The Transition Advisor's Corner - Random Musings from the Front

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

“Equity” is one of the most frequently discussed and least understood topics in the healthcare growth arena.  

Have you heard the question, “What’s your equity story?”  When it comes to the answer, the old adage - “Everything before but and after because, is bullshit.” - most definitely applies.  

These days, the development professionals at most groups are intentionally kept in the dark as to how their employer’s equity is actually valued.  It is intentional, structural ignorance.  So, how could they ever possibly explain it to a prospect correctly?  They really can’t.  

Not an excuse but possibly an explanation as to why an increasing number of doctors who have sold to consolidators find themselves dissatisfied.  The “front end” (sales/development) and the “back end” (platform operations) are often segregated with little crossover or communication.  Quality control tends to lack - the front end moves on to the next deal whilst the back end attempts to digest the last one.  Everyone is crossing their fingers that the doctors remain happy.

What gets lost?  What gets lost is a common understanding of how equity value is created or destroyed in a group environment.  So much of it simply lies on clear, timely communication.  Most deals do not go sideways or backwards due to financial issues.  Most deals that go sideways or backwards do so almost always because of human capital issues.  Turning off or losing key providers is certainly a revenue challenge.  Losing key managers and front desk people can introduce unplanned overhead increases and operational bottlenecks.  Sticking your head in the sand and hoping that it all resolves itself is not a strategy.

If you are a practice owner that is open to group exits as an option, it behooves you to run a process that yields bids from multiple parties.  Those bids will most likely include a material amount of non-cash consideration  - e.g. seller notes, earnouts, equity, etc.  

Unless the advisor understands how the “sausage is made” in DSO-land, it can be very difficult to compare and contrast multiple offers for the same practice or group.  The equity of each group comes with a unique set of risks and opportunities that only an experienced advisor can properly vet and provide feedback on.  Has your advisor worked on the buy-side?  Have they been directly involved in multiple “recap” processes?  Are they fluent in leveraged finance and private equity?  No, not “I read it on Google” or “per AI”.  They were there, in the room, negotiating, fretting, sweating the details, re-running the numbers, getting it closed.  

As always, the key question to ask any bidder as it relates to rollover equity is:  Do you need my equity or would want my equity?  Answering the former could suggest a thinly capitalized or overleveraged platform.  It also tends to suggest a JV-style and/or “light touch” consolidator that is more focused on the rate of growth than it is on the quality of the growth.  Answering the latter could suggest the bidder is an operator and primarily looking for the positive signal an interest in the equity suggests.  A healthy bidder is happy to offer equity at FMV to the right sellers.  An unhealthy bidder tends to require significant equity rollover because their parent company’s credit and/or liquidity is lacking and they need the seller’s equity rollover to plug a gap in their own balance sheet.  

Curiosities should be piqued by any bidders who are reluctant to share their platform’s financials while also requiring sellers assume their credit or equity risk.  That doesn’t pass any partnership smell test.  “Trust us” is not due diligence.  “Trust but verify” is.  

If you are a practice owner open to group exits, we’d love to hear your story and see how we might be able to help.  

Good luck, have fun, don’t die!

Stay Frosty

Sean