“How much more can you really improve my offer? Why would I pay someone to negotiate on my behalf if I already have a deal I’m happy with?” These are questions Kevin Cumbus, President and Founder of TUSK Practice Sales, hears from practice owners nearly every week.

In this article, he explains why the answer has little to do with improving the number. It’s about protecting it. Kevin and the TUSK team have guided more than 200 practice owners through this process, totaling over $1.3 billion in closed transactions. The headline valuation rarely tells the full story. What determines your real outcome is whether that number holds through diligence and whether the terms surrounding it actually work in your favor.

Here’s a pretty standard offer you might look at from a DSO:

• DSO Determined EBITDA = 850k on 3.5MM in Revenue
• Dental Practice Valuation is an 8X = 6.8MM Enterprise Value or 194% of collections
• Allocation = 65% Cash (4.42MM) // 25% Joint Venture Equity (1.7MM) // 10% Holding Company Equity (680k)

In the above example, the doctor/seller was thrilled with the dental practice valuation and ecstatic to sign the LOI. A few months after signing, the doctor came to us because the deal had blown up in due diligence and they were confused, tired, and upset about the entire process. So where did they go wrong? Why does this happen?

At face value, the outlined deal looks great. But buried deep into every LOI are deal terms, background information, and legal language that needs to be reviewed and negotiated for the deal to move forward. Deals often change dramatically from LOI to final documentation and doctors are left with the unenviable decision between agreeing to the changes or walking away from a process they’ve invested 6+ months into.

Here are just a couple of areas that are overlooked when perusing an LOI:

Problem Number 1: EBITDA

This baseline practice valuation metric is at the core of all PE/DSO/VC offers. As a measure of profitability, it informs the buyer of how long it will take to begin receiving a return on their investment. During the closing process you’ll go through a “Quality of Earnings” process which is a third-party analysis of your EBITDA. If it comes up negative, the value of the deal will generally be reduced. If it comes up positive, in a DIY deal, you’ll rarely receive feedback that it did. In a represented sale, we’ll help determine your EBITDA based upon the same accounting mechanisms that a QofE firm would, and then defend that number. We see numerous offers sent to sellers that have heavily inflated EBITDA projections from the buyers, dramatically inflating the offer, just to keep the seller engaged in the deal.

Not sure what your EBITDA actually is? Request a no-cost, in-house practice valuation from TUSK and find out what your practice is actually worth.

Problem Number 2: Rollover Equity

It is highly likely that between 30-45% of your transaction will come in the form of rollover equity. In dental transactions, there are two specific types of rollover equity. JV Equity (localized to the practice you’re selling) or Holdco Equity (specific to the parent entity as a whole), both buckets can have all kinds of parameters that need to be sorted out for you to have a full picture of the offer you’re receiving.

Questions like:

• Exit Valuation
• Exit Timeline
• Who can you sell it to and at what price point?
• What is the historical track record of the equity?
• How realistic are the projections they’re putting forward?
• Can you sell it all at once or in chunks?

Problem Number 3: Management Fees and Distributions

This will impact the profitability of the practice and the distributions allocated to your JV Equity percentage. However, there are also various clawbacks that are often a part of the final APA, related directly to maintenance of EBITDA, growth clauses in earnout computations, and the value of the JV Equity. If you’re selling to a management entity, you need to understand how management fees will impact the numbers that you’re paid from.

Problem Number 4: Private Equity

This point is simple. It is critical you understand both the purchasing entity, and the organization writing checks to that entity. Where the funds come from matter and ensuring that you’re partnering with a group that has a track record of successful exits from their healthcare investments is critical for the future value of your investment in the organization.

These are just a few of the overlooked areas that make-or-break deals after signing an LOI. We often also see obstacles with legal language, buyer risk mitigation and a myriad of other topics. Suffice it to say, there are successful and disciplined buyers out there who understand exactly what they need out of a transaction to turn a hefty profit. They have a full team behind them helping them to bring on deals that check those boxes. You are at a disadvantage if you don’t have the same working behind you!

Would You Like TUSK To Review Your Current Offer?

Getting a second set of eyes on your offer costs you nothing. Signing without one could cost you significantly more. Contact TUSK to request a confidential offer review today.

Kevin Cumbus – Founder & President, Partner

Kevin has worked in the healthcare industry for close to two decades. He has valued and sold over 200 dental practices, worked in operations and business development for one of the world’s largest DSOs, Affordable Dentures, successfully founded and exited a dental practice, Mundo Dentistry, and today is the President of TUSK Practice Sales. TUSK is the premier Healthcare M&A Advisor helping owners maximize the value of their life’s work. He earned his BA from Washington & Lee University and MBA from Wake Forest University.

Meet Kevin Cumbus Here