Responding Wisely to Unsolicited Offers to Buy Your Practice
Kevin G. Cumbus
Whenever I speak at dental conferences I make it a point to ask attendees if they've received an unsolicited offer to buy their practice or group in the past 12 months. At one recent event in the Southeast, about 80% of the more than 800 attendees raised their hands. I paused to let this sink in to everyone. Many of the solicitees surely thought they'd been contacted because their practice was special (and it no doubt is!), but in reality many practices with more than $1 million in collections and group practices of almost any size have probably been propositioned to sell their practice.
A Rise in Unsolicited Offers
One reason for the high number of unsolicited offers is that there appears to be more demand for dental practices than there are practices available for sale. Virtually every group practice or dental service organization (DSO) in the US market is looking to grow and expand its footprint. Many DSOs are backed by private equity (PE) investment and must grow to achieve a return for their investors. More than 70 PE-backed DSOs are operating in the United States today, and all of them strive to at least double the size of their business over a 60-month period, knowing that same-store sales growth alone will only get them so far. Groups and DSOs that are doctor-owned and debt-funded (pre-PE investment) also are looking to grow to increase the value of their company as they prepare for a sale.
In addition to existing DSOs, at least 300 PE companies are looking to invest in the dental economy (based on bids they make on many of the deals our firm takes to market) but have not yet made an investment. These PE companies frequently attend DSO conferences to connect with groups that are pre-PE investment hoping to partner with a group. The demand for dental practices is extremely high, and the inventory that is "for sale" at any given time does not meet this demand.
Another reason buyers contact owners of practices and groups directly is because they are always looking for an advantageous deal. Owners of practices that are not "for sale" may not be aware of current market conditions and, as a result, may not know the true value of their asset. Buyers like finding practice owners who believe that the value of their practice is 80% of collections, which has long been the historical value of a practice established by dental brokers. In situations like this, buyers can offer 90% of collections, let the owner feel good about the sale, and obtain a favorable transaction. This is a disturbing trend in the market and demonstrates what our company calls "information asymmetry." The "buy side" is well aware of the value of dental practices and groups in today's market and knows that their value is currently based on EBITDA (a proxy for operating free cash flow), not revenue. Many sellers are unaware of this. Selling a solo practice for 90% of collections could result in a valuation of 2x-3x EBITDA instead of possibly 5x-7x EBITDA if the practice is sold for 100% of collections.
In short, accepting an offer from the first group that calls will likely lead to a "good deal" for the buyer and much second-guessing for the seller.
How to Respond to an Offer
Practice or group owners who are solicited by a buyer, whether via a phone call ("we found you online…") or a well-crafted e-mail, offering to purchase the practice can follow several recommended steps to make the most of the encounter:
Ask lots of questions. Practice owners should treat this correspondence as though it is to their advantage as much or more than to the solicitor's advantage. Ask multiple questions, such as: What attracted them to your business? How did they find your contact information? How long have they been in business? How many practices have they purchased in the last 12 months? How are they capitalized (bank debt or PE invested capital)? What are their plans for growth over the next 12 to 24 months? How are they different than other buyers in the market?
Be wary of sending your financials. The buyer's primary purpose for calling is to have you send them some financial information about your practice (eg, income statement, balance sheet, production reports). Upon receipt of these reports, the buyer will have many follow-up questions to help them understand the business. It is best not to share the practice's financial numbers unless the business is in peak financial form and you are prepared to discuss it in detail. Owners should be fully informed about what the numbers indicate and be able to defend the practice's financial condition. If you are not ready to discuss specifics, it may be best to hold off, as the financials are the primary driver of interest in the practice.
After the call, stop and think. There are two major considerations to ponder. First, is now the right time to sell the business?Your personal financial house first needs to be in order. This takes into account, for example, your retirement planning, kids' college accounts, and debt, both professional (practice) and personal. While it may be exciting to muse about selling the business, retiring the practice debt, and working post-sale for a DSO without the headaches of human resources, payroll, bill paying, and revenue cycle management, practice owners must know that the time is right and should formulate a selling price needed to achieve their goals. The practice or group is likely your largest financial asset, and there is only one chance to sell it.
Second, what are you, as the owner, looking for in a partner?While receiving one phone call from a buyer may be intriguing, realize there are hundreds of DSOs, groups, and PE groups in the market looking to buy practices. These transactions do not happen overnight; there is likely to be a post-sale employment agreement of 2 to 5 years, linking the two parties together for an extended amount of time. Practice owners would be wise to explore the market and learn about as many groups as possible to determine the right fit for them, their team, and their patients.
Contact a mergers and ac-qui-sitions (M&A) advisor who knows the space.Such an advisor should be experienced with practice and group owners who have received unsolicited offers and be able to talk through the offers and help the owner understand the deal terms. The advisor should also explain what they are observing in the market to help the owner make an informed decision regarding a sale. The advisor should lead the business owner through a marketed sales process, bring multiple buyers to the seller and through this process, and drive up the value of the business. A good advisor should be able to boost the value of the transaction well above the original unsolicited offer and, more importantly, assist sellers in finding the right partner at the right price.
While DSOs are eager to buy an unmarketed deal, they are unlikely to accept one on their business. PE-backed DSOs typically go through a marketed sales process with a M&A advisor or investment bank to: (1) prepare the business for sale, (2) bring as many buyers as possible to the table, (3) drive up the enterprise value or purchase price through a competitive process, and (4) find the right fit for the business culturally. Knowledgeable owners in the DSO space would never sell their business without going through a marketed sales process. So, why would you?