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Chip Fichtner
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Chip Fichtner

Do-It-Yourself Investment Banking is Just as Dumb as Do-It-Yourself Root Canals!

by | Nov 23, 2019 | Insights

I wouldn’t do my own root canal! Why would you attempt the biggest transaction of your life without a specialist? 

Each of the doctors experienced failed deals. All of them received acceptable, not the best offers, but they could not close a transaction and put cash in the bank at the initially agreed upon value, or even at lower prices. Sadly, this is not uncommon

Monetizing your practice value involves far more than just identifying one buyer. Virtually any larger practice can attract one eager buyer. Smart doctors will want to have multiple “dates” with many prospective partners and bidders. The key to doctor happiness and value is to identify and date multiple acceptable partners, create a bidding contest to achieve an extraordinary value and then actually complete a transaction.

Finding a buyer is 10% of the work involved if you know where to look. The best buyers have a strong reason to buy your practice. The other 90% is in the details of due diligence, QoE, legal documentation and closing a transaction at the highest value with the RIGHT partner. This is a marriage, not a one-night stand. As in marriage, you must choose wisely or risk a very painful and costly exit.

Several of the doctors who returned to us in Q4 19 were those who attempted to monetize their practices directly with DSOs without an advisor. Others had chosen what they perceived to be less expensive advisor options than LPS. (Net, net our fees are FREE due to higher values our process achieves!) ALL of these doctors wasted a year or more of their lives either trying to save a     few bucks with a “cheaper” advisor, or attempted a transaction by themselves without a specialist advisor. Of course, LPS welcomed them back and are giving them professional help.

The following are some of the pitfalls of “Do It Yourself  Practice Sales

The Do it Yourself Practice Sale to a DSO

Real World Example #1:

A pediatric specialist with $3.0 million in EBITDA sold directly, without an advisor, to a DSO last year for 6X EBITDA. With no pesky advisor to pay, the doctors kept the full $18,000,000. Sadly, we knew THE buyer for this group who would have eagerly paid 8X EBITDA, and possibly more. The buyer LPS identified for this practice, and knew well, owned the surrounding orthos and OMFS practices that we had sold to them previously. This was the perfect fit and the buyer could justify a much higher value than 6X. Yes, the doctors would have paid LPS a 9% fee, but consider the math: No Advisor: $18,000,000 vs. with LPS: $21,840,000 NET, after fee. LPS could have achieved a 21% increase in pre-tax gains in their pockets. Sad, but true.

The DSOs Goal is to Buy Practices as Efficiently as Possible

Every large practice is contacted directly by DSOs interested in completing transactions without an advisor. There is a reason. Unrepresented doctors are easy targets. Doctors know teeth but few have done multi-million-dollar business transactions.

Good advisors know the details and pitfalls of dental practice transactions with DSOs. Some DSOs would rather deal directly with the virgin, unsuspecting doctor because they can buy practices at lower values and avoid all of the critical doctor protection provisions that a good advisor will insist are a part of every deal. The DSOs don’t have these challenges when dealing directly with a naive dentist. The doctor does not do DSO transactions every day. We do. In 2021, we partnered practices in 18 U.S. states with 16 different IDSOs.

Many doctors believe that their lawyers and CPAs will help them through a transaction. This is usually not the case. Unless these local experts have completed multiple doctor-to-DSO partnerships, they generally have no knowledge of the multiple contractual and tax pitfalls to avoid. In the average LPS advised transaction in 2020, there were four airplane flights, over 100 phone calls and conference calls and over 300 pages of legal documents to review. And that does not include the countless emails and texts that went back and forth, seven days per week.

Many of the local lawyers and CPAs shockingly fail on the basics of a DSO transaction, including minimizing the tax impact for the doctor. I cannot tell you how many clients’ lawyers have required explanations on the basics of complex DSO structures. And many CPAs do not even understand that the Obama 3.8% investment tax does not apply, among other key points…. It’s a little scary.

Inexperienced Advisors

With absolutely no prejudice against the local dental practice brokers for doctor-to-doctor transitions, a transaction for a large practice with a DSO is complex. One of the most important elements of a large practice to DSO transaction is the Quality of Earnings (QoE) process. In what is functionally an audit of your last three years of financial history, every line item is examined, and the outcome matters to you in ultimate value.

The buyer typically pays an outside group to determine your practice’s financial performance. The EBITDA upon which your final purchase price is determined is a direct function of the QoE. Buyers are paying for the QoE and obviously have a direct incentive to drive down the EBITDA as it reduces the purchase price. It is critical that the QoE process is managed by an experienced advisor on a line-by-line basis. LPS has CPAs, lawyers and experienced dental practice controllers ON STAFF who manage the QoE process for our clients on every level, line by line. A $100,000 list of personal add backs can result in a $1,000,000 purchase price swing in some cases.

Real World Example #2

A large group of practices selling to a single DSO buyer went through the QoE process and saw their EBITDA reduced by $4,000,000 resulting in a $30,000,000 reduction in purchase price. When asked what their cut rate advisor’s participation was in the QoE, the answer was ZERO. The deal collapsed, and the advisor was fired. They tried to save 3% on the advisors fee and instead lost the transaction. They came back to LPS.

The Real Intentions of Any DSO

Many advisors are paid by both the seller doctor and the buyer DSO. LPS is only paid by the doctor, which is why LPS achieves the highest values for our clients. We work only for doctors. We bite the hand that does not feed us; the DSO, to get the highest values for our clients.

Trickery by the DSO

When doctors represent themselves, they have no idea what industry standard is, nor what negotiation points can be won and which cannot. Knowledge is power in negotiating for what the doctor deserves and hopefully more!

While the purchase price may be important, ultimately what is paramount are the seemingly small details in 300+ pages of agreements. Some of these points can make a multi-million-dollar swing in your ultimate net proceeds, both short and long term. A few points to consider:

  • Is your employment contract no cut? Or is it at will? Do you get your equity repurchased if you are terminated without cause, and at what price? And if you got terminated without cause, you chose the wrong advisor.
  • Is your final purchase price adjusted immediately prior to closing to give you the benefit of your growth in EBITDA since the execution of the LOI? (Especially important during COVID)
  • Is your team contractually protected?
  • If you own your practice real estate, is the lease structured to enable you to ultimately sell the property, or did the lease with your new partner render your building unsellable?
  • Who is the guarantor on the lease? The big parent? Or the new JV that is your practice only?
  • Upon what metrics was the valuation of the equity you received in the parent based? Are you early in this particular DSOs’ game or at the tail end? Did you see the buyer’s audited financials? Do you know when they may or may not sell or recapitalize and how?
  • Did you get representations and warranties from the buyer as to their financial condition? They certainly got them from you…
  • How is the goodwill determined and what is your tax impact?

These and 100+ other “minor” details will determine not only the cash you get at the closing, but also the long-term value of your “partnership” or retained equity. If you or your advisors have not negotiated and completed dozens of these transactions, you are at risk.

Real World Example #3 

A doctor nearing completion of a transaction with a DSO was referred to LPS by a happy, closed, client (Perio, 2.7X collections.) The doctor was “engaged” (LOI signed) to a well-known, Top Five DSO. The doctor told us his story and the EBITDA as calculated by his CPA. The buyer accepted the EBITDA as provided. It sounded low to us… We requested the doctor’s financial statements, and our calculation was $150,000 higher than his CPA calculation, and thus the number which the discount advisor presented to the buyer and upon which the buyer based their purchase price was far too low.

We pointed out our EBITDA calculation to the doctor and to his discount advisor who had not bothered to do their own research and calculation. We then suggested another buyer and the doctor received $900,000 more in value for his practice. We received no consideration, except for the future doctor referrals his existing advisor will NOT get!

Calculating EBITDA is not just an accounting function for CPAs, but rather understanding how each DSO calculates EBITDA. They are all different. See Memo: EBITDA

Summary

Hopefully, you would not do your own root canal. Smart patients would only trust a specialist who has done thousands of procedures. Monetizing your life’s work is more than one tooth. It is a complex process that requires knowledge, expertise and experience. Don’t trust the value of your life’s work to the low-priced generalist. With LPS you engage an advisor who has completed almost a half a billion of transactions for dentists in the last three years. We only get paid when you do…

Chip Fichtner
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