What buyers overlook when purchasing a dental practice
Essential reading for clinicians considering practice acquisition: understand cost structure changes and avoid overvaluation.
Buying a dental practice is a major financial decision that extends beyond the headline figures in a sales brochure. Success depends on whether the buyer truly understands what they are acquiring, including how the business will operate under new ownership and what costs will actually change.
Understanding true profitability after a purchase
Most practice valuations rely on a 'reconstituted profit' figure, which takes reported profit and adds back items such as directors' salaries, pension contributions, and discretionary expenses. This can make a practice appear significantly more profitable than it will be after purchase. The critical oversight is that outgoing principals are not simply expenses; they are part of the productive engine of the business. They generate revenue, maintain patient relationships, and drive day-to-day performance. When they step away, those functions must be replaced, typically by associate clinicians paid 50% to 55% of revenue. A practice showing £240,000 in profit may realistically deliver only £150,000 to £200,000 under an associate-led model. This difference often determines whether an acquisition is well-judged or an overpayment.
Transaction structure and financial reality
Buyers often focus on the business itself but overlook how the transaction is structured. A dental practice can be acquired through an asset purchase, where the buyer acquires goodwill, equipment, and the patient base while leaving the company's history behind, or through a share purchase, where the buyer acquires the company as it stands, including all assets, liabilities, and historic obligations. While share purchases may appear simpler, they carry greater complexity and risk. For many independent practices, an asset purchase is often the cleaner route. The balance sheet also matters more than many buyers recognise. Key indicators include the level of liabilities, whether reserves are positive or negative, and how dividends have been extracted historically. A practice can be profitable and still be financially stretched.
Goodwill, revenue trends, and valuation
Goodwill typically represents the largest component of the purchase price, reflecting the patient base, practice reputation, and expectation of future earnings. However, goodwill is not fixed or guaranteed; it depends on patient retention, continuity of care, and clinical team stability. When a principal retires or steps back, the key question is whether that goodwill will transfer. Revenue trends matter too. A single year of strong performance rarely tells the full story. Buyers should examine how revenue has moved over several years, whether decline has occurred, and whether recent improvements are sustainable. A pattern of decline followed by partial recovery differs markedly from consistent growth. Effective negotiation reframes the conversation away from challenging the business itself and toward aligning the valuation with how it will perform under new ownership.
Frequently asked questions
How does 'reconstituted profit' differ from actual profit after buying a practice?
Reconstituted profit adds back directors' salaries, pension contributions, and discretionary expenses to reported profit. However, when the principal departs, their revenue-generating role must be replaced by associate clinicians paid 50% to 55% of revenue, significantly reducing actual profitability. A practice showing £240,000 reconstituted profit may deliver only £150,000 to £200,000 under new ownership.
What is the difference between asset purchase and share purchase in dental practice acquisitions?
An asset purchase means acquiring goodwill, equipment, and the patient base while leaving the company's history behind. A share purchase means acquiring the company as it stands, including all assets, liabilities, and historic obligations. Share purchases carry greater complexity and risk; for independent practices, asset purchase is often cleaner and more straightforward.
Why does goodwill value change when a principal retires from a dental practice?
Goodwill depends on patient retention, continuity of care, and clinical team stability. When a principal retires or steps back, the key question is whether patients will remain under new ownership and whether the expected future earnings will continue. Goodwill should be assessed on what the business is likely to do going forward, not solely on historical performance.
What should buyers examine on a practice balance sheet before purchase?
Buyers should review the level of liabilities within the company, whether reserves are positive or negative, and how dividends have been extracted historically. A practice can be profitable yet financially stretched. These balance sheet indicators reveal how a business has been managed and whether hidden financial stress exists.
How should revenue trends influence a practice valuation?
Buyers should examine revenue over several years, not a single year of strong performance. A pattern of decline followed by partial recovery differs markedly from consistent growth. Valuations based on a best year are rarely representative of future performance. Understanding the trend context is essential for realistic expectations.
