As the world of consolidation in dentistry continues to grow like gangbusters, many doctors are beginning to pay more attention to this option. Whether as a planned exit strategy, to utilize a partner’s capital for growth and expansion, or to just minimize administrative burdens for a better work-life balance, doctors have never been more exposed to this option like they are today. Valuations are the highest they have ever been and more buyers in the market allow for more options to choose from for the dentist. It’s all very exciting if you ask me. But what I am about to share with you is NOT what these buyers want you to know.
In this first part series, I will be discussing the potential pitfalls of enterprise values when it comes to your EBITDA figure. EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) is the foundation for what types of offers you will receive for you practice now or down the road if you are to partner with private equity. Determining your EBITDA is an art NOT a science. There is no formula (despite what your CPA might think) and every buyer has their own customized way of determining it. It’s extremely important that you have thorough knowledge of this exercise, or at least have someone in your corner that does, because it is the determining factor in how much money will end up your pocket.
When a buyer controls the narrative (unsolicited deal with little to no competition), they also have control over how your EBITDA is constructed. It should come to no surprise that a buyer wants your EBITDA to be as low as possible. The lower the EBITDA, the lower the offer. In fact, the sales guy/gal you have been going back and forth with is compensated more if they can get you to take a low-ball offer. They are under the impression that you are minimally educated on M&A, structure and terms of the deal, and the overall market valuations. They probably aren’t wrong, right?
I’m a big advocate for utilizing a REPUTABLE sell-side M&A firm as they bring so much value to the process for you. The offers they negotiate will far outpace their commission. One of those values is the Adjusted EBITDA exercise they will perform. NOTE: If an advisor/broker does not ask for your business ledger while conducting your EBITDA, run away as quickly as possible. They are lazy, incompetent, and more than likely leaving money on the table. Don’t let them be paid by the buyer too but I digress! Good firms have the “secret sauce” and know what they can and can’t add back (this isn’t just about adding back the “ITDA” part of it). Again, this is an art form not some formula and not many people have the financial/underwriting chops to do it the right way as it is very complex. Contrary to the buy side, an advisory firm wants your EBITDA to be as high as possible…higher the offer, higher their commission. Here are some of the methodologies a reputable advisory firm can impact your EBITDA figure:
- Utilize economies of scale the DSO has on supplies and lab fees
- Cost of benefits administration the DSO will pay verse what your current cost is to pay for your staff benefits
- Ability to utilize DSO’s higher reimbursement rates (which will increase your Collections when you partner too)
- Identify every discretionary item or one-time purchases over your TTM.
Finally, if you are going through the process on your own with a DSO, you will eventually end up in the closing phase, or better known in the world of private equity as the “Due Diligence” phase. A third party will conduct your EBITDA at this time. And guess what? If your EBITDA comes in higher than the initial figure conducted by the buyer at the beginning of the process, it is more than likely that you won’t ever know about it. Your buyer isn’t exactly motivated to pay you more money. BUT, if that EBITDA figure comes in lower the second time around (was your EBITDA figure bloated in the first place to keep you excited and engaged??), you can bet you will definitely hear about it in the form of a lower offer for the business. And at that point you will have deal fatigue from doing everything by yourself the past 6 months, or you just waited too long to make a move and now you have to take this mediocre deal in front of you. Lose lose either way.
Conclusion:
Underwriting/EBITDA is a critical process in getting yourself the best deal possible. I hear a lot of talk from doctors about “multiples of EBITDA” and how their colleague got a 9x multiple. Multiples mean absolutely nothing if the EBITDA wasn’t constructed in your favor. If you have a 5-year window (minimum requirement) to retirement or just want to cash in and take advantage of the remarkable offers’ dentists are seeing at the moment, it might be in your best interest to see where your EBITDA currently stands. Having a sell side advisor handle the initial underwriting process is a step that I would highly recommend. Happy to provide introductions if you would like.
