Understanding Equity Arbitrage for DSO Owners
Updated: Nov 28
Equity arbitrage might be a sophisticated financial term, but it’s also one dental practice owners can leverage during the current wave of consolidation. In this article, we break down Frequently Asked Questions about equity arbitrage for DSO owners and providers.
What is arbitrage?
The term arbitrage became more common in dentistry when the industry started to consolidate. We explain arbitrage in three steps:
Buying up assets or securities (dental practices)
Increasing their value through economies of scale
Offloading that portfolio at a much higher value
In the private-equity-backed DSO world, it is the ultimate driving force behind consolidation.
What is equity arbitrage?
Equity arbitrage describes how valuable the equity is in your practice currently, and how much your equity ends up being worth after the sale of your dental practice. We dive into this deeper in the next section, but check out this video, by Professional Transition Strategies founder, Kyle Francis for a clear explanation.
What does equity arbitrage look like for DSOs?
Dental Economics explains that equity arbitrage takes place during a consolidation wave. Practice owners own the practice’s cash flow. But when this equity is combined with multiple practices’ equity, it creates a larger investment vehicle that grows quickly and provides more returns than a practice could on its own. DSOs then compile this equity and sell at a higher return.
For example, private equity can purchase a practice for 5-6x Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), add it to a platform of other acquired practices, and sell it to the next buyer at a multiple of 11-12x. This can be a major win for shareholders.
How can dental practice owners benefit from arbitrage?
We wrote an article outlining how providers can benefit from arbitrage. In summary, they benefit in three ways:
Increased Practice Value
Arbitrage can increase practice value by creating economies of scale and synergies. Vendors will offer certain rates or prices for a single practice. But that same vendor may offer enterprise-level pricing to a large group of practices, which leads to huge cost savings for each individual location. Increased reimbursement revenue and lower expenses leads to more profitability (and stronger EBITDA).
Rolling Equity into the DSO
Most DSO buyers will offer sellers some form of equity in their growing organization. This can mean that the seller is paid upon closing the sale of their own practice, and then gets to realize another payday when the buyer recapitalizes or sells the portfolio (of which you are now an equity holder).
We defined equity arbitrage above, but here, we take a look at how owners might leverage this tactic. Most important is this sentiment: “It may be appealing to wait until retirement before starting the sale of your practice, but you would be leaving value on the table,” Kyle shares.
What does this mean? In sum, the arbitrage game does not just have to be played at later subsequent exits. Rather, savvy brokers and advisors may be able to roll your practice into another seller pool to obtain a significantly higher valuation than a single practice might obtain on its own. In this way, the seller is maximizing their value at the first exit in addition to the subsequent exits.
How does Marti Law Group help dental providers navigate arbitrage equity?
We aim to help buyers and sellers maximize value in dental transitions. With hands-on experience navigating hundreds of transactions with clients, we operate as advisors first, attorneys second. What’s more, we maintain strong broker and financial advisor referral partners to be by your side throughout the entire process. Contact us to learn more.