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When to Sell Practice--Private Equity offers

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  • When to Sell Practice--Private Equity offers

    I am a dentist. My office will collect around $1.8 million this year. That's a combination of 3 part time docs. I own 100%.  As the office gets larger it's become more challenging to manage.  We've had 20% growth each year for the past few years and it's getting difficult to sustain that trajectory.  I am feeling burnt out on the management and read a lot of financial blogs and am really into the F.I.R.E movement.

    The question is when to jump and sell. I have been aggressively pursued by corporations this past year, and have an opportunity to sell pretty high (relative to most practice values).   When does one take the money and invest it and just go back to being an employee.  Our home expenses including mortgage are under $10K per month including kids college savings.

    Basic stats:

    --I am 38 years old

    --my spouse can draw a nice pension starting in 12 years ($6K+ per month)

    --I currently pay myself $160K per year through salary. We are use to living on this amount comfortably.

    --practice debt is $650K

    --Most recent practice offer---$2M

    --new offer could be up to 12 times EBITA......this is a private equity deal that I could get in on.  Would have to sign a LOI that says if they get 12x I intend to sell. EBITA is around $ after brokerage fees it could be around $4M.

    These deals come up occasionally in dentistry....but not often. They go in waves and it really is selling your practice to the highest bidder. Usually you are required to stay on for a period of 2-5 years and you're giving up control of a lot.

    My question is, who takes the golden ticket?  most of this is taxed as capitol gains.  I'm just thinking if I net $2M and invest that at 38y/o then what does that grow to? i would still work to keep from touching the nest egg. our day to day expenses are low....most of our money goes to savings.  This would give us a big head start.  My target for retirement has always been $4M. Because so much time and money was spent building this practice our total savings now is only $250K range.  Most of our assets are tied up in this office.   Our only other debt is $400K owed on a home.

    thoughts?  I would continue to work.  Due to insurance involvement I do not see my office being as profitable in the coming years.  As in medicine, its getting harder and harder to stay profitable. The changing tides are part of the reason I'm burnt out on management. has anyone sold in one of these deals?

  • #2
    Some questions/comments about the OP.

    • I doubt a PE fund would pay 2x+ revenue ($1.8M?) for a practice

    • How is EBITDA ~$400k on revenues of $1.8M when you only pay yourself $160k?  Really $1.2M in other annual expenses?

    • Why are you netting only $2M on a $4M purchase price when you own 100% of equity and only $600k of debt.  Is that an after tax number?  Still seems low.

    • LOIs are typically non-binding.  You can let them do their work, and change your mind later.  Hire an attorney to make sure.


    • #3
      Obviously dont know the full extent of your situation.

      However, it sounds like a possible great deal. What about bringing in the other docs as a partnership, is this viable and reasonable? 4M in the bank with your non over spending and contented style of life means youre set. You could work for the corporation, draw a decent salary and never save really, just let it compound and you'll still be fine.

      Who knows if this deal will be here in the next recession, if its so much more than usual EBITA, sounds good...but what are they seeing that you're not if anything? Dont really think you have bad options.

      It does sound a bit like a golden ticket. Will you be happy all the sudden taking orders on something you built? I would for 4M, but some couldnt.


      • #4
        Sorry my w-2 earning is $160k. My taxable income this year will be $500k+. Most taken as either s-corp distributions and some is principal payments towards practice loans. We've been paying down huge student loan and Heloc loan with distributions....but our ongoing living expenses are in the $160k salary.... meaning we could easily live off just that replaced as an employee and not touch the nest egg.

        Just hard to know when to cash in the chips. Has anyone sold a practice to get a nest egg? I'm tired of running the practice too. It's such a headache even with my decent office manager. I'm a bit burnt out and see this as a possible golden parachute


        • #5
          I still don’t think I fully understand, but if an irrational PE firm is willing to pay you 12x EBITDA and 2x revenues, you should probably take it. I have a feeling the numbers are inflated. The PE strategy is generally to roll up small practices at 3-4x EBITDA and arbitrage selling the platform to other PE firms at 6-7x EBITDA. Given the numbers you mentioned are way outside of these boundaries, i think you may not have a full handle on the financials, so I would suggest hiring someone to help you with the sale process.

          Regarding burnout, with the profitability of the business, you should be able to hire a better office manager to handle all the things you don’t like. If you are burned out of dentistry, go ahead and sell and find something else to do with your time. You can always come back to dentistry later if need be.


          • #6
            How much of the purchase price is cash and how much is stock? Often these deals include a large amount of stock which is highly illiquid and difficult to value. I would want the vast majority to be cash.


            • #7
              So everyone who is implying I have no idea what I am talking absolutely

              --I had my accountant figure out my EBITA and he said it is currently $527K, but that a dentist salary has to be subtracted from that since I would have to eventually be replaced.  What that number is who knows?

              --further more, my accountant said a typical dental office sells for 3x EBITA, but that he has seen private equity deals in the 4-6x range.   He has never seen anything near 12.  He did say private equity loves dental right now, and that he's not saying it's not possible to get more than that, he just hasn't ever seen it.

              --I have heard of several groups that have sold for more than 10x...but these were all large groups and established DSOs

              --There is a good possibility that this company who is rolling up this practices is full of crap......but it's hard not to think about it.

              --I have no idea what the offer is, or if it's stock or cash. I agree it would need to be mostly cash.   Also sometimes they have ridiculous clauses like I'd have to work for them for 5-7 years and I am just not interested in staying on for a long time. I may want to teach or do something else or possibly relocate.

              --I think I'm going to throw my numbers out there and see what they come back with.

              any other thoughts?  I know my income is awesome and i could just keep going the way things are....but my taxes kill me and because I own 100% doing any type of 401K doesn't make sense and I can't do a Solo401K because i own this whole thing.  I feel like I'm fighting an uphill battle as an owner and I'm just tired of it.  my associates are not partner material.



              • #8

                • Depending on your location (i.e. If it is desirable or not), you might want to shop your practice with some of the dental practice brokers. One consideration is taxation. If you could possibly find an individual or group who would be willing to buy your stock instead of the practice assets (which is what you'll be selling to the corp), you'll be taxed at LTCG rates.

                • Otoh, if you go with the corporate sale, is an installment sale a possibility?

                • If you are charitably inclined, the year of the sale would be a great time to frontload a DAF (Donor-Advised Fund).

                To address your questions regarding what factors you need to take into consideration and how to structure a nest egg out of the sale of your practice (by the way, your practice is your nest egg and you are highly undiversified), you would be an ideal candidate in this situation for financial planning. I would encourage you to learn more, as most advisors offer free initial consults. You have too much at stake, imo, not to at least consider putting a real working plan together.
                My passion is protecting clients and others from predatory and ignorant advisors 270-247-6087 for CPA clients (we are Flat Fee for both CPA & Fee-Only Financial Planning)
                Johanna Fox, CPA, CFP is affiliated with Wrenne Financial for financial planning clients


                • #9
                  I'd say as a theoretical maximum, it would be hard to get more than 15x EBITDA, so 12x would be pretty great.  Obviously, you've discovered that's not the case, but if you could get 12, I think the optimum move is to sell, stay for however many years you are obligated to by the terms of the sale, and then just practice somewhere else out of the non-compete radius.  Or if they treat you well, just stay on as an employee.  You could just work part-time or whatever.

                  Only reason to turn it down would be if you want to put in the work to grow the practice yourself and you have a long time horizon.  But if you don't want to do that, just take the money now.


                  • #10
                    I'm a practicing Ophthalmologist and have become involved in brokering some deals in Eyecare over the past year or so.  I've met with several Private Equity Groups and they likely are the best option for someone to sell their practice (or portion of their practice) at a strong valuation. 12X EBIDTA sounds high but I haven't been involved in any dental deals so far.  Mostly eyes although I'm branching out.  Brokerage fees can be avoided by working with a broker (for instance I don't charge the docs anything - but get a finder's fee from private equity).  These deals may not be perfect but there are not a lot of buyers out there. Most hospitals will only pay for hard assets in my experience. Happy to share more info if anyone interested.  Thanks, Harry   [email protected]


                    • #11
                      Sounds like you are tired of managing staff. This can be very draining.

                      Selling out could be a good idea at the right price. You might feel like you are selling out your employees and associates.

                      Make sure you don't blow the cash on a silly investment.

                      Working for someone else will have some disadvantages also.

                      They will probably have a large equity proportion for a higher payout figure and also the 5 year or whatever period you have to stay will be stressful. If the numbers do not meet target, you may have significant penalties.

                      But it could work out well. If you are a male with a supportive partner, this is much easier than if you are a female planning to have children in the next 5 years, as not meeting target is a much higher risk in the latter and you could be torn between two imperitives.


                      • #12
                        Is there a good way for a practice owner to find out if there is any interest among PE firms in buying? I am part of a large group practice that would seem to be a perfect fit for a PE investment. 10x multiple of EBITDA would send me directly to a comfy retirement (after working the contracted employment period of course).

                        I hear of people getting these random phone calls from PE firms looking to buy, but is that how it normally goes? Do practice brokers have good info on this?


                        • #13
                          I have only heard of multipliers in the 4-5 range  in the dental world pending on the number of offices and collection size.




                          • #14
                            I've been approached by several people tying to do PE deals...the one I posted about was like "we're going to get 12x ebita".... so I started exploring this option.... and long story short.... they are lying. It's going to be 5-6x best case scenario. Still a lot of money, but I have office debt and am young and it's just not enough.

                            My office is big enough that I've been approached 3x this year by corporations and this other PE thing... but also I'm in an area where corporations have bought up most practices so not a lot of offices for sale so they're soliciting owners.

                            I have recently dropped some of my crappiest insurances (delta ppo sucked)..... my increased reimbursement is helping with my burnout. I'm also down to working 22 clinical hrs a week so just going to ride it out a bit longer and pay down some practice debt. If someone can really get me anywhere near 12x ebita I'm selling. Sometimes when things sound too good they are.


                            • #15
                              WCICON24 EarlyBird
                              orthodds...Some practice brokers have contacts in Private Equity but likely will want you to sign a contract where the broker acts as a buying agent.  I think many charge high single digits to 10% of your practice price.  I have contacts in private equity that buy dental practices so let me know if I can help.  Multiple of EBITDA vary significantly on specialty and esp on size of practice.  You have to be huge to get double digits.   But I do have some ideas to increase EBITDA prior to a potential sale if you want. Good luck!  Harry  [email protected]

                              Rb52dds...good for you for being willing to drop insurances that either pay too little or hassle too much. Very few practices will do that.  If you are young and plan to practice for a while, might be best to stay the course and take the steps you are to be happier and avoid burnout. What's been shocking to me is the number of docs very late in their careers with no exit strategy in sight! Be well! Harry