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

Probably the most overhyped/oversold reason to join a group dental practice is the "second bite" or “equity story”.  

Having done this for too long, I’ve been able to witness the evolution of deal structures and terms.  Trendy new acronyms to describe the same thing - the tortured mental gymnastics.

The reality is that to function as a group healthcare business at scale, nearly every group has to do 80-90% of their “doing” the same way.  There is a growing business to run and multiple masters to answer to - staff, colleagues, lenders, investors, insurance companies, and PATIENTS (remember them?).

The only real differentiation across groups is culture and philosophy.  What is their “Why?  Are they an operator trying to build a durable, sustainable business?  Or, are they an opportunist gambling on their ability to synchronize market momentum before flipping the group to the next sucker, er, buyer?

There remain plenty of groups selling outlandish equity stories across the country.  Nonsensical return claims in a market where professional investors are realizing historically low sector results.  Many of these same groups are under severe financial duress yet they are still “faking it” in the market - disrupting and distracting auction processes they never actually had the capability to participate in, let alone close.  This has created the now ubiquitous “Zombie LOI” phenomenon.  Be on the lookout for rising bankruptcies and out of court restructurings.  

If you are open to groups as an alternative, consider requesting as many bids as you can manage without driving yourself nuts.  When comparing bids, lay out the cash at close, seller paper (if any), and equity (if any).  If seller paper represents a big part of an offer, make sure you get the best possible understanding of the buyer’s credit health and relationship with their primary lender as you’ll most likely be subordinated to them in a downside scenario.  Finally, look at the “equity story”.  What % of the overall value being pitched by the bidder is coming from the equity?  For perspective, few investors are realizing cash-on-cash returns over 2x of late yet many groups are still selling 3x-5x+ in their pitch decks.

Also, if equity is part of the calculus, recall that you are a buyer and a seller in the same transaction.  Would you pay the same amount for your business the next day?  How does any platform generate reasonable returns if they are overpaying for every acquisition?  Is your transaction the exception or the rule?  How many full recaps has the platform been through?  How did those recaps perform?

If the bidder is suggesting a 3-5x equity return, maybe chop that in half to help make comparisons across multiple deals more meaningful.  There is no scaled group that drives outlier synergies.  There is only so much you can squeeze out of supplies, labs, equipment, benefits, etc. - those vendors still need to pay their staff and run their businesses.  Any meaningful synergies coming from scale are realized quickly in the group model and they tend to flatten out once realized.

Same Store Growth (SSG) remains the single largest challenge for every group.  Consider asking each of your bidders how their operational teams help drive SSG post-close.  That might be the best litmus test for vetting operator vs. opportunist.  "Light touch" affiliation models tend to be associated with the latter.  How are they driving new patient flow (that you want)?  How do you build a healthy, scalable business without systems?  That's simply a bucket of EBITDA the next owner will have to figure out how to professionalize on their time and dime.

Good luck, have fun, don’t die!

Sean