Supply-cost drift: the hidden cost multiplier cutting your practice value

Tim Doswell reflects on the stark financial reality of supply-cost drift, explaining how unexamined overhead compounds into a devastating penalty when a buyer calculates your EBITDA.

Practice valuation is a function of earnings before interest, taxes, depreciation, and amortisation (EBITDA), and EBITDA is a function of overhead. Most of us focus on the wrong end of that equation for 15 years, and then a buyer’s accountant gets a closer look at our cost base than we ever did.

There is a moment that most principals experience only once, and almost always in retrospect. It is the moment you realise that a buyer has formed a clearer view of your practice’s cost base than you ever did, and has priced that view into their offer, without you ever seeing their workings.

The practice sale process

Earlier in the process, your accountant will have pulled together calculations of past and forecast EBITDA for the information memorandum that goes out to market.

By that stage, the cost base is what it is. There is not much remedial action you can take at that point that would meaningfully change the multiple.

And in many cases, the timeline to sell is not yours to decide. It is dictated by health, family circumstances, partnership issues, or simply the year you have settled on for personal reasons. The luxury of saying, ‘I will sell when my consumable costs are optimised’ is one most principals never have.

What I want to share is what I now wish I had understood about that ordinary, unremarkable corner of the business in the years before any of this became relevant.

Not because anyone is doing anything wrong, but because the maths of how supply costs translate into practice value is much less forgiving than most of us realise, and the window for doing something about it is much longer and earlier than I appreciated.

The number that quietly compounds

Industry analysis suggests that supplies and lab fees account for six to nine percent of gross revenue at a typical UK practice, depending on size and treatment mix.

For a practice collecting £800,000 a year, that is somewhere between £48,000 and £72,000 annually, before lab work is even considered.

Within that figure sits something that I now think of as the silent line item. It is the gap between what you are actually paying for your supplies and what comparable practices are paying for the same things.

Some of that gap is genuine market movement. Some of it is drift, which is what happens to prices in any market where buyers have no comparison data.

Drift is not dramatic. It is a few per cent on a composite syringe one year, a product code that gets quietly replaced the next, a promotional rate that expired 18 months ago and that nobody noticed reverting. Each change is too small to challenge.

The cumulative effect, across a few hundred regularly ordered line items, is a different matter.

Research from dental procurement analysts has found price variations of up to 30% for identical products between practices, depending on the supplier relationship and the timing of the last negotiation. Most of that variation is invisible to the practices experiencing it.

Why this is a valuation issue, not just a margin issue

Here is the part I genuinely did not appreciate while I was running my practice.

Dental practices in the UK trade on EBITDA multiples that vary by buyer, structure, and circumstance, but generally sit somewhere in the region of six to nine times. The exact number depends on factors specific to each transaction.

The principle, however, is constant. Every pound of recurring overhead in your practice is not just a pound off this year’s profit. It is several pounds off your eventual sale value.

The arithmetic is straightforward but worth pausing on. A practice spending £4,000 a month on consumables, with 15% of that figure sitting above market rate, is overspending by roughly £7,000 a year. At a seven times multiple, that is nearly £50,000 removed from the practice’s eventual sale value.

At a higher multiple, the figure is larger. And that is for one category of overhead, on a relatively modest spend, with a drift figure I would describe as middle of the road, based on what is now becoming visible across the industry.

The number is not the point. Multiples vary, drift varies, and every practice differs. The point is the structural relationship between cost discipline and valuation.

Every pound of unnecessary overhead you carry is multiplied into the price you eventually receive, in the wrong direction.

The hard lesson is that this multiplier works whether you know about it or not. The practices being acquired today are being valued by buyers who do know about it, and whose accountants are perfectly capable of doing this analysis themselves.

By the time it surfaces in due diligence, the principal has lost the chance to do anything about it.

Why careful people miss this

Nothing about price drift is the fault of the principals it happens to. The way prices move in this market is specifically designed to sit below the threshold of attention.

A composite syringe goes from £18.50 to £19.80 to £21.40 over three years. Each step looks like inflation. None of them is large enough on its own to question.

But the cumulative move is around 16%, which is roughly double what general dental inflation has been doing over the same period. You would only know that if you had a benchmark, and most of us never have.

There are several mechanisms involved, none of them sinister. Products get discontinued and replaced by new models with a different code at a higher price, so no like-for-like comparison is possible. Promotional rates quietly expire when you open an account, and the standard rate applies.

A box of 200 gloves becomes a box of 180, and the unit cost rises, even though the invoice never shows a price change.

Or, most commonly, your supplier gradually edges your price up because the longer you have been a customer, the less likely you are to switch.

None of this is dishonest. It is rational commercial behaviour in a market without price transparency. Every industry without price transparency works the same way.

Energy did, before comparison sites. Insurance did. Telecoms did. Dentistry, until very recently, has had no equivalent.

What I would do differently

The point of what follows is not that every principal should be preparing for sale. Most of the principals reading this will not be selling for years, and some never plan to.

The exercise is worth doing regardless, because the same cost discipline that protects your valuation also protects your monthly margin, your associate pay pool, and your capacity to invest in the practice.

The valuation argument is one of several reasons. It just happens to be the one with the largest number attached to it.

If I were earlier in my career as a principal and looking at this fresh, I would spend a focused afternoon on the exercise below. It does not require software, although software now exists that does this continuously rather than as a one-off.

This exercise will not give you a complete picture, because true benchmarking requires comparing your prices against what other practices actually pay across a sample large enough to be statistically meaningful. But it will tell you whether the problem is real and roughly how much you are dealing with.

A note on suppliers

It’s worth being direct about this, because it matters.

Drift is not evidence that suppliers are doing something wrong. It is evidence that any market without transparency produces the same outcome over time. Prices trend upward when nobody is checking.

The vast majority of dental suppliers operate in good faith, with their own rising input costs and their own competitive pressures to manage. Greater transparency works in their favour, too.

Suppliers who price fairly and consistently have nothing to fear from comparison. The only people disadvantaged by visibility are those who depend on its absence, and in my experience, that is rarely the kind of relationship that serves a practice well in the long run.

The takeaway

If there is one thing I want a principal reading this to take away, it is the multiplier and the timeline. Every pound of unnecessary overhead in your practice is not a pound.

It is six to nine pounds, depending on what your buyer pays for EBITDA. And the time to act on that figure is years before any sale becomes a live conversation, because by the time it is a live conversation, your accountant is already preparing the information memorandum, and your options have narrowed.

Supply costs are one of the few overhead categories where you have meaningful room to optimise. The market largely sets staffing. Premises are what they are. But what you pay for supplies is variable, negotiable, and historically rarely audited.

The dental profession has been operating without the kind of pricing transparency that consumer markets have taken for granted for years.

That is starting to change, partly through tools that benchmark anonymised invoice data across practices, and partly through principals deciding that this is overdue attention. Either way, the question is not whether drift is present in your practice.

Statistically, it almost certainly is. The question is whether you would prefer to address it on your own timeline or face its consequences in an offer letter priced by someone who saw what you did not.

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