We nationally advertise that Large Practice Sales (LPS) achieves almost unbelievable values for dental practices of 2X, 3X and even 4X COLLECTIONS. These are all real examples of recent transactions, not historical outliers. The great practices earned their values with unique doctors, high margins and high EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
But there are several proprietary techniques we use to help achieve these values and earn our modest success fee; our only fee. And they are a big part of why we will close over $300,000,000 of dental practice transactions in the next 100 days.
Your practice may or may not be worth 2, 3 or 4X collections, but in every case its value is higher with LPS than other advisors or for those doctors who attempt to “do it yourself”. Here is just one of the reasons why and how:
EBITDA is Only EBITDA When the Auditor Says it is!
Our valuation process is based upon multiple factors, but it starts with the numbers we are provided by the doctor on their practice operations for the last three years. The EBITDA our team calculates for a practice is mostly science and a little bit of art. Our lead analysts and senior team members have fancy MBA degrees, law degrees and advanced tax degrees. But far more importantly, they have also managed large, multi-specialty dental practices. They know where to look for the buried value nuggets and they also understand dental accounting at the nitty-gritty level. This often explains why the EBITDA numbers we produce on practices are different from others, including your CPA.
Our experience and knowledge base is critical to your practice value when we get into the hard part of actually CLOSING a transaction. The hard part is always a piece of the buyer’s due diligence called the Quality of Earnings Report (QoE). This report ultimately dictates what you put in your pocket at closing. It can kill deals and value if not managed properly.
Note: QoE is tough, but the Pre-Closing Associate Extortion Attempt (PCAEA) is usually harder. (see memo: Challenges to Closing)
QoE is a process typically performed by an outside accounting firm on behalf of, and paid for, by the buyer. It is functionally an audit of your practice financials. In this audit the accounting firm is testing and reconciling your financial statements to the reality as shown in your practice management system, accounting system, bank statements and tax returns.
QoE typically takes about a month and it utilizes a variety of buyer provided assumptions based upon historical add backs for items including personal expenses and additions based upon the prospective buyer’s future pro-forma operations. A typical example is the past vs. future cost of employee benefits.
The QoE process is when buyers will often attempt to lean the EBITDA calculation in their favor (lower) and you or your advisor must be prepared and armed to argue every single line item.
Example: If your practice is valued at 6X EBITDA, every dollar we “win” in the QoE process results in six dollars in your pocket. It is important. It is not unusual to see a $5,000,000 transaction have $100,000 in EBITDA “argument”, resulting in this example in a $600,000 price swing either up or down.
While this battle is important in every specialty and general practice, it is particularly critical in orthodontics. The cash vs. accrual accounting challenges of ortho patient financing provided over the term of treatment are calculated differently by every QoE firm we have encountered.
Recent Example of the Impact of QoE; $100,000,000 Deal Blown Up (NOT by us!)
It is a long story, but in short, a group of clients chose another advisor over us a year ago. (We would not negotiate our fee.) The other advisor worked for 12+ months attempting to find a buyer for this $14 million EBITDA group of practices. After a year, with no deal closed, when the exclusive agreement was about to expire, the advisor and the doctors approached us to help them.
The 13 clients all signed exclusive agreements with LPS (at a higher fee) and we found them a written offer from a great buyer in two weeks. This offer was 40% higher than the best offer the previous advisor could create in a full year of floundering and wasting the doctor’s time.
However, the previous advisor did manage to get one decent deal under agreement, but then did not participate in the buyer’s QoE process. Their failure to understand the magnitude of QoE enabled the buyer to drive down the EBITDA of the selling practices considerably. The result was the value deserved by the clients was not achieved and the transaction collapsed. The buyer reportedly spent $400,000 on this QoE, so the buyer was not happy either. It all could have been avoided…
Our transaction for these clients will close early next quarter with the right partner at the right value. This was only possible due to our team’s ability to calculate EBITDA correctly and our ability to defend our logic and math to the QoE auditors. In this case, the QoE defense by LPS will result in a $10,000,000+ value swing in favor of our clients. Forgetting the 40% higher value, the QoE defense added value far in excess of our nominal success fee.
Bottom Line
Experience counts. Finding the right partner at the right value is not easy. Getting a transaction actually closed at the deserved value is even harder.
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