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Selling your dental business: Deferred consideration explained

Deferred consideration is an increasingly common element in high-value, corporate dental practice deals. However, how does it work and what should you look for when considering such an arrangement? In this blog post, Jamie Williams, Associate Director – Dental, shares his expertise on the subject.

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Jamie Williams

Jamie Williams

Associate Director - Dental

Scott Graham

Image credit: Scott Graham for Unsplash

What is deferred consideration?  

 Deferred consideration refers to a process in dental practice sales and acquisitions where a portion of the buyer’s payment is withheld during the formal tie-in period that the selling Principal decides to continue working for the new owner.  

 How much is deferred depends on the type of practice, its specialisms and the revenue generated by the selling Principal and other key dentists. Typically, though, 20-30% is deferred although some buyers may try to negotiate more. Anything over 30% is unique, and not commonplace in the market, even though some dental corporates may suggest otherwise. 

 Sometimes, the deferred element is tied to specific performance targets, such as individual turnover goals or the business’s post-sale EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), but it can be as flexible as the Principal committing to work a certain number of days a week for a defined period following the completion of the transaction. 

 Traditionally, in the private dental sector, a proportion of the agreed sale price is deferred for a period of up to five years and is inextricably linked to the Principal remaining in a clinical capacity. This is to mitigate the general risk of transitioning a practice from an independent owner to a corporate or group purchaser, whilst simultaneously incentivising the seller to support and assist in future revenue delivery.  

 For example, a high-end private or specialist practice with significant income being generated by an owner Principal is perceived to be a higher risk than an Associate-led practice where income is more evenly distributed across a team of clinicians. 

 

How do I get my money back?  

 Typically, the funds are only released if the business performance meets the agreed-upon level or other pre-defined metrics have been achieved during the tie-in period. 

 Deferred consideration is generally repaid in bullet payments at the end of each year of the deferred period, with a penalty if there is a shortfall in income. This is usually calculated on a pound-for-pound basis, but there are ways to negotiate a lower-risk deal for the seller whilst giving the buyer the security that they require. 


 How is the deferred element evolving in the current market?  

As the market adjusts and corporate/group buyers have become more cautious, we have seen an increase in the amount of deferred consideration that is built into offers from this specific buyer pool. This is partly reflective of the risk of transition but, also, the effective deployment of capital. In other words, the more a buyer can defer, the less they need to commit to upon completion and the more practices they can buy. 

 Across both corporate and small-group buyer pools, we are seeing an increase in the overall percentage of transactions that feature a deferred consideration. However, the proportion of small-group transactions with a deferred element is still significantly lower than corporate acquisitions, and usually comes with less onerous terms – the devil really is in the detail! 

 Some buyers will consider granting equity or bonus incentives, where the retained Principal can potentially realise an upside during the agreed period post-completion. These could be: 

 • Conversion of deferred cash consideration to equity which could realise additional 

value through enhanced share price 

• A cash amount based on increased turnover and/or EBITDA  

The growth incentives are commonly target-led and will generally allow for inflationary increases on an annual target which, in the current climate, could make a significant difference to earn out realisation. 

 

Is it necessary to defer?  

People, often ask whether it’s necessary to defer for a period after completion. Generally, the answer is ‘yes’. The transfer of patient relationships is a sensitive area for a buyer and its lending bank or institution. It also often suits the outgoing Principal’s circumstances to continue working, and this is usually on the income that they generated working as a Principal. 

Typically, the greater the Principal’s income, the higher the buyer’s risk and the longer they’re likely to tie-in for. When the Principal is remaining post-sale as a clinician, it’s important to agree on remuneration terms at the outset of the deal. This includes negotiating the rate of pay for NHS, Plan, and private treatments, the working days and hours, lab contribution and other adjustments, such as hygiene referrals and bonuses.  

It’s also important to study the offer letter and subsequent sale agreement details, which often include a competition clause. This will restrict the outgoing Principal acquiring or working in businesses within close proximity of their practice after completion. This can vary in both the mile radius agreed and the period of time it applies for post-sale. 

 

For a confidential chat about your business sales options, contact Jamie Williams: jamie.williams@christie.com / 0773 260 1749 

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