If you are a dentist that has 20% or more of your revenue attributable to implants, and over $1.5M in revenue you have one of the most valuable practices in America today.  This was not the case, a year ago…

Looking Back

20 years ago, when the consolidation of the dental industry was in its infancy, almost all the investors were focused on buying general practices.  They were plentiful, in great locations, and each year many new dentists graduated from school to join these practices as Associates. Additionally, GP practices had recurring revenue through their hygiene department.  Hygiene regularly represented 20%+ of revenue.  It helped de-risk the cashflows and the dependency on the dentists.

Congratulations! Your business survived COVID and the reward waiting on the other side of the pandemic was the Great Resignation. You weathered that storm and now you are greeted with rampant inflation. Additionally, you are being held hostage by your team for more compensation. Now, the benefit of surviving all of this is a looming recession.  It has been a hard run, and likely only going to get harder. 

Like you all, I spend a lot of time reading the financial press. Each paper, website, and author have a unique perspective on the US economy. Although the news is great, I also seek out those in the know for their opinions as well. 

PICTURE IT WITH ME: you’re enjoying a relaxing Saturday morning at home. As you sit on the front porch reading the paper, you notice that the grass needs cutting, the dead limb over the garage did not come down by itself while you were practicing dentistry all week, and although the leaves fell months ago, you still haven’t removed them from the flower beds. There’s certainly some work to do outside. Not wanting to tackle the chores today, you wander inside.

 As you walk past the fridge, you glance at the long list of honey do’s placed up there weeks ago that continues to grow. As you pour another cup of coffee and think about how to get through this mountain of work around the house, the doorbell rings.

The Mergers and Acquisitions (“M&A”) world is largely cyclical.  There are ups and downs and good times and bad to sell one’s business. Over the last 5 years, we have only seen dental practice values increase.  So, the question we are often asked is, “How much longer can they go up?”

If you spend too much time watching the news or reading the financial press, it can feel as though we are only one day away from financial ruin, but the story in the dental economy is a different one. Demand is high across all specialties and GP practices and new capital is entering the market with great regularity, keeping valuations high, for now.

As we prepare for the year ahead, I want to share a summary of conversations I’ve had in recent months with IDSO/DSO leadership nationwide, as well as our insights on the dental mergers and acquisitions (M&A) markets.

Valuations Remain High

2022 was one of our busiest years. Our clients enjoyed rich multiples and favorable deal structures with the best DSOs in the nation. We currently have more deals in the market than ever, and we’re consistently seeing bidding wars and multiple offers. Buyers are complaining that they cannot keep paying these rich multiples much longer and that they must be selective in how they spend their money, but for every buyer that bows out, two new buyers appear. There were at least 20 private equity- (PE) backed DSOs formed in 2022, and they must buy practices to grow and meet the needs of their investors. Q1 is always a fascinating time in M&A markets: fresh off the busiest M&A closing season, there are never enough sellers to meet buyer demand. Each year this results in bidding wars and premiums paid by buyers through the first four to five months of the year. The first half of 2023 will be fast-paced, resulting in excellent deals for sellers.

From Hunted to Hunter...

During my years in investment banking, I worked with a series of private equity (“PE”) backed companies across multiple industries.  Their business models were always the same: (1) buy one large platform business with adequate infrastructure and solid leadership; (2) buy additional businesses in the same industry and roll these companies into the larger one; (3) ultimately sell the business to a larger private equity company.  These PE investors made money by buying the acquisition targets at the most affordable prices possible and selling the resulting platform at the highest price possible and make money on the spread, defined as arbitrage.  Sound familiar?

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.

Too Much Focus on Exit Multiple / Price

I know that this may sound counter-intuitive, but price (or exit multiple) is only one component to a transaction and is not the most important. I am fond of saying, “I will pay you 25x your EBITDA, if you let me structure the deal.” 

I would argue that the deal structure is the most important feature of any transaction as the deal structure dictates how cash, equity, and cash flow from JV equity is delivered to you and your estate. In addition, today’s deals are far more complex that historical deals, with a lot of the enterprise value held in the various equity offerings of each individual seller.

Understanding what the triggers are for these equity offerings, and what exiting said offerings consist of is a critical component in realizing the full value of your deal.

Because of our extensive background in investment banking, our process mirrors that of many of the largest investment banks in the world. Each time we take a deal through a Marketed Sales Process, we receive a wide range of offers with a plethora of differing deal points and structure, including but not limited to:

The US Stock Market

As of the closing bell on June 16, all U.S. Equity indexes were all down set new 52-week lows:

Source: https://www.cnbc.com/quotes/.SPX

We are in a Bear Market with a recession looming and there is mass exodus of cash from the public markets to other investments to weather the storm.

Specialty Dental M&A Market Update

5 years ago, Specialty Practices and Groups were all but ignored by the DSO buyers in the dental market.  But in recent years there has been a new wave of Specialty Specific DSOs that have hit the market.  These groups have partnered with some of the smartest private equity groups and best names in the industry to form their businesses. As these companies have enjoyed financial success, grown in scale, and recapitalized (thus providing excellent returns to investors), more traditionally GP DSOs have stepped up their interest in Specialty practices and groups as well.  As a result, there are more buyers for Specialty practices than ever before!

Higher Demand for Specialty Practice and Groups = Higher Prices