Background
The sellers approached me through their CPA firm after receiving two offers from two different Dental Service Organizations (DSOs). The best offer, from a very well-known DSO, was $4.7M. After reviewing the financials and walking through the practice, I felt the practice was greatly undervalued by the two DSOs. The sellers challenged me to improve the offer.
Valuation
As with any business, 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 DSOs and a Seller's Discretionary Earnings (SDE) for financial buyers such as dentist interested in owning their own practice. 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 seven and eight times EBITDA. The value to a typical financial buyer would be closer to the $4.8M offered by the well-known DSO. The sellers were consulted as to their preference for buyers. Given they were interested in working for three to five more years, 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 seller to provide very detailed information on the practice history, service mix, customer data, provider and staffing detail, facilities, equipment, inventory, supplier relationships, technology, etc. 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, additional service upsells, etc.
Process
I was asked to re-engage the well-known DSO to see if they would adjust their offer based on the additional information. Their re-evaluation resulted in an increased offer from $4.7M to $5.3M. The consensus was this was still too low of an offer. There are roughly 60 additional DSOs presently operating in the State of Florida. We contacted each DSO directly to gauge their interest. Thirteen 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. A dozen PEGs and FOs signed NDAs and evaluated the practice. After communicating the expectations of what would be an acceptable offer, I received seven written offers. These offers ranged from $5.3M to $9.4M with a wide variety of terms and conditions. After interviewing four of the seven groups who made an offer, the sellers selected a DSO based in the Southeastern United States to pursue their sale. Price and terms were not the only determining factors; the sellers' comfort level working for the DSO over the next three to five years was critical to their decision.
Price
The sales price for the practice reached eight times EBITDA, roughly $7.4M, with approximately 80% down and 20% in a three-year seller note with payment contingent upon the sellers continuing their employment for the first three years after the acquisition.
Results
The sellers were obviously very pleased with the transaction as they received a $2.7M premium ($7.4M-$4.7M) based upon the initial offer they received. This quite easily covered their brokerage fees and then some, but the primary benefit to the sellers was bringing a party to the table they felt comfortable working for the next three to five years before their retirement.
Next Steps
If you are interested in buying or selling a dental practice, please contact Eric J. Gall at [email protected] or 239-738-6227 to discuss your interests.
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Wed, Feb 02, 2022Share Article
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White Paper: Sale of a Single Location $6M Annual Revenue Dental Practice
