The Practice Buyer's Corner - Random Musings from the Buy-Side

The purpose of this blog is to share current, real world, experiences on the topics of practice valuation, practice transition, retirement planning, and building equity value - over time - in your dental practice.

Blog By:
seanepp

What’s Your Multiple Kenneth?

Let’s give organized dentistry some credit, we’ve done a bang up job on educating the market about a variety of things when it comes to scaling businesses.

One unfortunate byproduct is the ubiquitous watercooler discussion of, “What multiple do you pay?”  

Sometimes directionally accurate and always the lazy approach, the ultimate purchase price multiple is where you land, not where you start.  The proverbial Cart v. Horse.

The far more important and impactful exercise is determining a realistic, sustainable amount of practice revenue and resultant cash flow: 
- Are all the players in place to support the operational model?
- Are any wages meaningfully lagging the current market?
- Have you deferred any recurring investments in the facility, equipment or technology?
- Have you left value on the floor of your hygiene operatories?
- Do you have a large and/or tenured team whose compensation and benefits are above the current market?

A helpful way to track the results of any practice is to present the financial statements on a group- or associate-basis.  Standardize the income statement down to Seller’s Discretionary Income (“SDE”) and then deduct the doctors’ compensation at market (e.g. 30% of collections) to land on practice-level EBITDA.  This can also be a helpful way to flag and track a variety of operational initiatives.  

Seller diligence can be worth its weight in platinum!  Negotiations are much more straightforward when you know exactly what you have to sell.

I encourage doctors entertaining discussions with groups to request an “EBITDA Walk” before rushing to a preemptive multiple discussion.  I posit that you’ll learn far more about the group and, most importantly, the potential fit with that group from doing the EBITDA Walk.  

If they are not willing to share their math with you…

Investing in the EBITDA Walk best prepares any owner to engage in the next step - the multiple and deal structuring discussion.

Stay frosty!

Sean