Insight from Dr. Alex A. Giannini
Currently, there are a variety of private equity companies aggressively moving into the dental support/service organization (DSO) sector, as well as long established DSOs who are expanding their footprint. With this exponential growth, dentists looking to sell or affiliate have more choices today than ever. Knowing who, when, what and how to accomplish this can be daunting. This type of endeavor also comes with change and, if not done right, it will be costly. Not having the right advisor (practice broker, investment banker or consultant) will make it more difficult for the average practitioner to navigate their way through the DSO affiliation/sales process. Let’s remember that Michael Jordan, considered one of the greatest basketball players, always had a coach who advised him on how to make changes to improve his performance.
As a leader of dental groups within the DSO world for almost thirty years and having been involved in hundreds of transitions from both sides, I feel compelled to help my colleagues know how to screen for the appropriate advisors when considering selling/affiliating your practice or group with a DSO. Every DSO has its own unique criteria used for acquisitions; there are no clear-cut rules that all operate by. Therefore, it is important for the practitioner to have the appropriate advisors from the beginning. Choosing an advisor is a task that should not be taken lightly, as often times, hundreds of thousands of dollars are at risk for the seller. For this reason, this article will provide some things to consider when choosing an advisor for a sale to a DSO.
It is vitally important to understand the role in working with an advisor. Advisors are involved as intermediaries to bring buyers and sellers together, and can be hired by or work for either party. Most are paid on a success-fee basis so there is motivation to complete a sale at the highest valuation possible for the dentist/dental group. Advisors who have successfully closed multiple transactions with DSOs are usually a good sign that one is dealing with a reputable firm.
A great advisor will understand whether there is a philosophical match or fit between the buyer and seller, especially as they meld the motivations, the desires, and the operating philosophy for each party. A transaction will create the event (the sale or capitalization by a private equity firm or bank), however during post transaction and transition both parties may have to live and work with each other even if there is a mismatch. While the ultimate responsibility to make the choice for both parties is not the burden of the advisor, it will dramatically help all parties if the advisor finds solutions to solve problems, identifies barriers, objections and issues. The process and ultimate solutions to these problems will be a tell-tale sign on how the parties will operate and work with each other post transaction. The advisor is in the best position to know how the problems and solutions are received, communicated, and resolved along with the attitude and approach of both parties.
Your advisor must have time and experience in the DSO practice sales arena. With new private equity companies entering the market every day, there has also been a flood of new advisors. These new advisors are banking on their “background in dentistry” to attract selling doctors. Your advisor should have years of experience in practice sales that include both doctor-to-doctor transactions as well as experience with DSO model sales. While years as a supply rep, banker, accountant, or lawyer may look good on the surface, how much has it actually prepared them for a practice sale to a DSO? Sadly, many advisors’ lack of knowledge in DSO sales, can result in either a sale at a significantly lower purchase price or no sale at all.
Commitment from your advisor through the sales/affiliation process is essential. I have experienced many advisors who do nothing more than introduce the Seller to the DSO and have very little participation through the process. This is more common than one might imagine. For them, it is the adage of “getting the most out with the least amount put in.” Again, hundreds of thousands of dollars are at stake and your advisors should be leading you all the way through this process. Ask for references to ensure your advisor has the knowledge required to see you all the way through to the closing.
Having the tools of the trade is one of the most important pieces of the DSO process. DSOs utilize an EBITDA valuation, an extensive and thorough process that always takes into account the post-sale picture for the DSO/investor. Many doctors have their accountant run an EBITDA calculation which is generally run based on an owner operator model, not a DSO/investor model. There is a big disparity in a DSO EBITDA versus an owner operator EBITDA valuation. As such, this is where many doctors are let down because the valuation expectation was set too high by their advisor. As a result, not only does the deal not get done, but the doctor ends up wasting a lot of time and money because their advisor was not familiar with the landscape. Every DSO has different allowances that are a part of the valuation process and your advisor needs to know the differences between them if they are to match you to the best one. Your advisor needs to have the knowledge and ability to run an EBITDA calculation based on what the DSO is looking for. As mentioned before, not doing this beforehand can be costly.
These are just a few main points for you to consider before choosing your advisors. Interview every advisor carefully and ask plenty of questions regarding their background and actual ability to represent you properly. As more DSO companies are formed, more advisors will magically appear to capture a piece of your pie. This is your life’s work and remember they work for you. The final decision is yours.