The Rise Of The Unsolicited Offer…
Hello! Can I Buy Your Practice?
I was invited to speak at a regional dental conference in the Southeast this month. There were over 800 dentists in attendance at the event. As I do at all my speaking events these days, I typically start with a simple request: “Raise your hand if you have received an unsolicited offer to buy your practice or group in the past 12 months.” Upon asking this question, 80% of the attendees’ hands were raised. 80%!
I paused a let this sink in to all the attendees. Many of them surely thought that they were contacted because they were special (and I’m sure that everyone’s practice is special in its own way), but the reality is that if you own a practice doing over $1,000,000 in collections or a group practice of almost any size, you have almost certainly received an unsolicited offer to buy your practice.
What is Driving the Glut of Unsolicited Offers in the Dental Industry?
The first reason for the high number of unsolicited offers it that there is more demand for dental practices than there are practices available for sale. Every Group Practice or Dental Service Organization (DSO) in the market is looking to grow and expand their footprint in the U.S. Many of these DSOs are backed by Private Equity (PE) investment and must grow in order to achieve a return for their investors. And there are over 70 PE-backed DSOs in the U.S. today. Each of these PE-backed companies look to at least double the size of their business over a 60-month period and same-store sales will only get them so far. Groups and DSOs that are doctor-owned and debt-funded (pre-PE investment) are looking to grow as well to increase the value of their company as they prepare for a sale. In addition to the existing DSOs in the market, we know of at least 300 private equity companies that are looking to invest in the dental economy (they bid on a many of the deals we take to market) but have not yet made an investment. These Private Equity Groups are at every DSO conference, connecting with groups that are pre-PE investment and looking to partner with a group. There is an extremely high demand for dental practices and the inventory that is “for sale” at any given time does not meet that demand.
The second reason buyers are contacting owners of practice and groups directly is because they are always looking for a good deal. Owners of practices that are not “for sale” may not be aware of current market conditions and as a result, may not know the true value of their asset. Buyers love to find owners of practices who have been told (and still believe) that the value of their practice is 80% of collections. In situations like this, buyers can offer 90% of collections, let the owner feel good about the sale and get a good deal on the business in todays world (TUSK Partners has never sold a practice for less than 100% of collections – see the table below). This is a disturbing trend in the market and one the primary drivers behind the founding of TUSK: Information asymmetry. They buy-side is well-aware of the value of practices and groups in today’s market and know that the value in practices today is based off EBITDA (a proxy for operating free cash flow), not revenue. Many sellers are not aware of this. Buying a solo practice for 90% of collections could result in a valuation of 2-3x EBITDA when we regularly sell dental practices at 5-7x EBITDA. You can see a small sample of recent transactions in the table below:
Taking an offer from the first group that calls you will likely lead to a “good deal” for the buyer and a lot of second guessing for the seller.
What Should I Do When I Receive an Unsolicited Offer?
So, next time you take a call from a buyer who found you on-line or you reply to that well-crafted e-mail from a buyer offering to purchase your practice, I recommend you follow these steps:
- Ask lots of questions. You should view this call as much or more for you than for them. I strongly recommend asking a lot of questions, such as:
- What attracted them to your business?
- How did they find your contact information?
- How long have they been around?
- How many practices have they purchased in the last 12 months?
- How are they capitalized (bank debt or PE invested capital)?
- What are their plans for growth over the next 12-24 months?
- What makes them different than the other buyers in the market?
- Do not send your financials. The primary purposed of their call is to have you send in some financial information about your practice (typically an income statement and balance sheet along with production reports). Upon receipt of these reports, they will have a stack of follow up questions to make sure they understand the business. I do not recommend you send your numbers over unless you are prepared for a lot of follow up conversations and back and forth about your business & your business is in peak financial form. Your time is precious, and if you are simply kicking the tires to see what your practice might be worth, remember this is a time hungry process. If you are serious and have the time, be mindful of what your financials say. Did you suffer a tough month or quarter last year? Are you fully informed about what the numbers say, and can you defend the financial story? If not, you may want to hold off. You only get one time to make a first impression and your financials are the primary driver of interest in your practice.
- After the call, stop and think.
- Is now the right time to sell your business? Do you have your personal financial house in order? Where do you stand on your retirement planning, the kid’s college accounts, what does your professional (practice) and personal debt look like? Although it can be exciting to think about selling your business, retiring the practice debt and working post-sale for a DSO without the headaches of HR, payroll, paying the bills and revenue cycle management, I encourage you to ask the question, is now really the right time? Come up with the number you need to make your goals. Your practice or group is likely your largest financial asset and you will only get one chance to sell it.
- What are you looking for in a partner? Yes, you have received one phone call from a buyer but keep in mind that there are 100’s of DSOs, Groups and PEGs in the market looking to buy practices. These transactions are not walk away sales. In these types of transactions, you are more than likely signing up for a post-sale employment agreement for 2-5 years. That is a long time. It is like a marriage. You owe it to yourself to explore the market and learn about as many groups as possible to determine the right fit for you, your team and your patients.
- If you are serious about selling, call a M&A advisor who knows the space. At TUSK we take calls regularly from practice and group owners who have received unsolicited offers. We talk through the offers and help them understand the deal terms. We also share with them what we are seeing in the market to help them make an informed decision around a sale. We have been fortunate to work with many group and solo practice owners who received unsolicited offers from the market. In every case, we took them through a marketed sales process, brought multiple buyers to them and through this process, and drove up the value of the business. On average, we have been able to drive up the value of the transaction by 35% above the original unsolicited offer, but more importantly the seller (our client) made a well-informed decision and found the right partner at the right price.
What would the DSO do?
While DSOs in the market love to buy an unmarked deal, it is highly unlikely that they would ever accept one on their business. To date, we have not seen any PE-backed DSO accept an unsolicited offer from a buyer. Why would they? PE-backed DSOs go through a marketed sales process with a M&A Advisor or Investment Bank to (1) prepare the business for sale, (2) bring as many buyers as possible to the table, (3) drive you the enterprise value (EV) or purchase price through a competitive process, and (4) find the right fit for the business culturally.
If the most knowledgeable owners in the DSO space would never sell their business without going through a marketed sales process, why would you?
About TUSK Practice Sales: TUSK Practice Sales is the premier healthcare M&A advisory firm in the United States. Since its founding in 2016, TUSK has closed over $1B in healthcare transactions by providing best-in-class client services and flawless execution for clients nationwide.
TUSK advises large and group healthcare practice owners seeking to maximize the value of their practice with a partnership to a strategic or financial partner. The TUSK proven marketed sales process ensures our clients explore the entirety of the market, securing them the right partner at the highest value. For more information, visit www.TuskPracticeSales.com