Lessons Learned From Industries Long Consolidated
We’ve heard a lot of late about the economic environment, financing rates, interest rates, PE funding and valuation levels. It’s a veritable cacophony of conflicting thoughts, values and guidance. Largely missing from all of these are references to industries consolidated long ago which can give us some incredibly valuable insight into where we currently are, and where the industry aggregators may be moving in the future.
Lesson 1: The Slow Crawl
We are in the golden age of private practice acquisition. Valuation models are through the roof, even within today’s challenging capital markets environment. Sellers have a tremendous amount of leverage. Despite all of the naysayers, present market conditions do not impact expectations placed on these groups and the dwindling supply of opportunities will and is leading to premium valuations. The truth is that a well-managed solid practice will fetch a premium, regardless of the market environment. And presently, because of the dwindling supply, there are more players competing for fewer opportunities, so running a fully competitive process will pay off in spades. The question is how sustainable it is, how long will it last, and when IS the right time to sell your life’s work.
Lesson 2: We Take Our Cues From...
The medical space is the easiest comparable industry to contrast against the dental space. The Medical space which has been absorbed into the hospital/university space began that evolution over 30 years ago and experienced a precipitous rate of aggregation that provides a lot of applicable lessons for us in the dental space. By most estimates, the dental industry is roughly 30% consolidated. Compare and contrast that with a medical industry that’s 15 years and 60% (consolidation) ahead of us, and you begin to see some clear leading indicators.
Early Adopters Don't Win
Practices are generally evaluated according to traditional industry standards which led a lot of doctors down the path of receiving anywhere from 80-120% of prior year collections. Private equity groups realized they had a head start on an industry that was largely unfamiliar with their process, arbitrage, EBITDA based valuations or practice value. And second, that they had a limited amount of time before firms like TUSK stepped in and began driving valuations through the roof. As such, they moved quickly, aggressively, and succinctly.
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Late To The Game Could Have Devastating Consequences...
As medical approached 50, 60 and 70% consolidated the large hospital systems began eating the smaller hospital systems. Premium valuations were limited to those entities that could “move the needle”, and unfortunately the private practices were left out in the cold. Not large enough to “move the needle” for these larger organizations, many practice owners took buyouts at a significant discount, or shuttered their practices entirely and opted to work for the larger entities with better pay, reimbursements rates, benefits, etc.
The Sweet Spot
Where are we headed? The sweet spot. The area between about 20% and 50% consolidated. We have an industry runway of about 36-60 months where valuations will remain high, the number of aggregators will continue to increase, the M&A space will be doggedly competitive and there won’t be enough practices for the number of buyers in the space. As that happens, valuations will increase for good practices and the doctor/owners will win out.
The Next Cycle - A Prophecy
It’s already begun, most notably with Heartland Dentals acquisition of American Dental Partners 300+ locations. The largest entities can only substantively grow by making mammoth acquisitions to impact their sizable bottom lines. This will continue and organizations will begin focusing primarily on the small group practice (3-15 locations) to mid-level groups (15-80 locations) to satisfy their investment targets. That progression will take 3-5 full years to mature and provides us an optimal valuation period (0-3 years) in which those mid-tier organizations need to acquire as much EBITDA as possible to beef up their numbers for acquisition by larger parties which will increase the stock value of their entity, thus paying off their shareholders and providing the arbitrage to their investors that is needed. And the location of that acquirable EBITDA for those mid-tier organizations? The private practice market.
Where Do We Go With This...
If historical references to medical, derm, veterinary, and numerous other industries are leading indicators, we can succinctly determine how the dental space will progress. From any and all angles, planning and analysis are critical. The timing of your sale can be heavily dependent upon numerous variables and arming yourself with as much information as possible is critical to the success of your transaction.
Would You Like To Explore Your Options In Today's Marketplace?
Please contact us to get the ball rolling on a market analysis for your practice. It’s a free service, specific to your practice, that will give you an idea of the value we believe your business will bring, to include cash at close, annual clinical compensation, annual equity distributions and returns on HoldCo. We’ll discuss your goals, timelines, and the optimal time to maximize your value, and help you decide if that is now, a year from now, or potentially even longer. Don’t let these opportunities pass you by.
About TUSK Partners: TUSK Partners (“TUSK”) provides M&A Advisory services in the dental industry. TUSK has completed over $950M 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
About the Author: Josh Swearingen has over 15 years of leadership experience in the dental and healthcare industry, most recently serving as the CEO for Vesper Alliance, a DSO located in Cincinnati and Columbus, OH. Prior to that Josh was Director of Corporate Development for American Dental Partners and quarterbacked several of their largest transactions during his tenure there. Josh received his B.S. from THE Ohio State University