If you missed part one of this article, you may access it HERE.
3. Taking Too Much or Too Little Cash at Close
I love that dental deals these days come with so many options when it comes to the allocation of the purchase price. I also love that every DSOs equity packages are vastly different and come with different risk factors.
Some DSOs offer equity that is trapped at the DSO level, provide no distributions, and can only be monetized when their PEG sells their position. Other DSOs offer equity at the practice level that distributes profits quarterly based off EBITDA and comes with put features that enable you to put the equity back to the DSO when you choose at a pre-determined valuation.
Almost every deal we close comes with the opportunity to roll some of your proceeds from the sale into equity at some level. And each tranche of equity comes with very specific rights, obligations, privileges, and responsibilities. We work closely with our clients to make sure that they understand the risks and the expected rewards that accompany each equity offering.
There are some equity offerings that I would take a second mortgage out on my house to gain access to and others that terrify me and have all the trappings of Enron or WorldCom. The key is to know the difference!
The returns on these investments can range from 0% (you lose it all) to 500-600%. We make it our business to understand all of the risks in these businesses and help our clients choose which equity option makes sense for them given their risk profile. In addition, we work through various cashflow scenarios, historical performance, etc. to help determine the overall value, timeline and expectations for each option.
4. Not getting Full Credit for your Growing Business
Most businesses we represent are growing. They are growing through same-store-sales, acquisitions and/or de novo activity. They have dynamic leaders who are growth minded and the trailing 12 month (“TTM”) revenue and EBITDA are not indicative of what the future revenue and EBITDAare likely to be. Yet, buyers focus all of their attention on the TTM time period.
Their valuations are almost always a multiple of the TTM EBITDA (7x on $1M of EBTIDA =$7M of Enterprise Value). If you have a rapidly growing business and are focused exclusively on the multiple that you receive at closing you are very likely selling your business for less than it is worth.
We know of one group that sold their rapidly growing business for 10x. They felt great about the multiple and were proud that they achieved a double-digit multiple. But that 10x was on their TTM EBTIDA of $3M (resulting in a $30M deal) and over the 12 months after the close of the transaction, they had massive same-store-sale and a pipeline of deals under LOI that they closed on.
12 months after closing their deal, their TTM EBITDA was $4.5M. If we look at their $30M deal in the context of the $4.5M of EBITDA, their effective multiple 12 months post-close was a 6.6x. They did not get credit for their growth in this deal.
Although your TTM EBITDA is a good starting point for a conversation around valuation, there is so much more that should be considered. Some buyers are less likely to give you credit for your growth initiatives, acquisition pipeline and cost reduction strategies, while others are happy to do it to win the deal in a Marketed Process.
Ensuring that you bring the right buyers to the table is critical for any process, but even more so for a growth-oriented business anticipating post close improvement. Understanding how to present that to the market, capture it within the LOI and defend it through closing can have a massive impact on your enterprise value.
Find out the true value of your practice today:
5. Working with an Inexperienced M&A Advisor
As the dental M&A world has grown, so have the number of M&A Advisors looking to play a role in the transaction. Although there are a small handful of excellent M&A Advisors in the space that have worked on 100’s of deals across all specialties, there are literally hundreds of brokers who have no idea what they are doing.
These brokers are out gunned and out manned in negotiations with DSOs. They cave on soft points in order to get a deal to close and get to their commission. They are doing their clients a massive disservice.
A great M&A Advisor truly understands the nuance of each buyer. They have visited the DSOs corporate headquarters, know the C-Suite personally, talk with the PE guys backing the businesses on a regular basis and know the lenders providing the capital to aid in the company’s growth.
They can connect you with previous clients of theirs who have affiliated with these groups and provide you an insider’s look at what life is actually like post-close. Great M&A Advisors also know when to leverage their relationships inside of these businesses to get deals done.
Ready to work with a partner that understands the intricacies of selling your practice and has proven experience that you can rely on to make the best deal possible? It’s time to give TUSK a call.
With private capital flowing into the dental world, consolidation is only speeding up. This incredible growth has provided multi-generational wealth for many doctors in the space. While it has opened up numerous amazing new DSO’s, groups and PEG’s buying in the space, the tremendous influx of deals has also given birth to a significant growth in poor representation, startup groups with lackluster performance results, 10X increases in unsolicited offers and a trail of heartache and tears for those that fall prey to some of the downfalls of industry consolidation.
We truly hope that this guide serves as both an educational tool and warning of some of the pitfalls that can become of your life’s work. We at TUSK Partners are aggressive in our representation of our clients that we represent and voracious in our pursuit of the highest possible enterprise value with the most appropriate, advantageous, well strategized deal terms possible. That is our responsibility, and it is one we do not take lightly.
About TUSK Partners: TUSK Partners (“TUSK”) provides M&A Advisory services in the dental industry. TUSK has completed over $650M of transactions across all specialties. With an in-depth understanding of the marketplace and access to 100’s of buyers nationwide, we help our clients confidently pursue M&A transactions that maximize their long-term value. With our significant collective experience of over 40+ years of dental practice transactions, we offer our clients solutions that help them achieve their strategic and financial objectives. For more information, visit https://tusk-partners.com