The Transition Advisor's Corner - Random Musings from the Front

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

So, you’ve received multiple offers from group buyers.  

The Total Enterprise Values look positive and maybe even within a reasonable range.  One or two may even stand out as runaway winners on the first pass through.

Then, the fine print.

The component parts - cash at close, hold-backs, seller notes, earnouts, and equity - vary both widely and wildly.  Some offers are more cash-oriented, others more equity heavy.  The former tend to represent the lower end of the valuation range while the latter almost exclusively occupy the high end of the range.

Why is this?  How much of this is realistically achievable?  How much of this might not be?

Cash will always be king.  To that end, most folks look at cash at close, hold-backs and seller notes as typically being “good money” - save only for the passage of time.

As we move down the capital stack, we usually encounter earnouts (contingent or performance-based payments) and the oft discussed equity.  

Do your advisors understand how to break down and compare the relative risk of junior capital and equity across different groups?  What about TopCo vs. JV vs. Hybrid models?  Is anyone performing financial analysis on the bidders themselves?  If you are taking back debt or equity in a transaction, you are both a buyer *and* a seller in the same deal.  Due diligence is absolutely warranted.  Is the group being transparent about their credit worthiness, liquidity, and their ability to actually create the equity value?  Or, are they quick to deflect and attempt to steer the discussion back to the “second bite” or “recap” discussion?

Equity and debt “wipeouts” are on the rise again.  Do you have any doctor friends or colleagues that have recently experienced this?  Any horror stories?

The group/DSO sector is suffering from excessive and only worsening credit health issues.  More debt restructurings are hitting the news wire.  Outright sales or recaps are being shifted to partial liquidity events, preferred stock issuances (think, high yield debt), or dividend recaps (a HELOC for your business).

It is only human nature to be drawn in by some of the outsized returns being routinely marketed by some groups.  

What kind of discussions have you been able to have around the assumptions driving their suggested equity valuations?  What kind of multiples have they sold the platform for previously?  How does your valuation compare to other opportunities in their pipeline?  Are they a proven, serial recap machine, or is this their first or second rodeo?  How do they price their “rollover equity”?  What is their main value creation driver?  Supply and lab synergies are never the reason any group buys a practice, that's only a sweetener.  Without some or all of the foregoing information, it is nearly impossible to risk-rate the junior capital or equity instruments of one group versus another.  Said differently, if bidders can’t answer the foregoing questions succinctly and without defensiveness, you might want to get more curious or focus on the bids that are not outliers. 

This is where the right advisor can prove invaluable - helping segregate proven operators from riskier platforms by risk-weighting a pool of offers into something digestible and discernible by independent doctors.

Good luck, have fun, don’t die!