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

House of Cards?

House of Cards?

8/13/2026 7:01:00 AM   |   Comments: 0   |   Views: 32
Capitalization Matters.

While the majority of the watercooler talk swirls around the much vaunted “multiples” and “recaps”, how businesses are capitalized is rarely discussed. This is a disservice to everyone around the table.

Too many owners and sellers focus on maximizing optics without investing time understanding the fundamentals of the platform they are considering joining.  Have you ever asked yourself, “If they’re paying this much for every practice, how the heck do they ever make money?”  If you have, good for you for paying attention.  If you haven’t, please consider doing so.

Twenty years ago, money was loose and fast.  Practices could be easily acquired for <4x EBITDA, sometimes <3x.  Those were market clearing transactions.  Total Debt to EBITDA financial covenants approached 7x and interest rates were roughly half what they are now.  This is what drove the initially flurry of group M&A activity.  You had to almost intentionally screw up as an investor to book a loss. Massive, debt-funded, multiple arbitrage - sometimes exceeding 10x.  Early group dental investors made it look easy.  Some of these same investor groups and platforms are still thriving.  Many of them, however, are not.  

Why?  The late ‘10s and early ‘20s were difficult times for all.  Interest rates, COVID, political unrest, wars, economic malaise, etc.  All the while, insurance companies have only put downward pressure on reimbursement rates and the workforce environment remains a net negative due to ever rising costs of people and benefits. The result?  Significant margin compression.  Most practices seem to have given up 15-20% of their profit margin over the last decade.  The dollars may still be there, they’re just arriving at a lower margin.

Slimmer profit margins increase operating and financial risks.  All this is happening amidst a high interest rate environment and unfavorable credit trends.  Total Debt to EBITDA covenants are likely <4.5x for most borrowers.  This is the covenant that usually sets the cap on the amount of cash paid at closing, not the buyer’s “philosophy”. Less debt availability means more non-cash consideration is required to meet a given purchase price – creating a capitalization gap.  This gap is typically plugged with seller paper, earnouts, and equity strips.  Understanding the risks associated with these gap fillers is where most owners and sellers do themselves a disservice.

When you assume credit or equity risk in a platform as part of your affiliation, you are both an investor and a seller in the same transaction.  Read that again, an investor and a seller in the same transaction.  Investors and their advisors should be conducting their own due diligence on the buyer.  It is completely reasonable for owners and sellers to request items such as lender compliance certificates, audited financial statements, board materials, investment decks, etc.  Buyers that scoff or push back against such requests are raising their own red flags.

As anyone with an internet connection can find, there seems to be new bad news weekly on the bankruptcy and restructuring front.  When the house of cards comes tumbling down, it tends to do so swiftly.  Staff flee, schedules fall apart, patients find new doctors.  It tends to be very difficult to pull any practice out of such a nosedive without engaged doctor leadership.  The number and variety of thinly/poorly capitalized group practices in the market right now is remarkable.

If you find yourself part of a house of cards situation, it may behoove you to get (more) curious and start asking hard questions.  Keep asking, don’t accept deflections.  Are you getting any information on the health of the platform and your personal investment?  Have you had any payments blocked or threatened to be blocked?  Is the platform asking you to renew or extend employment contracts with little or no consideration?  Are they slow paying key vendors?  Is staff overtime being rejected? 

Remember, doctors have the real power - don’t be shy about judiciously flexing it!

Good luck, have fun, don’t die!

Be well,

Sean
Category: Ethics, Jurisprudence and Malpractice, Financial Planning and Investments, Health, Wellness and Ergonomics, Practice Management, HR and Accounting, Practice Transitions
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