The dental industry has recently experienced a tidal wave of emerging group practices. These emerging groups are creating waves for a number of reasons, but one of the most notable is the staggering dollar amounts buyers are seemingly willing to pay for them.
Have you ever wondered if all it was actually true? Did your buddy who sold his group really walk away with $50,000,000?!
Or are there other details behind the dollars? There are – and we’re going to unpack those details right now.
The BIG Numbers
The two figures that grab all of the headlines in today’s world are the purchase price and the multiple (of EBITDA). These are the gaudy, ego-driven judgments of who won and who lost.
“I sold my group dental practice for $50,000,000. They paid me TEN times for my business.”
If the numbers seem unreal, then that means there are strings attached. Those strings are details…and details matter more than multiples.
If you’d like to watch a video to illustrate the concepts we’ll be discussing, you can view it here.
If there’s one thing you can almost always count on in today’s world, it’s this: the purchase price is never 100% cash without any further obligation to the seller. No purchaser is not going to write you a check for $50,000,000 and let you go buy an island in the Caribbean.
The “Sale Price” is made up of several possible components: cash-at-close; earn-out; and equity roll.
Cash-at-close is exactly what it says – it’s cash in your bank account to be spent however you’d like. No strings attached.
An earn-out is a multi-year commitment to the buyer that you will stay on board and continue to operate (and grow) the business. If certain goals are achieved, then a portion of the earn-out dollars are paid out; if the goals are not met, then you usually don’t realize most (or all) of that year’s allocation. An earn-out is a common way for a buyer to minimize the amount of cash they have to pay at the closing table and helps to ensure the ongoing success of the business.
An equity roll is not part of all transactions. In short, some buyers don’t offer it. Where they do, the buyer gives you the opportunity to take some of the proceeds of the sale of your business and reinvest them into the parent company. The buyer, after all, is usually a savvy operator with a track record of success, and they often have an exit strategy. That exit strategy means they’re probably looking to sell the overall business at some point in time for an even higher multiple than what they paid for your business. If you believe in their ability, then you might want to go along for the ride.
If your deal has some component tied up in an earn-out over several years, then that means you’re going to become an employee - and you’re going to want to know the details of your employment agreement. These details can be set-in-stone by the buyer or they might be negotiable, so it’s always important to know what you want before you get to the deal table. Here are some of things to consider:
- Clinical Compensation rate (collection or production; lab)?
- Overall Benefits package (Health, Retirement + match, Malpractice, CE)
- Non-Compete (years & miles)
- Ownership (PC or DSO; buy or earn)
We’re often amazed at how sellers compare and contrast purchase offers without giving any consideration of the entity that is actually going to purchase their business. It matters. And it can matter a LOT if you have money tied up in an earn-out or an equity roll.
Some of the purchaser details are relative to what your individual needs and expectations are. Do you want to remain in an ultimate leadership capacity? Or do you want to relinquish the obligations and stress of management, and just focus on doing clinical dentistry? That consideration alone impacts whether you’re tilting toward a financial buyer (private equity) or a strategic buyer (larger established DSO).
If it’s a financial buyer you’re looking for, then consider whether they’ve done deals in healthcare before – and specifically in the dental industry. Sometimes those who are willing to pay the highest number are the ones with the least experience. If they have no prior experience and no track record of success, then are they going to be the right partner for you?
Selling your business is an emotional rollercoaster, so it’s important to choose an advisor who can help to set your expectations about the process. Nobody gets everything they want in a negotiation, so you also need to prioritize what matters most to you – and it can’t be everything. “The BEST deal” is the one that balances your short-term and long-term needs with the abilities of the purchaser. It’s also critically important to know that the business has to continue to move forward after the money changes hands.
Stay tuned as we’ll be covering topics around the potential sale of your business in much more depth in the coming weeks. And if you think you might be nearing the point of wanting to actually take your business to market, then please consider joining us in Houston March 21st – 23rd for our seminar: “Selling Your Group Dental Practice or DSO: what you need to know and what you should expect.”
As always, if you’d like to discuss these topics or any others related to trends in our industry, please feel free to contact me at Perrin@TUSK-Partners.com. TUSK provides industry-leading resources for Group Dental Practices and DSOs. We help our clients START, GROW and SELL their DSO or Group Dental Practice. For more details, download our Overview of Services or visit our website HERE.
TUSK will be a featured presenter at the 1-800 DENTIST DSO Leadership Summit in Los Angeles, CA on March 16th where we will share “5 Things to Know if You’re Going to Use the Bank’s Money to Grow.” We hope to see you there as well!