This may sound counterintuitive, but the price, or the exit multiple, is only one component of a transaction, but it is not the most important one. I am fond of saying, “I will pay you 25 times your earnings before interest, taxes, depreciation, and amortization (EBITDA) if you let me structure the deal.”
Kevin Cumbus.
I would argue that the deal structure is the most important feature of any transaction. The deal structure dictates how cash, equity, and cash flow from joint venture (JV) equity is delivered to you and your estate. In addition, today’s deals are far more complex than historical deals, with a lot of the enterprise value held in the various equity offerings of each seller.
Each time we take a deal through the marketed sales process, we receive a wide range of offers with a plethora of differing deal points and structures, including but not limited to the following:
- Cash at closing
- Equity in the dental service organization (DSO)
- Equity shared at the practice or group level (JV equity)
- Distributions from the JV equity
- Management fees charged by the DSO or the private equity group
- Postsale employment commission on collections for the owner
- Earnouts
- Clawbacks
- Buyer-friendly leases on dentist-owned real estate
The list goes on and on.
Deals are complicated -- there are lots of dials to twist and levers to pull to craft a transaction. Don’t misunderstand me, price is important! However, what is most important is getting the most total benefit over the lifetime of the transaction in the form of cash, equity, and distributions with the least amount of risk following closing.
Taking an unsolicited offer
Every DSO in the U.S. has a large, well-capitalized business development team that spends hundreds of thousands of dollars each year to identify new targets (dental practices and groups) to purchase.
These teams are financially incentivized to find “proprietary deals” (deals that are not represented by an M&A adviser), as they can buy these businesses more affordably than they could through a deal via the marketed sales process.
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 the U.S. have received at least one offer from a DSO.
We call these offers, “unsolicited offers,” as you, the business owner, were not looking to sell when the DSO approached you. The number of unsolicited offers delivered to dentists has increased exponentially in recent years due to the increased number of buyers and the increased prices of dental practices and groups.
DSOs know that they can put a very healthy multiple or a percentage of collections offer on the table (six times or 150% of collections, for example) that will survive the sniff test of an unrepresented seller.
However, based on our analysis of missed EBITDA calculations, misunderstood deal terms, and unchecked unsolicited letters of intent, we find that many of these offers are in the three to four times range when it’s all said and done. These dentists would have been given a far higher evaluation by the same buyers had the sellers been represented by a knowledgeable advocate.
While I understand the appeal of doing your own deal, it goes without saying that you are up against a 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.
Kevin Cumbus is the founder and president of Tusk Partners, an M&A advisory firm focused exclusively on large and group practices that want to partner with a dental service organization or private equity group.
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.
