• Fri, Jul 01, 2022
  • White Paper: Sale of Six-Unit Dental Practice Completed
  • Dental
  • Background

    The sellers, a husband dentist and wife CFO, were referred to me through their financial planning and wealth management firm after receiving interest from a Dental Service Organization (DSO) represented by a friend of the sellers' son.  The DSO was talking about making an offer, but struggling to do so based on the information they had collected on the business at the time I entered the process.  After reviewing the financials and walking through the six locations, I felt the practice would sell within the six to eight-times EBITDA range we have been seeing DSOs offer.

    Valuation

    As with the prior dental practice I recently sold CLICK HERE FOR WHITE PAPER, the first step was to gather financial information and recast the financials to determine adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for strategic buyers such as a DSO and a Seller's Discretionary Earnings (SDE) for financial buyers such as a dentist who would be a first-time buyer.  The second step was to gather other pertinent information critical to the operations of the business.  Based on my assessment, I believed we could sell the business to a DSO for between six and eight times EBITDA.  The value to a typical financial buyer would be in the four to six times EBITDA range.  The sellers were consulted as to their preference for buyers.  Given they were interested in maximizing their takeaway at the exit, they felt a DSO would be their best option.

    Preparation

    The third step was to properly prepare the business for sale.  This step was critical to maximizing the sale price.  It included a specific dental practice questionnaire developed by Edison Business Advisors that required the sellers to provide very detailed information on the practice history, service mix, customer data, provider and staffing detail, facilities, equipment, inventory, supplier relationships, technology, etc.  We executed these questionnaires for all six locations.  This information was packaged into a very professional Confidential Business Review (CBR) that allowed prospective buyers to obtain a better understanding of the practice prior to making an offer.  They were able to identify the opportunities the acquisition presented with respect to employee incentives, reduced supply and/or lab costs, improved reimbursement rates, additional service upsells, etc.

    Process

    I was asked to re-engage the DSO represented by the sellers' son's friend to entice them to make an offer.  They decided the six offices were a bit too small for their business model and decided to pass on the opportunity.  We immediately opened up the opportunity to roughly 60 other DSOs presently operating or desiring to operate in the State of Florida.  We contacted each DSO directly to gauge their interest.  Seven DSOs signed Non-Disclosure Agreements (NDAs) and evaluated the practice.  There are roughly 150 Private Equity Groups (PEGs) and Family Offices (FOs) presently investing in dental practices as well.  Six PEGs and FOs signed NDAs and evaluated the practice.  After communicating the expectations of what would be an acceptable offer, I received three written offers.  These offers ranged from $5M to $7.2M with a wide variety of terms and conditions.  After interviewing the three groups that made an offer, the sellers selected a DSO based in Southwest Florida to pursue their sale.  Price and terms were not the only determining factors; the sellers' comfort level working for the DSO to transition the business over the next year was critical to their decision.  The sellers' and the DSO's administrative staff had several working meetings to share their integration plans and ideas before the transaction and these meetings developed a strong bond among the key players.

    Price

    The sales price for the practice reached seven times EBITDA, with approximately 80% down and 20% in an earn-out based upon the seller continuing his employment for the first nine months after the acquisition and assisting in growing the practice by $1M in revenue. This included managing the buyer-paid expansion of one office.  The seller was also compensated for his dental services based on a percentage of his production.

    Problem/Solution

    The deal was set to close at the end of January, but in mid-January, the sellers discovered they inserted a "Right-of-First-Refusal" clause for the primary dentist at one of the six offices.  The offer had been made to this dentist several times in the past, but the dentist expressed zero interest.  This time was different.  He exercised his right.  Fortunately, we were able to carve out one office from the deal based on the trailing twelve months EBITDA and complete the deal on five of the six practices for the prorated amount.  The sixth office price and terms were negotiated to match the specific carve-out amount and terms in the DSO's offer.  This delayed the sale of the sixth office but kept the price and terms in place for the sellers.

    Results

    The sellers were obviously very pleased with the transaction as in spite of the problem and the resultant delay of the two transactions, they were able to keep the original price and terms intact.  The primary benefit to the sellers was bringing a party to the table they and their administrative staff felt comfortable working with in the future and a buyer that had a very similar vision of patient care, practice operations, and administrative support. 

    Next Steps

    If you are interested in selling or buying a dental practice, please contact Eric J. Gall at [email protected] or 239-738-6227 to discuss your interests.