Whether you are currently interacting with DSO investors or will begin entertaining this option for your business in 2024, there are a few different ways that a deal can be structured. Based on where you are in your career at this point, choosing the wrong structure (and partner for that matter) could potentially leave millions of dollars on the table for you.
As mentioned in the past, if an investor has valued the practice at say $10M (Enterprise Value), don’t expect a check for that amount at the closing table. These groups are essentially buying a portion of the business and that can be anywhere from 51% to 90%. The remaining balance, or your ownership left in the business, can be received at the Holding Company (Holdco) level, the practice level (Joint Venture), or a combination of both (Hybrid Model).
The traditional model in M&A across most industries is the Holdco level equity, but we are beginning to see more of the JV level in the dental space. In my opinion that’s a really good thing. I’m a big advocate of the JV model. When you agree upon a JV model and let’s say it’s a 60.40 split, you are keeping 40% ownership at the practice level, so you are receiving 40% of distributions moving forward on a quarterly basis. You are incentivized to continue to work hard and grow the business alongside your partner who will run the entire administrative side of your business if you want them to. You aren’t relying on the overall success of the platform to increase the value of your equity, but rather your own personal success. You are in control of your own destiny.
Another very important component of the JV model is that it reduces a doctor’s risk moving forward. In the traditional Holdco equity model, your fingers are crossed that the parent company will be able to sell the platform down the road, enabling you to see a very significant return on your investment. The equity will always be more lucrative at the Holdco level if things work out (and it does work out very often), but what if it doesn’t? Are you stuck with this equity? Will my partner buy it back? Do I have to get an associate to buy-in and purchase my shares from me if I want to walk away? It’s a high risk/high reward investment and some doctors aren’t willing to let it ride.
When a JV model DSO has a successful recap event, you will also receive the coveted “2nd bite of the apple.” Every group is different, but here is an example of what that could look like for you. If the PE firm is able to sell the portfolio at say a 12x multiple of EBITDA, you will also be able to realize that 12x of EBITDA at your 40% of Distributions.
Example:
EBITDA in the practice has grown to $1M annually over 5 years. The portfolio is sold and technically your sliver in the deal is valued at $12M (sold for 12x of EBITDA). You have 40% ownership so you will receive $4.8M.
“But Jonathan, what if they don’t end up selling and I’m anxious to retire or walk away? What is my exit strategy when I have 40% ownership in that practice?” Most of these groups will implement a “PUT” option where they will buy back your equity if you exercise that right (after fulfilling your agreed upon “work back” duration). As an example, the buyback value will be based on the increase in EBITDA over the duration of the relationship and a multiple off that increase.
So, you have received your up-front cash at the closing table (at attractive current tax rates that won’t last forever), you have gotten your 30-40% comp on an annual basis, you have gotten your 40% distributions on a quarterly basis, and you received that big back-end chunk from the recap event. All with very minimal to no risk on your end! And let’s not forget, you have minimized the headaches and burdens since your partner is handling all of the administrative duties, allowing you to focus on the clinical side while keeping your autonomy as well. Everyone can appreciate a better work/life balance! The JV model in dentistry is a great way for doctors to take some of their chips off the table while keeping ownership at the practice level. This is becoming a very popular option for doctors whether they are looking towards retirement, are just burnt out from running the business, or for the younger doc that is looking to scale his/her business by utilizing their partners capital for future growth. Expect a commitment of 5 years.
As mentioned in the past, I don’t work for a DSO. I don’t work for an advisory firm. I have no skin in the game in how you proceed. I am just here to help you determine what path is best for you. I’m always available to discuss in further detail what these deals would look like and answer any of your questions. Consolidation is continuing its rapid growth and valuations remain high at the moment. Also, since 2023 is coming to a close, it can’t hurt for you to get a ballpark valuation from me on what your practice is valued at after another full year is in the books. I am happy to provide that to you at no charge if you would like.
