owner-operated practices generate for the proprietor personally is not reflected in their trading accounts, meaning that they register a higher EBITDA %, but a lower valuation multiple. For associate-led practices, on the other hand, income is fully costed, resulting in a lower EBITDA % and a higher earnings multiple.

Overall, larger private practices generated a higher rate of multiple growth than their NHS counterparts, with larger, higher-quality practices (especially those in desirable locations) achieving record prices, with some approaching 10x EBITDA.

Future – What factors could threaten dealmaking
Given the ongoing (potentially growing) fragmentation of the dental market, the strong demand for acquisitions among a range of buyers and the likelihood of larger corporate groups returning to the marketplace in the medium-term, it seems fairly straightforward to predict that dealmaking will continue to grow in the dental sector, but there are potential headwinds that could threaten this.

Perhaps most notably in the current economy, there is the distinct possibility that the growth in cosmetic and aesthetic treatments (one of the key drivers of accelerating dealmaking) could be derailed or otherwise slowed by inflation and the cost-of-living crisis.

Widespread high street availability and the pop-culture influence of TV and social media have helped push cosmetic and aesthetic dentistry to the forefront of the market and prompted many high-profile M&A deals. However, as lower and middle-income households are increasingly forced to cut back on non-essential spending, it’s possible that the revenues generated from cosmetic and aesthetic procedures could decline.

Another potential headwind is the inevitable shrinkage of the pent-up demand that has driven the industry since the COVID-19 pandemic began to recede and patients started visiting the dentist in greater numbers.

Reflecting this concern, 50 per cent of private providers have said that their rate of revenue growth is declining. This suggests that, although spending remains strong and growing, the scale of pent-up demand in the wake of the pandemic is levelling off.

Furthermore, there are problems for dentists in terms of financing, which could derail growth plans (whether acquisitive or organic). Christie & Co report that 62 per cent of dentists have recently been declined access to finance by a bank, which it says “clearly shows the need for proactive, alternative finance to bridge this gap, reduce cashflow pressure, and enable ambitious operators to continue on their growth trajectory.”

In order to maintain growth strategies, owners will need greater access to unsecure loans, asset finance and short-term working capital. A lack of available bank financing may also lead many owners to consider private equity investment as potentially offering the quickest route to growth.

Finally, despite the huge degree of fragmentation on the market and amid soaring demand and valuations, limited practices are actually on the market, potentially as a result of sales plans still being put on hold as a result of COVID-19 and other disruptive factors. This means that numerous different types of buyers are competing for a limited number of available practices, pushing valuations up.

While the supply of new practices may improve as valuations rise and owners seek to take advantage, this also suggests that buyers looking to take advantage of fragmentation now may have to be creative and potentially examine off-market opportunities as well.

However, despite these headwinds, the trajectory of dealmaking in the dental sector seems clear. Having remained robust despite numerous uncertainties, strong demand among a diverse range of buyers, the sheer scale of fragmentation on the market and higher valuations encouraging more owners to sell while prices are high should help to ensure that M&A in the dental sector continues to perform strongly over the medium-term and potentially even longer.

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