Money just got more expensive! How this impacts the sale of your practice

Given the increased cost of sourcing capital to fund acquisitions, buyers will inevitably put even more focus on subjecting potential practice acquisition to rigorous financial due diligence

Written by
Alex Rogers
Published on
April 5, 2023
Read time

Rising interest rates

The Bank of England (BoE) raised the base interest rate to 4.25% last month (March 2023) in its ongoing attempt to dampen inflation in the UK economy.
This was the 11th consecutive rate rise agreed by the banks Monetary Committee since the historic lows when the bank key rate was just 0.1%, with the new current rate being the highest since the 2008 financial crises. Though many financial commentators believe that this rate rise may be the last for some time, it is notable that the BoE themselves have not ruled out further rate rises depending on future inflation & other economic data.

As many of you reading this will know, rising interest rates means higher repayments on current debts that are tied to the BOE base rate – household mortgages being a prime example. Higher rates also mean that is more expensive to obtain fresh debt capital as loans at the interest rates that we have become accustomed to over the last decade are no longer available.

What impact does this have on the dental sector and in particular the M&A space?

In the vast majority of cases, prospective purchasers of dental practices look to fund their acquisitions with debt, and as such the recent rate rises will make the cost of servicing those debts much higher than they would have previously been when interest rates where at historic lows.
Dental corporates make up a significant portion of the buyers in the dental market and they already have considerable debt piles to service, many of whom will now have to allocate more of their resources towards servicing their existing debts, as well as having to factor in the increased cost of securing new debt to fund future acquisitions.
In either case, this increased cost of capital makes borrowing a more risky prospect than it previously was and that in turn means buyers – often driven by their funding partners – are looking much more closely at the businesses they are negotiating to purchase. This is were ‘Due Diligence’ comes in.

Due diligence covers a wide range of areas of potential concern to acquirers when they are assessing the attractiveness of a practice with the most typical areas of focus being on the clinical, operational, legal & financial performance of the business. We focus here on the latter topic – financial due diligence.
When the owners of a dental practice decide to sell, they will often appoint a dental sales brokerage to market the practice on their behalf. The brokers will often create a sales prospectus to take to the market and gather interest in practice from potential buyers. The financial data contained within these brochures is usually the only financial data that potential buyers will see before they decide to make an offer to acquire the practice and commence the formal processes associated with that.

The purpose of a buyer carrying out financial due diligence (FDD) is primarily to allow them to verify the reported financial performance of a target business and to gain a more in-depth understanding of how the business generates its cashflow and profits.

Currently, many of the sales prospectuses that brokers produce contain financial information that is out of date, has not been reviewed with an adequate level of detail and often contains overly optimistic assumptions about the future performance of the practice. Once these figures are subjected to a formal FDD process, they are quickly proven to be inaccurate, leading to renegotiations of the agreed sale price, a fractious sales process and often a cancellation of the sale altogether with both parties incurring irrecoverable professional fees.

Getting the numbers right – pre sale preparation

Given the increased cost of sourcing capital to fund acquisitions in the current environment, buyers are inevitably putting even more focus on subjecting potential practice acquisition to rigorous financial due diligence and as such, it has never been more important to ensure that sellers have access to accurate and detailed financial information for their businesses that they can rely on to enter into a sales process on a sound footing.
Entering into negotiations with a firm grasp of your business financial position will allow you to negotiate from a position of strength and certainty, as well as give you a realistic assessment of what the business is worth as it is today, and what it could be worth in future.

The team at Mayfield have over 30 years’ experience in dental finance management. Our executive team have worked for some of the countries largest dental groups, both as buyers for them or representing sellers to them. We also have experience of buying and selling our own dental practice investments.

If you would like any advice on selling your practice then contact us today.

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