Q: I hear of practices valued on EBITDA. What is it and how is it calculated?
A: Earnings Before Interest, Taxes, Depreciation and Amortization loosely resembles net cash flow before these items. In a typical practice sale, we will guide a buyer to a recast EBITDA calculation which “adds back” expenses which may not be recurring under new ownership. These may include auto expenses, above market rents on doctor owned real estate, country club fees, travel, family on the payroll, etc. The adjusted EBITDA will also include a market rate calculation of the compensation for the doctor’s time.
Important Note: EBITDA in a buyer’s math is often very different from your accountant’s view. We have seen practice’s net income DOUBLED using buyer math vs. doctor’s accountants’ math. This is not a shot at your CPA, but rather comes from understanding how buyer’s compute EBITDA. Call us for a detailed memo on this topic.
Q: How is LPS different from the myriad of practice brokers?
A: LPS has a uniquely narrow focus. We are in one business only; helping large dental and specialty practices with annual recast EBITDA of $1.0 million+ achieve the highest sale prices. We provide no other services. Unlike others, our sole compensation is by sellers from the proceeds of successful practice sales. We receive no fees from buyers, thus potentially increasing the net proceeds to you.
Q: Why sell now?
A: Valuations of businesses including dental and specialty practices rise and fall. At the moment, valuations in many areas are at historic highs, surpassing those of 2007. After 2008, valuations fell dramatically. You would not have wanted to be a seller in 2009. Events beyond your control can dramatically affect your practice performance and value, including your health, the general economy and natural disasters. (See Irma, Maria, Nate and Santa Rosa). Interest rates and Federal and State income and capital gains tax rates also have a significant impact on practice value.
Q: What is my practice worth?
A: There is no stock answer. The values of specific practices are a function of many factors including net income, location, types of services provided, history, future potential and doctor personality. However, the historic rule of thumb has been 80 to 100% of collections for orthodontic practices and slightly less for GP practices. Practices with adjusted EBITDA above $1.0mm will generally bring the highest prices. The buyers with the deepest pockets prefer to complete a few large transactions vs. many smaller transactions. Bigger is definitely better.
Q: What happens to ME if I sell?
A: In most cases, higher selling prices will be achieved by practices in which the doctor remains with the practice for some period of time. Two years is often requested. More is not bad. Buyers are most interested in well managed practices with predictable, consistent growth rates and rising net income in areas with demographic growth. Each prospective buyer has their own unique goals that vary widely. Sellers may also be able to negotiate an “earn out” from profits in the future.
Q: Who runs the practice after a sale?
A: Each buyer has their own system for integrating acquired practices. Some are completely hands off and solely interested in helping increase the net income under a seller’s proven management. Others will assume all decision making authority.
LPS tries to understand a buyer’s goals and integration process in detail so that it can be communicated clearly to our clients. One of our most important functions is to match buyers whose goals are compatible with the doctor’s goals. The buyer with the highest offer is not necessarily the best buyer.
Q: Do I Have to Stay after a sale?
A: No. Certain buyers are willing to purchase practices where the doctor leaves the day their check clears; but this is not typical.
Q: If I continue practicing with the new owner, how will I be compensated?
A: A buyer will expect to pay for your talents at a rate commensurate with the cost of replacing you in your market. This is a highly negotiable part of an overall transaction and can include components including bonuses and percentages of collections.
Q: What happens to my team members in a sale?
A: Again, this is buyer specific. Team members who are valuable to you will most likely be valuable to the new buyer. Some doctors find that a sale enables them to “right size” their teams.
Q: Who makes the clinical decisions after a sale?
A: Doctors make all clinical decisions.
Q: Will I be forced to use certain vendors?
A: This depends upon the buyer and is something that you will discuss up front with prospective buyers.
Q: Will the buyer operate under my brand or theirs?
A: This is dependent upon the specific buyer.
Q: Do buyers pay cash or will I have to hold a note or other type of paper?
A: It depends upon the buyer and your goals. In general, holding unsecured debt or non-control equity in the acquirer’s entity can heighten the overall risk of payment but can increase the potential return to the doctor. LPS suggests that buyers fully understand the ramifications of not receiving all cash at closing. There can be upside and tax advantages to properly structured agreements in which the seller retains an equity interest either in their own practice and/or an interest in the buyer itself as a part of the overall transaction.
Q: What are the tax ramifications of a sale?
A: LPS does not purport to be a tax advisor. We work with your advisors and others we may recommend to ensure that a transaction achieves the most tax efficient structure for you. The obvious goal is to achieve the highest after tax net proceeds. A few practices may be sellable with little or no tax expense.
Q: What is the sale process?
A: It starts with a confidential discussion between you and an LPS principal and the signing of a mutual non-disclosure agreement. We will want to understand the basics of your practice including rough financial performance and practice metrics over three years, your general goals and future practice and area potential. From that discussion and a review of preliminary financials, we can give you a ballpark idea of the value potential for your practice.
If this value range is of interest, we will meet with you at your practice to learn more. Our analysts will request detailed data from you and/or your accountants to fully understand your financials and practice details. We will then present an engagement proposal outlining the steps of a sale in detail and the LPS compensation structure. There is no obligation or fee for this process.
If you decide to engage LPS, we will then complete a short summary marketing memo that describes your practice anonymously, in general. This document is used to ascertain interest from prospective buyers nationally.
Those buyers with interest, that you approve of, will sign a non-disclosure agreement to enable disclosure of more details about your practice. We then typically suggest a meeting between you, a buyer and an LPS principal to gauge the potential fit between the buyer’s goals and yours.
Buyers with continuing interest whom you believe will be a good fit for you will then be given access to a “data room” which our analysts will create for your practice. This confidential site will contain the initial due diligence information necessary for a buyer to best understand your practice and formulate an offer. The offer will be subject to a myriad of additional due diligence items specific to the buyer’s process.
Q: How long does the sale process take?
A: Time kills all deals. Assuming you are able to provide the necessary due diligence documentation, it should take no longer than 120 days from engagement to closing. The primary buyers we deal with are fully funded and have no desire to drag out the process.
Q: What does LPS charge for representing me in the sale of my practice?
A: First, we only get paid if and when you get paid. We charge no retainers, fees nor expense reimbursements. Our only compensation is paid upon the completion of a successful transaction. The LPS fee is based on a percentage of the overall sale consideration you receive, plus a bonus if the sale price exceeds a pre-determined threshold value. There is a small fee if we bring you a bona fide cash offer at the target price you have agreed to, but decline it.
Q: Do practice buyers also buy the real estate if owned by the doctor?
A: This depends upon the buyer. Some will buy real estate with the practice, while others prefer to enter into long term, market rate leases with the seller.
Part of the LPS engagement is to also arrange the sale of the practice real estate if the doctor does not wish to retain it. The value of the real estate is typically a function of the new lease with the buyer. The lease term and rate for the practice buyer is an important piece of the overall negotiations and overall consideration paid to the doctor.
Q: I am not sure I want to sell, but I am interested in learning more and understanding what my practice may be worth today. Do you perform valuation and appraisal services?
A: No, we are not appraisers nor valuation consultants. We believe the value of your practice is discovered by going through the marketing process and getting real offers from actual buyers. With your financials, we can give you a general value range based on recent actual practice sales, but only offers from bona fide buyers can give you a true estimate of value today. Give us a call to discuss your situation. Talking is FREE.
Call us at 844-976-5332 to learn more.