We spend a lot of time on the road each year and have the good fortune to be able to speak in front of many diverse audiences, so it’s really nice to have an opportunity “to be a student” from time to time. One of those times is our annual trip to “Chiberia” in February for the McGuireWoods HealthCare Private Equity Conference.
Hopefully you found Part One of this blog valuable. In the event that you missed it, you can access it HERE. Let’s get going on part two, which will focus on Concerns around Valuation.
Four Concerns Around Valuation
Let’s face it, the business of dentistry and emerging group dental practices specifically have seen some pretty amazing valuations lately, and we’ve got clients that have benefited tremendously from this. 
That being said, if we’re all going to do our part to keep multiples high, we need to focus on a few key areas.
ONE: Pro Forma EBITDA Adjustments
By now, everyone is hopefully familiar with what EBITDA is and how it’s calculated. EBITDA in and of itself is a historical proxy for cash flow. Many sellers and their sell-side advisors have gotten rather aggressive with pro forma EBITDA adjustments. Adam Willis, Managing Director of Madison Capital Funding, went so far as to say: “[These pro forma adjustments are] no longer a proxy for cash flow, but more of a projection of something that may not materialize…and have created a crazy environment on what add backs might never materialize – especially in the PPM and DPM markets.”
Suffice to say the buy-side is becoming more and more wary of the way these adjustments are justified. Matthew Evans, Managing Director of Monroe Capital, cited a specific example that has frequent relevance in our world: “A recent change in diversity of payer mix with a proforma adjusted EBITDA calculation is now viewed with some greater level of skepticism.”
All that being said, any business that is acquired is done so for the future potential that it brings to the new owner. Pro forma adjustments are part of our world, but their validity can be questionable. The credibility of your sell-side advisor matters, so choose your advisor wisely.
TWO: Integrating FFS Practices into Insurance-based Groups
There are a LOT of fee for service practices coming into the market for sale these days. They’re typically very profitable and command a premium. If you run a predominantly insurance-based group and are going to acquire one, you should consider the potential complications around post-sale integration.
Vito Dacchille, CEO of Redwood Dental, summed it up nicely: “Senior sellers with fee for service practices are languishing because solo young buyers can’t afford to buy them, and group buyers are wary due to culture and integration issues. Integration is problematic because the buyer has to re-educate that team on how to handle insurance payments (insurance verification, co-pays, processes, etc.), which could jeopardize the health of the team.” This could impact valuation of these high-profitability practices. We shall see…
THREE: Drivers of Recruiting and Retention in Emerging Groups
Recruiting and retaining key associates is one of the biggest problems every group faces. We’ve written about it extensively in our blog and you can find one of those entries HERE.
Provider continuity impacts valuation regardless of whether you’re a seller or an operator.
Joshua Gwinn, CEO of Hero Practice Services, provided some incredibly valuable insights based on their decades-long success in retaining providers. 
He stated: “Culture can drive a salary structure over commission, which often creates better clinician-patient alignment.” He also went on to share what they see as several keys to an overall recruiting strategy:
- Providing a true career path for a clinician
- Potential for equity piece, especially if they take on a management role as a regional clinical director
- Potential for paying off student loan debt
- Offering a more flexible work schedule, which is becoming key for both the provider and the patient
FOUR: Compliance Takes Center Stage
I’ve observed several panels through the years of attending this conference where the topic of “compliance” was discussed, but this year it seemed to take on a much greater level of significance. And it’s an area that all emerging group dental practice owners need to consider.
Let’s start with the fact that “compliance” has historically begun and ended with OSHA compliance. Today it’s much more significant than that. Diane Daych, Managing Director and Co-Founder of Granite Growth Health Partners probably summed it up best in saying, “A robust compliance program is the new cost of doing business. Private Equity Groups are focused more than ever on patient outcomes, and driving compliance has become a huge issue.”
Here are some specific areas from several different panels to shed more light:
- Audits: There has been a dramatic increase in the number of audits of Electronic Health Records through government and commercial payers
- Diagnosis: how do you guard against the “moral hazard” of over-providing services? Again, Joshua Gwinn provided great insight: “Compliance is king and the best way to achieve it is through chart audits. Hero conducts 30 per doctor per year [10 is standard in the industry] and audits the busiest days of the year. We view under-treating and over-treating as the same problem.”
- Data: make sure your 3rd party business associate agreements are in place and up to date, and validate security where they have access. Cyber security is mission critical in today’s world of healthcare. Track all metrics related to running internal scans to identify systemic failures and have procedures in place for response and recovery ability. Finally, be sure to have documented training for all employees.
If you ever plan to sell your group, then plan to answer buy-side questions around who your Chief Compliance Officer is as well as the details of your compliance program. And if your answers are made up on the fly, plan to see that reflected in your valuation.
Special thanks to Bart Walker and all of the great people at McGuireWoods for hosting us in Chicago. We look forward to seeing everyone at the conference again next year.
If you’d like to discuss any topics in this blog or related to any other trends in our industry, please feel free to contact me at kevin@TUSK-Partners.com TUSK provides industry-leading resources for Group Dental Practices and DSOs. We help our clients START, GROW and SELL their Group Dental Practice or DSO. For more details, visit our website HERE or feel free to download our Overview of Services.
