I Will Buy Your Business for 25x Your EBITDA...

I Will Buy Your Business for 25x Your EBITDA...

Offers from DSOs come in all shapes and sizes.  They contain a litany of terms, variables, vocabulary and numbers.  Yes, there is a “headline number” or “Enterprise Value” near the top of the page, but the reality is that many will never realize that headline number due to the structure of the deal.  Structure drives the long-term value of a transaction.  As I have said many times, “I will happily buy your business for 25x, IF you let me structure the deal.”  If you took me up on this offer, on a $1M EBTIDA business ($25M Enterprise Value on 25x EBITDA), I would set aside $1M of cash at close then structure the remaining $24M in unattainable earn outs, but you could tell all of your friends that you got paid 25x for your deal.  See where I am going?

That is really what makes our job at TUSK so interesting and exciting.  When we take a client to market, we will receive offers from 5 or more DSOs and they are all different: different enterprise values, different deal structures, different equity considerations, different post-sale employment compensation, all from different leadership teams.  The one thing that is always consistent is that there are some dollars that are at risk and others that are not. 

Below is a brief sample of some of the typical deal terms we have seen over the years along with issues that accompany them:

Cash At Close

This is the cash amount that is wired to you at closing.

     Issues include:

• In some cases, DSOs will create structures where they can come after these dollars if revenue or EBITDA targets are not maintained post-close.

Dollars At Risk

1. Post-Sale Compensation – how will you be paid as a clinician or manager in the business post close.

     Issues include:

• Clinical Commissions on WHAT? Collections, Net collections, Production, Collections less a percentage of labs?  It all matters as it drives your EBITDA which can impact valuation.  This is especially true with Orthodontists as we have seen compensation ranges from a fixed salary to a salary + bonus for starts to a flat commission on collections. 

• Termination Rights – when you sell your business you become an employee of the business you built. Your new boss will have the ability to fire you with and without cause, just as you do with you employees now.  In the event of termination, you will be subjected to non-competes, non-solicits, and potentially redemption of equity at less than market value or worse, release of equity held in the business.

2. Earn Outs – these are dollars only realized when your business achieves certain revenue or EBITDA targets.

      Issues include:

• Once you sell your business, you give up control of the revenue and expenses and it can be harder to control the outcomes.

• The DSO is calculating the EBITDA going forward.

• Deals are sometimes structured to show HUGE earn outs that are practically unattainable (20% growth per year for 3 years) simply to boost the headline “Valuation” in LOIs. 

If you would like TUSK to review an unsolicited offer from a DSO, schedule a call to ensure you're getting the deal you deserve. 

    Issues include:

• How long the escrow is in place – keep in mind that this money simply sits in an account and does not enjoy any compounding interest.

• What are the conditions to release it – this is one of the most negotiated items in all agreements.

4. Equity Retained in Your Business – sometimes described as sub-DSO equity or Joint Venture (“JV”) equity, this is equity retained in your business post-close. Most times this equity allows you to enjoy distributions based on your pro-rata share of the retained equity in your business. 

     Issues include:

• Management Fees Charged by the DSO – these fees range from 10-0%. Some are capped at a certain dollar amount, while others are not.  The one thing that they all have in common are that they are paid before any distributions to equity holders.

• Liquidity of these shares – If you roll a sizeable portion of your proceeds as sale into equity in the business you are selling, you need to be able to sell these shares at some point. Every DSO has a different mechanism for this.

5. Equity Rolled in the DSO – some DSOs offer you the opportunity to roll proceeds from the sale into equity in their DSO at the “Hold Co” level. Many will tell you that these shares are the same as or “pari passu” to the shares that the private equity guys and leadership in the DSO have others will not be so fast to tell you where these share live on their capitalization table.  These shares don’t typically come with distributions and can return 1-5x cash-on-cash rolled.  That is a HUGE difference.  

     Issues include:

• Timing – when a PE group invests in a DSO, they expect to grow the business then exit within a 60-month period. If you are rolling equity into the DSO at month 5 your returns will likely be much higher than if you are investing in month 55.

• Quality and Experience of Leadership – has the leadership team recapped before? Has the PE group built and sold a DSO in their past?  What is the likelihood that they will be able to successfully return your money to you at all?  Keep in mind that some DSOs don’t make it and banks take possession of them and wash out the value of all of the equity holders – that’s right, the equity value can go to $0.

• Leverage (debt) Levels of the DSO – leverage matters because the lenders get paid first. Do you know how one DSOs balance sheet compares to another? Additionally, if a DSO gets too over levered, their lenders will quit providing them capital to grow and then they are stuck. This has happened to more than one DSO today!

If you have questions about deal points, are entertaining an unsolicited offer or are planning to sell your business in the next 24 months, give us a call.  We want to help you make an informed decision about the sale of your life’s work.

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