CHRISTY RATCLIFF OFFERS INSIGHT ON WHETHER HIGH VALUATIONS ARE HERE TO STAY.
Overall, the dental industry continues to grow and is projected to be a $170 billion industry by 2022. With this kind of steady growth, the industry has become an attractive sector for private equity (PE) firms, causing it to become one of the most highly consolidated sectors. Mergers and acquisitions are increasingly occurring, as dental service organizations backed by private equity enter into the market with a need to diversify services, streamline efficiencies and recruit dental practitioners. Acquiring existing dental practices is a clear solution to these challenges.
As a result, some private equity firms are sending out blanket letters to dental practices in attractive markets with offers to buy. Many of these offers seem too good to be true, with unusually high multiples, and therefore prices. Some are wondering: are those high multiples here to stay? Should dental professionals take advantage of the offers now or will the opportunity last?
“Private equity has been buying private practices for a while, but we have seen a surge of offers and popularity, particularly in urban settings. These offers have impacted the private dental valuation market in some areas, driving the overall market price up. Over the past few years, we have seen some pretty extreme offers,” notes Christy. “However, they are just that—extreme. Right now, we’re hearing less about 6-10 earnings multipliers and also hearing of longer work-back requirements. This is a market that is changing in real time, and I’m confident it will continue to evolve.”
Christy Ratcliff
SHOULD YOU ACCEPT AN OFFER?
As we discussed in a prior blog article, appealing multipliers and monetary offers are typically only one side of the deal. Practice owners need to ensure they are considering each offer individually and focusing on what they can negotiate. While it may feel urgent to accept a high multiple offer, it’s never a good idea to entertain an offer that doesn’t align with your goals—or rush into a big decision without extreme diligence.
Consider the plight of a younger practice owner, saddled with student loan debt and experiencing a bit of burnout from working hard to build their practice. A buyout offer may be an attractive and exciting way to simply reduce risk, workload and provide stable employment within a large dental practice. On the other hand, for dentists close to retirement, a buyout offer may be a way to pull the equity out and finish out their career without the “hassle of management”. In both situations, while the offer may check some of their boxes, it’s important to understand what you may be sacrificing financially in the short term and long term to take the offer.
Likewise, it isn’t just about the financial trade-offs. Especially if big multipliers have slowed—owners need to focus on selling for the right reasons. Negotiations should center around three critical factors: time, money and control.
Consider asking these questions:
- How long am I committing to work back?
- Am I comfortable with any proposed production goals?
- What does the offer look like and how much will I be compensated?
- Will I operate the same way as the day before I closed?
- Will the buyer take over marketing and management?
- What does this mean for my staff?
- Am I ready to just be an employee now? Will I still be the face of the office? Does that matter to me?
While the private equity bubble may not have burst quite yet, dental practice owners are getting wiser. With any kind of market, things are cyclical and there are times of heightened interest. It’s more important than ever for dental professionals and practice owners to understand its impact on the overall industry and their future before accepting an offer. As Christy explains, “Let education and knowledge bring you into the next phase of your professional career and personal life with confidence—offering peace of mind in where you want to be.
Questions around a private equity offer, or another type of practice transition?
