A growing number of dental practices are being purchased in a less traditional manner: through a dental service organization (DSO) owned by a private equity firm.
For a dentist who has invested years in building their business, growing their staff team, taking care of patients, and managing their own practice, the sale is a significant milestone. That said, it can come with a ton of confusion and stress.
Selling a dental or orthodontic practice to a private equity firm can be a strategic move for any dentist looking to maximize the value of their hard-earned business or a way to remove themselves from the management to focus on the clinical side of the business. However, navigating the world of private equity transactions can be complex.
To help dentists be more informed about the process, it is crucial to understand some of the key terms and concepts that often arise as they begin discussions.
Managing partner of Spaugh Dameron Tenny and host of the Prosperous Doc® Podcast, Shane Tenny, CFP®, recently interviewed Kevin Cumbus, founder and president of Tusk Partners, about trends in dental transactions and considerations before selling to a DSO.
After their conversation, Shane and Kevin realized that they needed to come back together to define some of the key terms and concepts that dentists should be familiar with as they consider selling their practice to a DSO backed by a private equity firm.
What is EBITDA? This acronym stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a proxy for operating free cash flows inside your business after normalized doctor compensation. To find your EBITDA:
EBITDA goes hand in glove with multiple. It is how many times your EBITDA would need to pay you for your business to achieve the enterprise value you received at closing.
The multiple is derived from a variety of things, including:
Buyers will have varying opinions on what your multiple is and what your EBITDA is.
Enterprise value is equal to the EBITDA times the multiple.
EV = EBITDA x the Multiple
Private equity refers to capital investment (money raised) by individuals made into companies that are not publicly traded. Pools of investors called Limited Partners (LPs), provide private equity companies dollars to invest inside private markers.
This is a legal term for a dental service organization. It is a legal conduit — a pathway or contract — that allows private investors (non-dentists) the opportunity to share in the profits of a practice.
It is important to remember that the rules and regulations vary by state because the individual state's legal board regulates it.
Other similar terms include:
The three most common tools for the structure of a transaction or terms of the sale are:
Typically, cash at close is a portion of the value you receive at closing. It's the money that hits your checking account the day the deal closes.
Joint venture equity is a portion of the enterprise value that you retain in the business you sold.
The thinking here is that you retain equity in the practice you're selling to the DSO. And because you're keeping some equity in that business, the DSO will allow you to enjoy distributions every quarter after the DSO takes a management fee of somewhere between 5% to 10% on top-line revenue.
JV equity can help you offset the annual or monthly cash flow you are accustomed to receiving as a business owner.
Holding company equity is at the very top of the DSO with the management company. This is typically the same class of shares that the private equity company has, as well as the same class of shares that the CEO, CFO, or leadership team has.
These shares are rather ill-liquid. They do not offer distributions, and you can only monetize them when the private equity company that currently owns that DSO sells to a new private equity company.
Imagine you are eating a freshly picked ripe apple. The first bite is good, but the second bite is even juicier.
You get your first bite when you sell your business. Your second bite of the apple comes if you have rolled equity as part of the structure, the private equity group sells to another private equity group, and some of your equity gets redeemed.
"Today, there is more opportunity, more buyers for dental practices than ever before. And that's a really good thing if you own a dental practice because you have more options than you've ever had … I would encourage everyone to at least get the information about what their practice would be worth in an exit to a DSO compared to an exit to a dentist so they can make an informed decision."
– Kevin Cumbus, Tusk Partners
If you are considering the sell of your dental practice to a DSO, know you don't have to do it alone.
It's important to understand what you want and need to sell your practice for to continue the life you have built for yourself and your family. That's where a financial planner comes in. Our team of financial planners is here to help you better understand your personal financial situation and how a sale would impact it.
Neither do you want to leave any value on the table and find that you didn't choose the right partner to sell to. That's where an M&A Advisor with experience focused on selling dental practices to private equity firms can help.
Kevin is the founder and president of TUSK Partners, an M&A firm that exclusively represents sellers in transactions with DSOs. He has valued and sold over 120 dental practices, managed over $100MM of revenue in a DSO, and is the co-owner of a startup dental practice, Mundo Dentistry.
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