Practice Transition... “Buyer and Price”
Published on
- 08-22-2024
Read Time
- 6 minutes read
Practice Transition... “Buyer and Price”
Many doctors are not aware that there are several types of buyers. The correct buyer for a practice will depend on the desired outcome of the seller. If the seller plans to walk at the close, then focus will be on the Individual buyer or possibly a Small Group “SG” but almost never a major Dental Service Organization “DSO”. If the seller wishes to continue practicing, possibly all will fit the bill but most definitely SG & DSO. Since every practice is unique and today’s transitions are much more complex than the handshake and transfer of keys that may have occurred decades earlier, the seller will be making a mistake if not seeking the assistance of an experienced dental practice broker. Be certain that the Individual, SG, and DSO will have one. For many living in the Midwest rural areas, the SG purchases are becoming more prevalent while the DSO activity is becoming less and less. Metropolitan practices are usually more aware of the DSO and SG existence, as they have likely received mailers and soliciting phone calls. This article will review what buyers seek in a practice, how offers may differ, and pricing. NOTE: The pricing section pertains to all transactions (Individual, SG, or DSO).
Practice attributes commonly sought by DSO/SG include:
- Profitability
- FFS or PPO based practices (Some DSOs will consider practices with an HMO component.)
- Practices producing minimum 700K+ in gross collections DSO…SG may consider lower
- 5 or more exam rooms
- Retail or superior exposure/signage
- Large populated areas or surrounding areas to pull from
- Seller willing to stay post transition for a minimum of 2 to 3 years with DSO…SG may consider less
- Fully digital with recently upgraded equipment (that’s what everyone wants…right?!?!)
Both the SG and DSO will likely be in a position to offer more than the individual purchaser due to lower costs. Their administrative staffing costs may be shared with several practice locations and the number of supplies, lab equipment, technology…etc. that they purchase demand significant discounts. They benefit from Economies of Scale (economies of scale = the more purchased, the higher the discount).
The DSO will likely offer more money but will do so with higher expectations. They often expect the seller to accept a percentage of the offered price at close and agree to holdbacks with production requirements. Holdbacks are usually split equally over the term of the deal. When production levels are met a full payout of the holdback may be expected and with negotiation may include production bonuses when exceeded. Be aware, a less than full payout of the holdback may occur when production levels are not met. Small groups may handle it differently and the purchase offer will likely be less than that of a DSO; the purchase price is paid up front with an employment agreement that is more user friendly to the seller who wants to practice but at a slower pace. Typically, the seller working as an associate for a DSO or SG will be paid anywhere from 28% to 35% of their personal net collections. Small groups may look to the seller as a trainer for the associates they plan to introduce where the DSO looks to the seller as a major producer. Some welcome the DSO opportunity while others have wants/desires that are better suited with the Small Group or Individual buyer.
PRICING…what drives it? Proper dental practice valuations will consider many different aspects of the practice; the most important being earnings. The lower the cost (overhead) the higher the earnings, and the more valuable the business. The model for dental practice appraisals has evolved over the years; but the formula has always incorporated EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) when determining the value. As written earlier, SGs and DSOs with proper business plans and policies in place are successful due to economies of scale. Greater purchase amounts equal greater discounts which equate to lower costs per category. Lower costs produce higher EBITDAs thus greater value. Plugging their expense percentages into the existing practice categories increases the value which allows them to offer larger amounts.
It’s all about valuing the practice properly, marketing, and finding the right buyer for the practice that will fulfill the seller’s desires. It is important to have broker representation; there is so much involved in a transition. Many sellers have little to no idea. You may be certain that the buyer, whether an Individual, Small Group, or Dental Service Organization, will have a professional guiding them. The seller that allows the buyer to control the transition will likely come out on the short end; much more than the cost of a broker. It’s all about valuing the practice properly, marketing, and finding the right buyer for the practice that will fulfill the seller’s desires. Shortcuts may seem less expensive but usually cost the seller dearly; which seems silly when they could be easily avoided.
To discuss your transition or to have a practice valuation conducted, contact Henry Hemmen & Associates, Inc. at 1-800-745-1438.