Congratulations – you received an unsolicited offer.
So did every other dentist and group in America. If you have a practice with over $1M of collections or more than 1 location, it is safe to safe to say that you have been contacted by a buyer and possibly received an unsolicited offer from them.
Buyers in our market love to connect with dentists and groups directly to help inform them of their EBITDA and value. Why wouldn’t they! They get to control the story, the financials, and the process. This puts them in the driver’s seat in the relationship as they work hard to win you over and shield you from other opportunities in the market. The less you know, the better for them.
In fact, all Dental Service Organizations (“DSOs”) and Private Equity Groups (“PEGs”) keep statistics on how many deals they close each year that are a result of their outbound marketing efforts. They are proud of these numbers. These are deals that they did not have to win in a competitive process. They simply had to pay just enough to have the seller commit- many times, well below market. I don’t begrudge them; they are capitalists. I’m a capitalist. And I think it is safe to assume that you are as well. It is simply how the game is played.
My only hope is that you didn’t take that offer. Taking an offer from a buyer without running a competitive process is doing you and your estate a disservice. If you took that offer, you left money on the table and, worse, might have missed the opportunity to do a deal with a partner that would be a much better fit for the long run.
In this article, we are going to take a closer look at unsolicited offers / un-marketed deals, why buyers love them, and why taking a deal from a DSO without an advisor is the worst decision you could possibly make for you, your business, and your family.
One final comment before we jump in – this is not an assault on any one DSO or PEG. Rather, it is an explanation of the value that is being destroyed on the sell-side and vast amounts of wealth that is being created on the buy-side through a deal like this.
Never Bring a Knife to a Gunfight
I love the Indiana Jones movies. Growing up, we had a VHS copy of Raiders of the Lost Ark that I probably watched 40 times. To this day, if I stumble across it on TV, I will gladly watch it until the end. I was hooked on the franchise from the very beginning. Indiana Jones was so cool: a college professor and archaeologist adventurer with a wry sense of humor. He would fall into successive dangerous events and survive each one, all the while dawning his high-crowned, wide-brimmed sable fedora. My favorite scene in Raiders of the Lost Ark is when Harrison Ford’s Indie takes down a sword-spinning bad guy with a nonchalant single gunshot. While it always brought me pleasure and laughter, the message always stuck with me: never bring a knife to a gunfight.
Working through an unsolicited offer from a PE-backed DSO is the equivalent of bringing a knife to a gunfight. When the conversation starts, it feels so friendly. That kind, business development person that you are talking with (the one who is getting to know you and your spouse over plates of sizzling steaks and bottles of red wine while promising you rich returns on your equity) is not the only person on the team working to buy your business. Behind him, there is a team of analysts, high-priced attorneys, brilliant CPAs, and Private Equity guys from New York who are all wading through your numbers, helping the CEO pull together an offer that they hope you will accept. Sure, they leave wiggle room in the offer for you to feel good about negotiating your deal. In fact, they will gladly craft the deal to “meet your needs” so long as they don’t have to shell out too much cash or take on too much risk. You are a team of 1 (maybe 2 if you have an excellent CPA or office manager), and they are a team of many. While you are running 2 columns of clinical and are running 20 minutes behind schedule, they are meeting regularly to run models, and cash flows on your business and focused 100% on how to get your deal “done” with the least amount of money and risk to them. In deals where you are unrepresented, you are outgunned, outmanned, and will likely be outdone.
Information asymmetry is present in every transaction where there is a buyer and a seller. It is present where two parties have unique knowledge about an asset being sold. For example, a used car salesman might know that a car on his lot had been in a massive accident, has a bent frame, and leaks oil by the pint daily, but the buyer only sees a shiny new paint job and the new tires. He makes a buying decision based only on what is apparent to him. When DSOs are looking to make an offer on your business, they ask questions – LOTS OF THEM. Why? Sure, they want to know about you and your journey as an entrepreneur, but they are really working to shrink the information gap that they face. They start by asking for financial and operational information, and you think, what can it hurt to share? This opens the door, and they ask for more and more and then set up calls to clarify some items that they have discovered. All the while, they are shrinking their information gap to gain more clarity into your business. Buyers are continually working to shrink this information gap and hoping you will not work on shrinking the gap you have regarding them.
Some examples of this knowledge gap uninformed sellers face are:
- Quality of the buyer’s balance sheet
- Quality of the equity being offered
- Deal knowledge (what options are there?)
- What is the culture of the buyer really like?
- What is this group’s reputation like in the broader market?
- Can this group be trusted with my life’s work?
- Will they really do what they say they are going to do?
By the time the offer comes in, the information gap is very, very small on the buy-side and still an information chasm on your side of the table. At this point:
- Buyers have information that you do not.
- They use that information to their benefit and not to your gain.
- Buyers know what they will ultimately likely sell for and what they can afford to pay and still make a great economic return for their shareholders and partner docs (through the arbitrage of on the multiples) while making you feel like you “got everything that you wanted in the deal.”
The buyers are financially incented to pay you as little as possible and still get a deal done. Again – not knocking the buyers. Heck, they are great at what they do. Just don’t misinterpret their questions about your business as simple curiosity. Rather, it is a shrewd tactic to get you to talk (A LOT) about your business so that they can understand it as well or better than you do.
Play the Game by Their Rules
Do you think that a Private Equity group that owns a DSO will sell to the first group that provides them an offer? No. There are over 100+ PE-backed groups in the U.S. today, and I would venture to guess that none of them would take an unsolicited offer. Why? They know how the game is played – they made the rules. They know that the only way to maximize the value of their investment is to go through a marketed process. Even PEGs want an M&A Advisor / Investment Banker to help them prepare their business for sale, craft a story for the buyers and drive a competitive process. They know the value of an advisor and gladly pay the fee for representation to ensure that they get exposure to all the right buyers at the right price. They know an M&A Advisor is an investment worth making. They realize that they only get one chance to monetize their efforts and cash in their chips at the highest possible value. Competition and deal tension drive up value. The advisor does the diligence that the buyers are going to do and prepares the owners for the questions that they are going to receive. By the time the business goes to market, everyone is aligned on the sell-side, and they are mid-ready for battle.
Private Equity Groups understand that they need to prepare to sell to maximize their value. When they submit unsolicited offers, they know you are not prepared and look to take advantage of that. It is how the game is played. If you are going to play the game, know the rules, get an M&A Advisor and win the game.
About TUSK Partners: TUSK Partners (“TUSK”) provides M&A Advisory services in the dental industry. TUSK has completed over $600M 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.