As the dental consolidation train rambles on into 2024, one question I consistently get from doctors is how their practice will be valued by potential partners. Contrary to popular belief, it’s not just what your revenues look like. Yes, that is a very important factor, but it’s just one consideration of several others. Investors are very strategic in their acquisition process and are becoming more and more picky about what type of practice they want to dump their money in. Timing plays a critical role, but below are some important components to take into account if you are beginning to entertain the idea of affiliating your practice with a strategic buyer this year. Getting ahead of the game and controlling what you can control will lead to more money in your pocket.
Factors that drive the offer you will receive:
Financial Health of the Practice
Your net revenues will play a role in what groups will have an interest in your business. If you have a practice that is doing at minimum (in most cases) $1.2M in Collections, you will have groups interested in forging a partnership. The higher the Collections, the more bidders you will have access to. Has your fee schedule been adjusted recently?
Your EBITDA (essentially how profitable the business is after expenses are paid AND FMV doctor’s compensation) will also play a role. A healthy EBITDA will land in the 20%-25% of Collections. The higher the EBITDA figure, the higher the valuation. Trim some fat if you can.
Growth Rate
Investors love to see a practice that is growing year over year. For example, a practice with 15%+ increase consistently will receive a higher offer than one that doesn’t. However, it’s not the end of the world if you have remained steady or flat. Where doctors potentially get into trouble is when revenues have been dipping consistently for a few years. Try and keep those revenues up!
Office Location/Size
Most DSOs work at a regional level (some are nationwide) so your location will determine how many options you have. If you are in say Florida, there will be a high volume of choices compared to being in Alaska. The more choices, the more competitive the offer! Strongest markets in 2024 are FL,TX,AZ,TN,SC,CO,UT, but most states are in play. Demographic metrics play an integral role in all of this. Being within about 1.5 hours of a ‘major’ airport is preferrable, but there are still options for the more rural practices with less patient populations. Groups like to see 5+ operatories within the office or the ability to build out if need be. Ownership or lease of practice don’t really play a role.
Ability to Utilize Economies of Scale
DSOs are management companies. Their job is to help you run the operational side of the business. They are savvy financial partners that have already negotiated discounted rates on supplies and inventory. While analyzing your practices’ cost structures, the DSO will identify ways that can reduce pricing costs by up to around 30%. If you are part of a JV model (retained ownership at the practice level rather than the holding company), this will increase the distributions you will see on a quarterly basis. Win win.
Age of Doctor
The younger you are, the better the offer! This factor is probably the most influential besides the financial health of the practice. Ten years ago, affiliating with a DSO was a planned exit and retirement strategy. Times have certainly changed as over the past two years the industry has seen a dramatic shift in younger doctors affiliating their practice with a large group. Reasons for this are to eliminate the ever-increasing burdens of running the business and a willingness to pursue a better work/life balance. Getting some cash now (at favorable tax rates!) to reinvest is also a popular reason. The potential for generational wealth with their invested equity has also been a factor. There is still a place for the 60-year-old doctor, but they just won’t see as many options and the overall value of the deal will be less. Uncertainty comes with the older doc and some DSOs are not willing to take on that key man risk in a single doc practice. Most groups are now requiring a 5-year commitment so if you are thinking about sailing off into the sunset in the foreseeable future, you must make a move now.
Payer Reimbursement Rates
Similar to the economies of scale a group brings to the table, they will (already have) negotiate with the payers to increase the reimbursement rates (the power of having 50 practices under an umbrella vs the single doc practice). This will instantly increase your Collections and that is something that could drive up the value of your business before even partnering! So contrary to popular belief, a predominantly insurance-based practice could be more valuable to a DSO than a practice that is FFS. Did I mention that your partner will handle everything when it comes to dealing with insurance companies and reimbursements? Serenity at last.
In-House Procedures/Services
DSOs will take a deep look at what procedures are performed in the practice and what procedures are referred out. If you are a GP that is handling most procedures in house, this will have a positive impact on the valuation of your business. If you refer a lot of services out, this could have a negative effect on the offer. BUT, if they notice a significant amount of one procedure being referred out, they might look to bring in that specialist to drive revenues.
Selling Yourself and Your Brand
Let’s be honest…we prefer to do business with people we like on a personal level. Same goes for investors. Your personality will play a pivotal role in not only the offer you may receive, but if you will receive an offer at all! If you’ve ever watched Shark Tank, you know that a lot of the times a Shark has bought into the person and not so much their product or service. That same approach will be applied to your process as well. Tell your story. Be passionate about the business you have built. Articulate what you are looking for in a partner. Convince them. If you can do this, this will drive up the offer because everyone will want to partner with you.
I hope this has shed some light on some important factors regarding the value of your business. I understand that consolidation is not for everyone, but if you are one of the ones open to it, there is no better time to explore this option than in 2024. Just a friendly reminder that I am not affiliated with a DSO or any broker/advisory firm. No funny business here. I’m here to provide advice and steer you in a direction if you need the help. I’m happy to provide you with a ballpark valuation so you have a better idea of what a deal could potentially look like. Let me know if there are any questions that I can do my best to answer for you.
