January 31, 2024
Navigating Private Equity Turns: A Crucial Consideration for Dentists Eyeing Practice Sales
As the dental industry undergoes transformative shifts, dentists contemplating the sale of their practices are increasingly focusing on private equity turns as a crucial element in the process. Understanding the concept of equity turns and their impact on their enterprise value is crucial for practitioners seeking to maximize the value of their life’s work. In this blog, we’ll explore what equity turns are, why they matter for dentists, and the urgency for action in the current phase of industry consolidation.
What is an equity turn?
An equity turn is a measure of how many times a private equity firm or dental service organization (DSO) multiplies its investment in a company, and it hinges on the correlation between a company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) and a multiple.
The calculation of the equity turn, which is influenced by this multiple, demonstrates how many times a private equity firm or dental service organization multiplies its investment in the practice. For example, there are three common types of multiples – an entry multiple, exit multiple, and leverage multiple, which are all based on a company’s EBITDA, and the concept of a turn applies uniformly across them.
For dentists contemplating the sale of their practices, this metric plays a crucial role in evaluating the potential return on investment from private equity firms or DSOs.
Industry consolidation & implications
Industry experts predict that we are approaching a critical juncture in dental industry consolidation. With an estimated 60-70% of practices eventually falling under the ownership of private-equity backed DSOs, there’s a foreseeable shift in investment dynamics. Once the consolidation wave is completed (estimated in the next 5-7 years), the influx of money from investors will dwindle, impacting the sale value for independent practice owners.
Why does it matter for dentists?
The relationship between equity turns and the sale value of dental practices is pivotal. As the industry experiences consolidation, dentists can benefit from a much higher valuation if they act strategically. The more private equity turns available, the greater the value dentists can extract from the sale of their practices. This means a significantly more lucrative outcome for those who choose to navigate the evolving landscape wisely.
Potential scenarios & significance
If a dentist chooses not to experience an equity turn, they may receive upfront cash but limit their multiple, significantly impacting returns. On the other hand, experiencing one or two equity turns presents varying returns influenced by factors such as equity stake structure and the amount of equity rolled.
As an example, for a practice valued at $2 million with $500K EBITDA, here’s what it could look like when experiencing no equity turns, one equity turn or two equity turns:
– No equity turn: 5.5x deal for a value of $2.75M day one. No additional consideration.
– One equity turn: 6.5x deal for a value of $3.25M day one. For a joint venture deal at 60/40, that would end up with $4.4M in value. An equity roll would end up getting $7M over the same time horizon!
– Two equity turns: 6.5x deal for the same value of $3.25M. A joint venture deal would now end up with $5.7M in value. A joint venture converted to a holding company would end up getting about $7.9M. An equity roll 2x would end up getting $15M if you rolled ½ of your value.
In the above scenarios, you can see how the number of equity turns and the deal structure impacts the return on your investment. It could be the difference between a return of $2.75M versus $15M!
The time to act is now
In the back half of dentistry’s consolidation wave, the urgency for dentists to act is paramount. Our team of industry insiders project only one to two equity turns left on the horizon. This limited window presents a narrow opportunity for dentists to capitalize on immense wealth-building possibilities. Selling to a DSO or directly to private equity is becoming increasingly attractive for those who wish to secure the best return for their dental practice.
Understanding the dynamics of equity turns can empower dentists to make informed decisions, securing the highest value for their professional legacy in a rapidly changing dental industry. The evolving landscape of industry consolidation, coupled with a limited window of opportunity, emphasizes the urgency for dentists to act promptly.
However, selling to a DSO or private equity involves strategic negotiation and understanding the nuances of the process. Leverage the expertise of the professional brokers at PTS to help navigate the complexities of the transaction, ensuring you secure the best possible terms and conditions for your life’s work.