The Practice Buyer's Corner - Random Musings from the Buy-Side

The purpose of this blog is to share current, real world, experiences on the topics of practice valuation, practice transition, retirement planning, and building equity value - over time - in your dental practice.

Blog By:
seanepp

When it comes to business valuation, everyone loves to rush to “the multiple” discussion - i.e. what multiple of revenue or unlevered free cash flow (EBITDA) is used to arrive at the Total Enterprise Value (“TEV”).

While this approach can be directionally accurate and helpful for “swagging” (sophisticated wild ass guessing) a situation, it is rarely where any one practice changes hands.

If partnership is the goal, negotiations led by numbers are usually a waste of everyone's time.  It tends to only promote black and white thinking - wins and losses - versus mutual success.  Is there a shared “Why”?  If so, what is it?  Is there an actionable path to growing faster together?  If not, then what are you even talking about?

Would you consider investing in any business without thoroughly understanding the business model, competition, and the day-to-day forces influencing the results?  Is there any value to financial statements without management’s color to breathe life into the numbers?

Any business can have a rough quarter or year.  It doesn't matter that a business has a rough stretch - that is expected and normal.  What does matter is how the business and ownership responds.  Healthy businesses tend to persevere whereas weaker ones tend to experience sustained declines and potentially even elimination.

As a buyer, all-time best results are a high-water mark.  They can even potentially be a red flag.  They’re the best results the current business can demonstrate.  Experience suggests that sustaining them can prove more challenging than getting to them.

Why?

Many of the same decisions that maximize profitability (margins) tend to quell growth.  They are often competing levers and inputs.

A healthy valuation is going to look beyond the immediacy of the income statement over the last twelve months.  That tells only part of the story - an important portion - yet still only a portion.  

A common topic is the “group premium.”  Many groups can and do arrive at premium valuations compared to what an independent dentist may be willing to offer.    The common misperception though is that group premiums are driven primarily by quantitative factors.  

They are not.  

Valuations received from groups are often deal-specific (geography, specialty, etc.) and/or platform-specific.  Group premiums tend to be more weighted on qualitative factors than quantitative ones.  Considerations around expected partnership length and long-term provider recruiting weigh heavily on decision making for most groups.  These factors are the primary drivers behind the expansion of both valuation multiples and work-back periods over the last 7-10 years.

Stated most accurately, groups tend to offer premiums not due to financial reasons but rather qualitative ones.  So, it is not a “group” premium per se, but rather a “fit” premium.  Groups are usually better positioned to pay up based on qualitative considerations than an independent dentist.

Stay frosty,

Sean