Researching options for selling your practice can yield a veritable cacophony of conflicting thoughts, values, and guidance. Thankfully, references to industries consolidated long ago can give us valuable insight into where we currently are and where industry aggregators may be moving in the future.
The slow crawl
We are in the golden age of private practice acquisition. Valuation models are through the roof, and sellers have lots of leverage. Despite the naysayers, present market conditions do not impact expectations placed on these groups, and dwindling opportunities lead to premium valuations. The truth is that a well-managed practice will fetch a premium, regardless of the market. Currently, due to dwindling supply, there are more players competing for fewer opportunities, so running a fully competitive process will pay off in spades. The questions are: How sustainable is the current environment? How long will it last? When is the right time to sell your life’s work?
Related reading:
- 2023 market update: Finding the rhythm
- 2023 M&A market predictions
- I'll buy your business for 25x EBITDA
Taking cues from medical
The medical space is the most comparable industry to dentistry. The medical space, which has been absorbed into the hospital/ university space, began its evolution more than 30 years ago and experienced a precipitous rate of aggregation that provides applicable lessons for the dental space. By most estimates, dentistry is roughly 30% consolidated. Compare that with a medical industry that’s 15 years and 60% (consolidation) ahead, and some clear leading indicators emerge.
No advantage for early adopters
Practices are generally evaluated according to traditional industry standards, which led many doctors to receive anywhere from 80%–120% of prior year collections. PE (private equity) groups realized they had a head start on an industry that was largely unfamiliar with their process, arbitrage, EBITDA (earnings before interest, taxes, depreciation, and amortization)-based valuations, or practice value. They also had a limited amount of time before firms like TUSK stepped in and began driving valuations through the roof. As such, they moved quickly, aggressively, and succinctly.
But don't be late
As medical approached 50%, 60%, and 70% consolidated, the large hospital systems began eating the smaller hospital systems. Premium valuations were limited to those entities that could move the needle, and unfortunately, private practices were left out in the cold. Not large enough for these organizations, many practice owners took buyouts at a significant discount, or shuttered their practices entirely and opted to work for the larger entities with better pay, reimbursement rates, benefits, etc.
The sweet spot
The area between about 20% and 50% consolidated is the sweet spot. We have an industry runway of about 36–60 months where valuations will remain high, the number of aggregators will continue to increase, the M&A (mergers and acquisitions) space will be doggedly competitive, and there won’t be enough practices for buyers in the space. As that happens, valuations will increase and the doctors/ owners will win.
Predicting the next cycle
It’s already begun, most notably with Heartland Dental’s acquisition of American Dental Partners’ 300-plus locations. Large entities can only substantively grow by making mammoth acquisitions to impact their sizable bottom lines. Organizations will begin to focus on small group practices (three to 15 locations) to midlevel groups (15 to 80 locations) to satisfy their investment targets. That progression will take three to five years and provides us with an optimal valuation period (zero to three years) in which those midtier organizations need to acquire as much EBITDA as possible to beef up their numbers. And the location of that acquirable EBITDA? Private practices.
If historical references from other industries are leading indicators, we can determine how the dental space will progress. The timing of your sale can be heavily dependent on numerous variables, and arming yourself with as much information as possible is critical to the success of your transaction.
Action steps
Please contact us for a no-cost market analysis, specific to your practice. This will give you an idea of the value we believe your business will bring, to include cash at close, annual clinical compensation, annual equity distributions, and returns on HoldCo (holding company). We’ll discuss your goals, timelines, and the optimal time to maximize your value, whether that is now, a year from now, or potentially even longer. Don’t let these opportunities pass you by.
Editor’s notes:
TUSK Partners is a recent financial supporter of Dental Economics.
This article appeared in the June 2023 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
