Most of what you pay for a dental practice is goodwill. Understanding how it is valued, and how it is funded, is worth more than negotiating the rate.
What you are buying
Goodwill is everything about a practice that is not the building or the equipment: the patient list, the reputation, the trained team, the systems, the referral patterns and the cash flow they produce together.
On a typical practice it is the larger share of the purchase price, sometimes substantially so. It is also intangible, which is why a generalist lender is uncomfortable with it and a healthcare lending desk is not.
How it gets valued
Goodwill valuation in dentistry generally works from maintainable profit: what the practice reliably earns, adjusted for anything that would not continue under new ownership. A multiple is then applied, and where in the range it lands depends on the characteristics below.
What pushes a valuation up:
- Consistent, growing profitability over several years
- A large, stable patient list with good retention
- Income spread across a clinical team rather than concentrated in the principal
- A healthy private mix alongside contract income
- Modern equipment and a practice that will not need immediate capital investment
- Associates who are staying
What pulls it down:
- Heavy dependence on the departing principal personally
- A recent profit spike that looks unlikely to persist
- A declining or ageing patient list
- Deferred capital expenditure, such as equipment at the end of its life
- Short unexpired lease on leasehold premises
- Key associates leaving with the vendor
Principal dependency is the big one
If a substantial share of the practice’s income is generated by the principal personally, and the principal is leaving, both the valuer and the lender will ask the obvious question: what exactly is being sold?
This is the most common reason a goodwill valuation is challenged and the most common reason a funding case gets difficult. It is also the most fixable. A managed handover, with the vendor remaining as an associate for a period, addresses it directly and is worth negotiating for funding reasons as well as clinical ones.
Why the term matters more than the rate
Here is the part practice buyers most often miss.
Goodwill and freehold are funded on different terms within the same transaction. The property element typically runs to around 25 years. The goodwill element runs materially shorter.
That means two offers with identical interest rates and identical total borrowing can produce very different monthly costs, depending purely on how the goodwill and property elements are split and termed. On a substantial purchase the difference is not marginal.
Ask for the split to be modelled before you compare offers. A lender quoting one blended rate on the whole facility is not necessarily giving you the better deal; you need to see the components.
What lenders will lend against it
Specialist healthcare lenders will lend against goodwill and equipment rather than requiring a charge over your home. For well-structured purchases, high loan-to-value funding against goodwill is available, and in the strongest cases matches what is available against freehold.
The test throughout is whether the practice’s profitability comfortably services the borrowing, assessed on actual trading rather than on your plans for it.
Practical advice before you offer
- Get the vendor’s accounts and management figures early and understand what is driving the profit
- Establish how much income is attributable to the principal personally
- Ask what the associates intend to do
- Check the equipment: deferred capital expenditure is a price adjustment, not a surprise for year one
- On leasehold, check the unexpired term before anything else
- Model the funding structure, not just the price
See also: dental goodwill finance and dental practice purchase loans.
All figures are indicative and subject to lender assessment, your circumstances, valuation and prevailing market conditions. Commercial mortgages and unregulated bridging loans are not regulated by the Financial Conduct Authority. Property offered as security may be at risk if you do not keep up repayments.