The days of sky-high multiples and quick exits in dental M&A are fading. As buyers take a harder look at the practices they acquire, sellers are finding that what a practice is worth depends less on its potential and more on what it has already proven.
DSOs are becoming more selective, scrutinizing financials and operations more closely, and more of them now require a post-close employment term. For owners thinking about a sale, that means the work of building value has to start long before a deal is on the table.
From maintaining equipment and staff to cleaning up the books, the steps owners take years in advance can shape what buyers are willing to pay.
Four dental executives discussed what practice owners should be doing today to increase their value down the line at Becker’s 5th Annual Future of Dentistry Roundtable in Chicago.
Editor’s note: Responses have been lightly edited for clarity and length.
Question: If someone wants to sell their practice in the next few years, what is one thing they should be doing today to increase its value down the line?
Ray Caruso. President and CEO of Lone Peak Dental Group (Denver): Don’t do anything different. Keep giving your staff raises, and keep plugging along. Don’t add Saturdays or Friday afternoons that you’re going to take away later. When I see a practice that’s now at a 30% margin when it was at 20% before, or at $600,000 to $700,000 in EBITDA when it was $400,000 to $500,000, I know what happened. You’re only looking at the trailing 12 months, and I’m going to do the math, because math is always going to win. Ask the same questions of the buyer that they’re asking of you. Look at their balance sheet and see what’s going on with them, because too many doctors are sold a bill of goods by a DSO and get themselves in trouble.
Sam Jenio. Vice President of Strategic Partnerships and Procurement at EPIC4 Specialty Partners (Scottsbluff, Neb.): Know your numbers and where they generally fall. One smart thing dentists can do is talk to their peers, put their numbers side by side and figure out where there might be areas of opportunity, whether it’s low-hanging fruit or not. You don’t have to tackle everything right away. Over a few years, look at the areas where you can improve your position, so that when you go to market, you really know your business.
Jason Lockwood. President and CEO of Flagship Specialty Partners (Charlotte, N.C.): Don’t wait until you’re two years out from retirement. Most DSO buyers would say that will absolutely hurt you. We’re looking for a minimum commitment of five years. Some sellers get a little too cute. We see through that, and a lot of buyers won’t even participate in that process.
The other thing is to clean up your revenue cycle and your books. We have to go in and clean that up for almost every practice we look at. Keep personal expenses, like boat insurance or your kids’ horseback riding, out of the practice. I know you can get away with it, but should you? I’m trying to make a character assessment. If someone is trying to get one past the IRS, why would I think they’re going to change once they’re part of our group?
Lauren Riley. Operations Director at Billerica (Mass.) Dental Associates: Make sure the numbers can be maintained. Maintaining the equipment is a big one. I personally fix a lot of our equipment, so I see how much it’s going to cost a new owner in the short term. When a buyer does due diligence and sees equipment that isn’t worth what you’re asking for the practice, that’s going to take a lot off the price. The biggest one is the staff. Staff turnover is a huge issue for a lot of offices right now. I’m in the Northeast, where wages are much higher. I have assistants at $38 an hour and hygienists at $65 an hour, and some new owners may look at that as unsustainable. I’ve gotten creative with compensation before, but investing what you can in your practice now will yield a better price in the long term.
