Practice value is enhanced by the potential that a doctor can create and articulate, not just about their practice.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is important (Net Income, see LPS EBITDA Memo), but a doctors’ practice value is also dictated by growth rate, the doctor’s personality, experience and vision of future growth. Value is measured in your ability to deliver quality clinical care and robust numbers, but also in your ability to paint a vista for your practice future and its potential. You want to be perceived by an IDSO partner as a driver of fast growth in your area using their resources, capital and support combined with your vision and local knowledge of acquisitions and denovo possibilities.
As an example, take two practices, in the same community, with identical EBITDA. The one with the “great doctor” will sell for 20% more. Practice value is enhanced by the potential that a doctor can create and articulate, not just about their practice, but also the opportunities for their new partner to grow and expand the practice both internally and externally.
The definition of the “great doctor” in a sale process is not clinical. Certainly, the doctor must be clinically competent and provide outstanding patient care and service; that is a given. An impressive EBITDA and strong margins are the initial ticket to the game. However, the doctor with a personality that is known and respected in their community, with an articulated growth plan, will command a higher price than a doctor just going through the motions.
Buyers are interested in acquiring practices with doctors who can provide not only their own great practice, but also introductions to other practices which may be acquired in the future. These potential acquisitions may be similar or complementary to your practice. As an example, a great general practice will be worth more if the doctor has a relationship with a pedo or ortho nearby who may also be interested in selling in the near future. Or, an ortho who is a valued referral source for an oral surgeon may help attract that doctor as a part of the bigger team.
Two Types of Acquisitions; One Worth More Than the Other
Buyers are seeking two types of acquisitions; “platforms” and “tuck-ins.” Platforms are a buyer’s initial entry into a state or city. There are no DSOs with coverage in all 50 states, nor in every major city in the states they are in now. The dental consolidation process is in its early stages. Today, over 70% of medical practices are affiliated with managed groups, whereas only 15% to 20% of dentist practices are associated with DSOs or IDSOs.
Platform practices are a buyer’s initial entry or purchase in a region, city or state. From this platform, the IDSO’s goals are to expand via similar future acquisitions, through denovo growth or by additions of specialty, or GP practices.
The most valuable practices will have a growth-oriented doctor who can help a buyer’s business in the city or state. Doctors must paint a vision of internal growth, acquisitions and/or growth potential in their area to achieve the highest values. Potential acquisitions may come from the doctor’s relationships or standing in the dental community in the city or state.
Tuck-ins are acquisitions are those which can be added to an existing footprint of practices already owned in the area by the buyer. They may be additions to an existing footprint of similar services, or possibly the addition of specialty practices to an existing GP footprint. They may also fill in gaps in an IDSO’s coverage area.
Platform acquisitions will typically command a higher price as buyers often pay a premium for their first entry into a market. They want well-respected doctors who can help attract other acquisitions of all types in the area. The buyer’s goal is to pay less for tuck in acquisitions to justify the relatively high price they may pay for the platform.
LPS’ goal is to achieve a premium price because of the value you add personally in assisting the buyer to hit their growth targets. With knowledge of dozens of IDSOs, LPS can drive multiple bidders to find the right fit for you.
The Vision For Your Practice
The most valuable practices are those which have shown consistent, predictable, growth in new patients, collections and EBITDA. Static or declining collections is not the end of the world, but a detailed explanation is required of why the future will be better.
Practices with impressive growth help LPS create their future growth plan showing why and how their current practice can grow even faster and more profitably with the new partner’s resources.
Some examples of opportunities we have helped our clients offer to buyers include:
- Utilizing excess physical capacity via a new associate or incorporating a pedo into an ortho practice. We have started the associate hunt for clients when necessary.
- Adding an ortho into a GPs practice several days per month.
- Developing marketing plans including website overhaul and social media plans
- Adding adult care within an orthodontic practice to increase revenues and new patient flow.
- Helping doctors understand attractive areas for denovo opportunities.
The list of potential growth action items is lengthy for virtually any practice and will be customized to a buyer’s goals. Some buyers are only buying orthodontic practices and thus a plan of adding GP practices is not valid. Conversely, some buyers are only interested in GP and thus offering opportunities to buy your ortho friends is of no value.
Whether it is growth by acquisition, adding an associate or adding denovo locations, doctors must clearly articulate a growth strategy. The buyers of large practices have capital and an appetite for growth. Showing them your convincing future ideas to profitably deploy their capital will enable you to achieve the highest selling price.
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- Practice Partnership Podcast Ep 9: Top 10 Attributes to Achieve the Highest IDSO Partnership Value in ’24 - February 21, 2024
- The DrBicuspid Podcast featuring Chip Fichtner - February 6, 2024