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.

“I want a 9X on 1.8MM in EBITDA, 80% cash at close and no earnout!”

“I want an 8X on 550k in EBITDA, 100% cash at close and a 12-month employment agreement.”

I hear this all the time. At times, I must sit back and wonder where it all comes from and how these expectations began. There are a dozen funnels of information that can find their way into the general dental population, however I believe that there is a vast chasm between expectations and reality right now that simply has to be addressed, and the fault lies everywhere.

I Am Not Your Friend…

For a long while, I operated on the buyside of both a smaller regional DSO, and an elite national DSO. In that time, if I could have honestly started off every single meeting I had, it would have started with the phrase “I am not your friend!”. Obviously, that would be incredibly counter-productive to my cause, so I generally just settled with “Dr. Jones, it’s wonderful to meet you! You’ve built an incredible business and my job is to make sure a partnership is a good fit for all parties involved and get you the value you’re looking to receive!” Phew, that feels better for everyone sitting at the table. Amazing how semantics can alter the focus of a conversation greatly.

But I digress, as a buyside representative, my job was to find opportunities that were a good fit for my organization, and then pay as little as possible for those opportunities, thus maximizing the arbitrage that my organization would experience at their next capital event. Rinse. Repeat. This was done through a myriad of strategies, a couple of which I’ll touch on here.

A baseball reference… which is funny, considering I’m not even remotely interested in the sport. The term… 3 solid hitters starting off the batting order, and then a fourth, batting cleanup has the opportunity for the grand slam, or to knock a runner in… Often the best hitter in the lineup, they certainly have the best opportunity for run production.

So, how in the world does this apply to dentistry? 

You’ve built a successful business. You’re heading down the home stretch and are trying to figure out if it’s time to sell… how to sell… what type of preparation needs to be done heading into a sales process? How do you undertake such a process, without upsetting the performance of the practice(s), while maintaining your team and ensuring you receive a maximum valuation on the back end? How do you hit a grand slam when selling your business? 

Now Is The Time…

M&A is a largely cyclical business… Deals get brought to the table, and a vast percentage of them end up closing either in Q4, or even the week between Christmas and New Year’s celebrations. Everyone is incentivized to get things done before the change of the calendar! However, what further incentivization may exist as we look at spots that don’t traditionally fall in line with the natural cycle of the market?