February 22, 2024
Beyond the Hype: Why Multiples Are Just the Tip of the Iceberg
In this guest blog, PTS Founder and President Kyle Francis dives into the murky waters of dental practice sales and shines a spotlight on a topic that’s often overhyped: EBITDA multiples. You know, those numbers that everyone throws around like they’re the be-all and end-all of a good deal? They don’t matter as much as you think.
The subject of “multiples” frequently pops up in conversations among dentists contemplating selling their practices to DSOs or direct to private equity, typically when sharing success stories about the multiples they’ve heard friends or colleagues have scored.
What is a multiple? It’s a factor multiplied by a practice’s EBITDA (earnings before interest, taxes, depreciation, and amortization) to determine the offer for selling a dental practice. For instance, consider a practice generating $2 million in revenue with an EBITDA of $600,000. If it receives a 6X offer, the $600,000 is multiplied by 6, resulting in a sale price of $3.6 million.
This may seem like simple math, but there’s many other factors you should know that come into play when crunching EBITDA numbers.
First, let’s get one thing straight: People love to boast about the multiples they snagged, but multiples are like golfers bragging about their custom-fit clubs – flashy on the course, but they won’t improve your swing.
Here’s another little nugget of wisdom for you: Everyone lies about their multiple. So, take those numbers with a grain of salt.
Ego boosts & the real deal
Forget the fancy multiples; the true value lies in what’s filling your pockets and securing your future; that all has to do with the enterprise value (EV). Multiples are part of this, but so is the EBITDA amount, type of deal structure, and type of buyer.
The enterprise value is the comprehensive assessment of a dental practice’s overall value, including the buyer’s valuation, timing of purchase, and capital structure involved – whether it’s cash, debt, or equity.
Working with the wrong type of buyer can completely throw off the equation. For example, you might end up with a sky-high multiple but a low EBITDA, which ultimately reduces your enterprise value. This is one of the myriad ways that multiples can be finessed to appear more favorable than they truly are.
When investment groups present offers, they’re essentially playing the same game as you when purchasing a car or a house: negotiating for the best deal possible. It’s a fair strategy, driven by their responsibility to make sound financial decision-making to their investors.
However, here’s the catch for dental entrepreneurs: These groups may adjust the EBITDA, tweaking it to enhance the apparent value. It’s a strategic move. They might adjust management expenses or rental costs, while highlighting an amplified multiple instead.
So, that $2 million practice we discussed earlier with a $600,000 EBITDA? It might attract an 8X multiple based on a modified EBITDA of $380,000 instead of the initial 6X offer, resulting in a $3.04 million sale. While the increased multiple may seem appealing, it’s important to recognize that it often serves more as an ego boost than genuine value.
What really matters?
Doctors gearing up to sell their practices need a reliable way to size up the enterprise value and break it down into key categories. When you’re thinking about selling, keep these three things in mind:
– Safety: Ensuring the seller receives a substantial cash amount
– Equity: Identifying the potential for investment growth
– Future: Assessing additional rewards tied to practice expansion
In order of importance, prioritizing safety and equity is key, with future growth prospects serving as the cherry on top. This perspective offers a more nuanced approach to evaluating offers, tethered to enterprise value and the tangible benefits sellers can secure through a deal, rather than relying solely on EBITDA calculations that may be subject to manipulation based on various factors.
A variety of deal structures exist, ranging from traditional dental service organizations’ (DSOs) arrangements that provide upfront cash alongside an earn-out period to joint ventures where doctors retain a stake in the practice while potentially increasing the multiple.
Equity roll arrangements are popular in practice transitions, offering upfront cash along with opportunities for wealth accumulation through multiple recapitalization events. The optimal deal for selling hinges on your individual goals and time frame, but in all scenarios, maximizing enterprise value to achieve your objectives remains paramount.
Having a seasoned partner versed in optimizing practice value and navigating the competitive landscape is invaluable. Consider this scenario: Initially presented with a DSO offer of $2.8 million for a practice generating $2.6 million in revenue, one doctor enlisted PTS’s expertise to enhance the practice’s position. Consequently, the owner ultimately sold to the same DSO, securing an additional $1.3 million in value. While the initial offer boasted a higher multiple, the revised offer delivered better value in the end.
Don’t get too caught up in the hype surrounding multiples. Sure, they’re part of the equation, but they’re not the whole picture.
What really matters is finding a deal that is the right fit for you, both structurally and personally. You need to be comfortable with the terms and the people you’re dealing with. Trust me, it makes all the difference in the world.
Contact the experts at Professional Transition Strategies to see which deal structure is the best fit for you. Here’s to making smart choices and securing a bright future for your dental practice!