In the midst of transformative shifts within the dental industry, practitioners contemplating the sale of their practices are increasingly turning their attention to private equity turns as a pivotal aspect of the process. grasping the concept of equity turns and their profound impact on enterprise value becomes imperative for practitioners aiming to optimize the value of their lifelong dedication. This blog will delve into the significance of equity turns, their relevance for dentists, and the pressing need for action amidst the ongoing industry consolidation.
Understanding Equity Turns:
An equity turn serves as a metric gauging how many times a private equity firm or dental service organization (DSO) multiplies its investment in a company. It hinges on the correlation between a company's EBITDA (earnings before interest, taxes, depreciation, and amortization) and a multiple. The calculation of the equity turn, influenced by multiples such as entry, exit, and leverage, showcases how many times the investment multiplies in the practice.
For dentists contemplating practice sales, this metric plays a pivotal role in assessing the potential return on investment from private equity firms or DSOs.
Industry Consolidation and Its Implications:
Experts predict a critical juncture in dental industry consolidation, with an anticipated 60-70% of practices falling under private-equity-backed DSO ownership. As this consolidation wave progresses, there's a foreseeable shift in investment dynamics. After the wave subsides, the influx of investor money is expected to decrease, impacting the sale value for independent practice owners.
Why It Matters for Dentists:
The relationship between equity turns and the sale value of dental practices is crucial. As the industry consolidates, strategic action can lead to a higher valuation for dentists. More private equity turns translate to greater value extracted from practice sales, resulting in a more lucrative outcome for those navigating the evolving landscape wisely.
Potential Scenarios and Significance:
Choosing not to experience an equity turn may provide upfront cash but limits the multiple, significantly impacting returns. One or two equity turns present varying returns influenced by factors such as equity stake structure and the amount of equity rolled. The scenarios illustrate the impact on a $2 million-valued practice with $500K EBITDA, emphasizing the difference between no equity turn, one equity turn, and two equity turns.
No equity turn: 5.5x deal for a value of $2.75M day one. No additional consideration.
One equity turn: 6.5x deal for a value of $3.25M day one. For a joint venture deal at 60/40, that would end up with $4.4M in value. An equity roll would end up getting $7M over the same time horizon!
Two equity turns: 6.5x deal for the same value of $3.25M. A joint venture deal would now end up with $5.7M in value. A joint venture converted to a holding company would end up getting about $7.9M. An equity roll 2x would end up getting $15M if you rolled ½ of your value.
The Time to Act Is Now:
In the latter stages of dentistry's consolidation wave, the urgency for dentists to act is paramount. Industry insiders project only one to two equity turns left on the horizon, presenting a narrow window of opportunity to capitalize on immense wealth-building possibilities. Selling to a DSO or private equity is becoming increasingly attractive for those seeking the best return for their dental practice.
Bottom Line:
Understanding the dynamics of equity turns empowers dentists to make informed decisions, securing the highest value for their professional legacy in a rapidly changing dental industry. The evolving landscape of industry consolidation, coupled with a limited window of opportunity, emphasizes the urgency for dentists to act promptly. However, the process of selling to a DSO or private equity requires strategic negotiation and understanding the nuances, making the expertise of professional brokers at PTS invaluable in navigating the complexities of the transaction and securing the best possible terms and conditions for their life's work.