Editor's Note: This is the second in a three-part series about the mergers and acquisitions landscape in dentistry. Read part one here.
Consolidation is the buzzword in the dental industry, and it's not just dentists who are planning for retirement. The fastest-growing segment right now is small group practices -- three to five locations -- that are being acquired by larger dental service organizations (DSOs). There's also movement with large groups: Several DSOs with more than 70 practices are exploring mergers with even larger groups.
Chris McClure.
"Groups that had variable rates on their debt have been squeezed recently, leaving them in a bad position with their banks,” said Chris McClure, co-founder of Aligned Dental Partners, which provides M&A advisory and consulting services to group practices and DSOs. "Many have failed their bank covenants and don't have leverage to fund new acquisitions."
Private practice owners and DSO executives are eyeing the market to gauge when might be the best time to sell. Many strategic buyers postponed transactions in early 2024 because of high interest rates and the rising cost of capital.
"Same-store EBITDA [earnings before interest, taxes, depreciation, and amortization] growth is really important right now,” Kevin Cumbus, founder of Tusk Practice Sales, said. "Buyers want to know: Is your business getting more or less profitable in today's market?"
What dentists and DSO executives should do to prepare for a sale
Planning for a dental practice or group sale starts months, even years, before going to market.
Rondi Michaux.
"I recommend practices get evaluated at least annually so you can identify areas to improve and position yourself for the greatest success," Rondi Michaux, the former director of corporate development for two large DSOs, said.
"Anything that makes you more efficient, lets you do more with less, and increases your A/R [accounts receivable] will help make you more attractive to a buyer, " Michaux said.
As you evaluate your practice from a buyer's point of view, consider the following:
- Audit all vendors to see if there are any that overlap and can be consolidated.
- Analyze how easy it is for patients to book appointments, receive treatment, and pay you.
- Move to a cloud-based practice management system to eliminate the need for servers and streamline workflows, training, and reporting.
- Deploy technology that will increase case acceptance, such as artificial intelligence for X-ray analysis.
- Negotiate and optimize fee schedules with insurance carriers.
- Know your numbers, including fixed costs, variable costs, and EBITDA.
Advanced practice management systems such as Denticon now include online scheduling and digital forms, email and text message functionality, revenue cycle management automation, detailed reporting and analytics, and other tools that used to require third parties. Evaluating your tech stack regularly helps ensure you're not paying for duplicate services and it can improve your EBITDA.
From coffee to close: What happens within 90 days
The pace of the sale is set by the seller. From "coffee to close," a sale typically takes 60 to 90 days, although it can take longer, Michaux said. Once both parties sign a nondisclosure agreement (NDA), the buyer will typically request the following:
- Up to three years of profit and loss statements, balance sheets, new patient numbers, practice production, and collection reports broken down by provider
- Real estate contracts and equipment expenses
- Associate contracts and staff W-2s
- Any fees charged to the company, such as country club memberships or entertainment expenses
- Disclosures of malpractice claims, legal situations, and interoffice relationships
A traditional sale timeline may include the following steps:
- Gathering financials, operational details, employee matters, contracts, legal and regulatory information. Consider having your practice manager sign an NDA and possibly include a bonus for the manager's time, effort, and discretion
- Having a lawyer review the NDA
- Conducting due diligence
- Understanding add backs for any expenses or information not originally disclosed
- Determining the financial details and deal structure
- Reviewing the letter of intent (LOI) with a lawyer
- Conducting more due diligence
- Renegotiating the real estate lease/contract
- Potentially meeting the dentist's spouse and associates before the sale
- Meeting the dental team, which may happen either right before the transaction or after the sale is final
Dental brokers, attorneys, and LOIs
Many dentists and dental group executives prefer to hire an M&A advisory firm to help guide them through the process.
Kevin Cumbus.
"Our job is to protect our clients from tire-kickers," Cumbus said. "We can do all the financial and operational diligence on a trailing 12-month basis in a few weeks, pull together a full analysis of the business and the adjusted EBITDA, and vet potential buyers -- all while keeping your identity a secret."
In this scenario, potential buyers sign a NDA before they meet with Tusk to walk through the seller's story and data. Tusk explained its process and how different deals can be structured in a DrBicuspid.com article published on April 11, 2024.
Top tips for telling your dental team that you're selling
Experts recommend having the buyer and the seller together tell the team about the sale. Often, it helps to have someone from the buyer's human resources team onsite to answer questions.
"They're going to want to know how this affects them," Michaux said. "They want to know how this will impact their job, their salary, their benefits, their vacation time."
There are often operational questions, too, such as whether the name of the practice is changing, how long the original owner will work post-sale, and what they should tell patients.
The key to success?
"The team will follow the doctor's lead,” Michaux said. "If you're happy and excited, if the messaging is clear and concise, if you have answers to their questions, and if you explain why you couldn't share the news with them earlier, then the team will respond positively."
In many cases, team members are not surprised. Currently, about 35% of the dental industry is consolidated. That number is projected to jump to 75% or 80% within 15 years. That's why many dentists and DSO leaders are starting to prepare now, so they can make the best decision for their company in the future.
In part three, our experts share the red flags that buyers look for when evaluating a merger or acquisition.
Beth Gaddis is the editor in chief at Planet DDS, a dental technology company specializing in cloud-based practice management systems, digital imaging, and dental marketing services. Previously, Gaddis was the marketing director for two large dental service organizations. Prior to entering the dental industry, Gaddis was a journalist for 16 years in a variety of roles, including as a TV news producer at the CBS affiliate in Boston. You can connect with Gaddis on LinkedIn.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
