5 Insights into Selling a Multi-Location DSO
Before founding Marti Law Group, Justin Marti co-founded a DSO and scaled it to 45 locations. In 2018, he and his partners sold the organization to a private equity group. Selling his DSO was Justin’s first experience with an M&A transaction, and it sparked his interest in guiding other practice owners through transitions.
Now, as an attorney, he and our team have been involved in hundreds of successful healthcare M&A transactions. He understands the nuances of each deal as an advisor first, attorney second. In a recent conversation with Dr. Mark Costes on The Dentalpreneur Podcast, he shares insights from his own sale (and now many others) that he takes into account when guiding practice owners through their own deals.
It’s Imperative to Find the Right Partner
For many sellers, exiting from the business they built will be the most significant moment of their career. And, it will also be their first time in the M&A process. Therefore, it’s difficult to form realistic expectations around a potential buyer. It can be tempting to look only at the financial offer, but there’s a lot more a buyer should bring to the table.
It’s crucial for sellers to see the transaction as a partnership. Is the buyer the right partner for you? What value do they bring to the organization? Are they a culture fit? What types of changes can employees anticipate? Sellers need to consider all of these questions in addition to the financial components of an offer.
Know What you Want your Life to Look Like Post-Transition
Is your plan to exit fully? Retire? Stay with the organization?
Buyers often want the seller to stick around as an associate for some time after the transaction. In a “doctor-to-doctor” deal, this may be a matter of a couple of months up to one or two years. In a DSO deal, the buyer will likely want a minimum of two to three years of employment, with upwards of five years becoming commonplace. Additionally, the DSO will tie an earnout component to this employment term. Thus, if you leave early, you could be leaving money on the table.
Understand EBITDA and Multiples in Negotiation
If you’re in the DSO world, you might see news of other transactions. Possibly, you’ve even seen multiples of 12 or 15. Is this realistic? Is that what practice owners should expect? Or, is something else going on with the numbers?
First, sellers need to have a true understanding of their own finances, especially EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). This is the key number in an organization’s valuation. However, many factors come into play after that. And, what is essential to one buyer may be less critical to the purchasing decision of another. Factors to consider include the consistency of revenue and patient visits year over year, payer mix, collection rate, size of the physical space, and strength of operating systems. These elements all play a role in driving up the value of a practice, and thus, what a buyer should be willing to pay for it.
When it comes to headline-making multiples, understand what could be at play. A red-hot market? A lower valuation? Other factors in the offer (like earnout) that compensate for the high number? Above all, assemble a team of knowledgeable and experienced legal and financial professionals. They can help you understand the value of your company and the fairness of an offer.
Consider What Changes Will Impact the Organization’s Culture, Brand, and Employees
It’s likely a seller has spent decades building their practice, growing their team, and establishing their brand. What happens when a new owner takes charge?
When selling a DSO, there might be a few different types of potential buyers and philosophies. Large, seasoned DSOs may have their own specific systems in place. In this case, it’s possible they’ll make changes to your organization (that you and other employees will need to accept) in order to fit it into their structure. Other PE groups may offer more autonomy to former owners, or keep more existing systems in place.
While it is in a buyer’s best interest to retain culture and goodwill after a purchase, it can be expected that at some point changes will occur. A seller must ensure they can accept the fact that they are no longer making key decisions for how the practice is run. Even if they stick around as an employee, they may not have a voice in key management decisions. These can be tough pills to swallow, and thus, a seller must ensure they are mentally and emotionally prepared for such a transition.
What is most important to you? It’s a consideration you’ll need to keep in mind as you consider different buyers.
Understand a Recap Cycle and How It Could Impact a Seller
A recap cycle is a private equity group’s targeted timeframe for when they buy an asset, build their portfolio, and then sell it (probably to the next PE group). It often lasts about 3-7 years, where a PE group may buy a company and plan to “flip” it later for a profit.
What does this mean for selling doctors? If you have equity in the organization that bought your company, it’s possible to have multiple “exits.” You might stay involved in the next sale, and theoretically see the numbers increase with each transaction.
Work with a team who’s been through the process of buying or selling a DSO
There’s a lot more to learn about DSO transactions. Luckily, our experienced team has a process to guide you through it. Want to learn more about selling or buying a DSO? Reach out for a free consultation.