Too Much Focus on Exit Multiple / Price
I know that this may sound counter-intuitive, but price (or exit multiple) is only one component to a transaction and is not the most important. I am fond of saying, “I will pay you 25x your EBITDA, if you let me structure the deal.”
I would argue that the deal structure is the most important feature of any transaction as the deal structure dictates how cash, equity, and cash flow from JV equity is delivered to you and your estate. In addition, today’s deals are far more complex that historical deals, with a lot of the enterprise value held in the various equity offerings of each individual seller.
Understanding what the triggers are for these equity offerings, and what exiting said offerings consist of is a critical component in realizing the full value of your deal.
Because of our extensive background in investment banking, our process mirrors that of many of the largest investment banks in the world. Each time we take a deal through a Marketed Sales Process, we receive a wide range of offers with a plethora of differing deal points and structure, including but not limited to:
- Cash at Close
- Equity in the DSO
- Equity Shared at the Practice / Group Level (JV Equity)
- Distributions from the JV equity
- Management Fees charged by the DSO or the Private Equity Group (PEG)
- Post-sale employment commission on collections for the owner
- Earn Outs
- Claw Backs
- Exit strategies of JV/Holdco equity, and the strings that are attached to each
- Treatment of Cash in bank pre-close, post-close
- New buyer-friendly leases on dentist-owned real estate
The list goes on, and on and on.
These deals are complicated with lots of dials to twist and levers to pull to craft a transaction that meets our clients needs. Don’t misunderstand me, price is important! However, what is most important is getting our clients the most total benefit over the lifetime of the transaction in the form of cash, equity and distributions with the least amount of risk post-close.
Speaking of closing… the list above represents just a small number of the considerations inherent within any deal. The closing process is a huge undertaking requiring hours of analytics heavy lifting, and ongoing legal/contractual negotiations at every step. There will be multiple opportunities for missteps throughout this process and absolute diligence in defending your best interests is critical.
Taking an Unsolicited Offer
Every DSO in the nation has a large, well-capitalized Business Development (“BD”) team that spends hundreds of thousands of dollars each year to identify new targets (dental practice and groups) to purchase each year.
These BD teamsare financially incented to find “proprietary deals” (deals that are not represented by an M&A Advisor) as they can buy these businesses more affordably than a deal in a Marketed Sales Process. They pride themselves on how many proprietary deals they close each year as the leadership knows this saves them money in acquisitions and creates additional profit when they sell their business.
DSOs are dealmakers at their core. They must grow through acquisition (buying low) to create an economic return for their investors (selling high). As a result, they do not want to pay a penny more than they must on any single transaction. Most dentists in America have received at least one offer from a DSO.
We call these offers, “Unsolicited Offers,” as you, the business owner, were not out in the market looking to sell when they approached you. The number of Unsolicited Offers delivered to dentists has increased exponentially in recent years due to the increase in the number of buyers and the increasing prices of dental practice and groups.
Let’s backtrack to a few sentences earlier pertaining to arbitrage and proforma P&L analysis. Most larger buyers understand that they can more efficiently run your business simply because of scale. They also understand that your accountant likely isn’t accustomed to running a true EBITDA analysis appropriate for a private equity buyer.
They know that they can put a very healthy multiple or percentage of collections offer on the table (6x or 150% of collections, for example) that will survive the sniff test of an unrepresented seller. Buyers love unrepresented sellers.
However, based upon our analysis of missed EBITDA calculations, misunderstood deal terms and unchecked unsolicited LOI’s, we find that many of these offers are actually in the 3-4X range when it’s all said and done, and would have been given a far higher evaluation by the same buyers had the sellers been represented by a knowledgeable advocate.
In every case, the additional enterprise value (over the initial unsolicited offer) we drive in the deals significantly outpace our fees, while providing more beneficial terms, a streamlined closing and QofE process and a regret free selling experience.
We can achieve these results for three primary reasons:
- We calculate the EBITDA.
- We run a competitive marketed sales process.
- We squeeze the buyers for every penny across all deal points.
Although I understand the appeal of doing your own deal, it goes without saying that you are up against professional deal maker with a long history of making the owners feel loved and appreciated while not paying a penny more than they must to close a deal.
When clients come to TUSK with an unsolicited offer, we have been able to increase that offer by 30 – 100% net of our fees.
Accepting an unsolicited deal is like taking a knife to a gunfight.
Hear How We Increased a Recent Clients Offer by 66% ⤵️
Don’t Leave Money on The Table! Partner With Experience.
With private capital flowing into the dental world, consolidation is only speeding up. This incredible growth has provided multi-generational wealth for many doctors in the space. While it has opened up numerous amazing new DSO’s, groups and PEG’s buying in the space, the tremendous influx of deals has also given birth to a significant growth in poor representation, startup groups with lackluster performance results, 10X increases in unsolicited offers and a trail of heartache and tears for those that fall prey to some of the downfalls of industry consolidation.
We truly hope that this article serves as both an educational tool and warning of some of the pitfalls that can become of your life’s work. We at TUSK Partners are aggressive in our defense of the doctors that we represent and voracious in our pursuit of the highest possible enterprise value with the most appropriate, advantageous, well strategized deal terms possible, made between partners (buyer and seller) that are a perfect fit for each other. That is our responsibility, and it is one we do not take lightly.
Ready to work with a partner that understands the intricacies of selling your practice and has proven experience that you can rely on to make the best deal possible? It’s time to give TUSK a call.
About TUSK Partners: TUSK Partners (“TUSK”) provides M&A Advisory services in the dental industry. TUSK has completed over $650M 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
