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.
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seanepp
seanepp

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Demystifying Rollover Equity

Demystifying Rollover Equity

9/17/2026 10:45:00 AM   |   Comments: 0   |   Views: 29
Just as cash will always be king, “equity” will remain the least understood transactional currency.  Due to its very nature, it is also the least understood, most easily abused, and heavily pitched “sweetener” in many bids from group practices.

While equity has always been part of the group practice ecosystem, it really came to the forefront as new flavors of group practice emerged (from DSO to DPO, MSO, JV, Hybrid, AKA, WTF).  This really took off in the wake of the COVID Era, as groups new and old scrambled to differentiate themselves from each other and sell their “Whys”.

The biggest blind spot for owners considering such offers is simply, “How do I make any sense of this equity yarn the group is spinning?”  The standard answer is, “Trust us.  This is just how it works.  This is what everyone does.  We can’t/don't/won't share that info.”  Hogwash.  

Here’s the deal, if another business is asking you to assume their credit or equity risk as part of their purchase of your business you are both a buyer and seller in the same transaction.  You have every right to conduct due diligence on the buyer’s business.  

Fast growth can be great.  It can also mask a lot of problems.  It is hard to fake financials though - especially free cash flow, leverage, and liquidity.  That is what you need to understand to actually assess the credit and equity risk you are being asked to assume.

Two groups with identical income statements can present wildly different credit and equity risks.  Said differently, no two group equity opportunities are alike.  They all bring platform-specific opportunities and risks.  

The sector is realizing and underwriting to historically low return expectations.  New platforms are being acquired with base case returns as low as 2x cash on cash returns.  At the same time, groups are still traveling across the nation trying to "sell" equity returns far in excess of 2x.  

Who? What? When? Where? Why? How?  That is nonsensical in the best case scenario and intentionally misleading in the worst case scenario.  Be very wary of any group suggesting above market returns without material extenuating circumstances.

One of the basic questions we recommend doctors ask bidders is simply, “Do you need my equity to fill holes in your balance sheet or do you prefer my equity as a partnership signal?”  If their answer to that question is not immediate and airtight, be wary.

None of the foregoing is intended to portray equity in a negative light.  Rather, if equity of interest to doctors, it simply behooves them to conduct proper due diligence on their buyers to understand their actual financial health, not an Excel-based dream.

Remember, most sellers share their multiples of Total Enterprise Value (TEV), not cash at close.  The latter is what we recommend most sellers focus on, maximizing cash at close, particularly in the current market.  Many (most?) sellers who took back equity over the last decade are looking at losses on their rollover equity.  Some don’t even realize the magnitude of their losses until they get a notice that a transaction occurred.

Many groups explain their thresholds on cash-at-close as their “philosophy”.  Sure, maybe.  More likely, the actual limit to cash-at-close is being determined by their lender’s debt incurrence test - e.g. 4-4.5x EBITDA.  On a 15% EBITDA margin practice, that is 60-67.5% of revenue.  Sound familiar to anyone?  Any TEV above that threshold is typically structured to be filled by seller paper and/or equity.

If you are a doctor reviewing multiple bids with seller note and/or rollover equity components and could use some extra eyes, we can most certainly help.  

If you already have an advisor, are they helping conduct the due diligence on your bidders to understand the credit and equity risk you are being asked to assume?

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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