Making the decision to sell your dental practice is a serious undertaking. In 2022, we spoke to 2,800 dentists who expressed interest in a sale or partnership with MB2. What stands out to us is that many doctors could not articulate why they wanted to sell their most valuable and hard-earned asset. The fact that “the market is hot” should not be the singular reason to sell your life’s work. Regardless of the reason to sell, or lack thereof, maximizing the economic outcome is always top of mind for any dentist. We do not at all disagree with that goal, but the path to maximizing one’s wealth is more complicated than just an initial practice valuation. Many dentists simplify the decision down to dollars and cents and believe that broker representation will get them the best financial outcome. In this post, we will provide our perspective on valuation outcomes in a brokered vs. non-brokered process.
First, Ask, “Why?”
If you are reading this, then you have likely considered selling your practice. What drives such a monumental decision? Can you articulate the outcomes you want from inviting someone to invest in your business? Do you have well-defined objectives after a sale, or is your motivation to get as much money on the front end as possible? Before you proceed with anything, you need to define a clear reason (or reasons) as to why you want to sell. Such reasons may include:
- Your practice has plateaued, and you need a partner to continue growing
- A substantial amount of your net worth is tied up in an illiquid asset (i.e., your practice), and you want to de-risk some of your financial position
- You want access to a broader range of investment opportunities
- You want to add new locations and want an equity partner to support that growth
- You want access to resources, capital, and data that you don’t have by yourself
- You feel like you’re on an island, and you want an invested and aligned community to lean on
- You can’t maximize the equity value of your business without a partner
If your only reason to sell is to maximize the top dollar you can get out of a transaction, and it omits any of the above, then we would submit your goals are short-sighted.
How to Maximize The Value in a Transaction
Since many dentists default to finding top dollar in a sale, they retain a broker because they believe a broker will help them achieve the highest valuation possible. We decided to do a little research with the data we have amassed over the last several years to see if broker representation resulted in our partners receiving a higher valuation with MB2. The results may surprise you. Since 2020, MB2 has closed 300+ transactions. 103 of those were represented by brokers. The brokered transactions had a valuation advantage of +0.1x (as an average of the entire data set). To further break that down, this is about a 1.0% difference, or $50,000 swing in the total value of a practice that is doing $2,000,000 in collections and $500,000 of EBITDA. This is a very minute difference in valuation and certainly does not offset the financial impact of the broker commission.
So if broker representation did not determine a material difference in valuation for MB2, what did? Here are some factors that stood out from our data:
- Long-term, committed doctor partner
- Obvious path to future growth without additional investment
- Verifiable, sustainable, and scalable business earnings
- Opportunity to improve profitability without altering the business
- Stable and growing patient base
- Attractive geographic markets
- Potential for network effect between specialist and general practices
We have partnered with over 475 dentists since 2007, and we have learned a lot of hard lessons over that time. Markets change. Investor sentiments change. The dental profession also changes. We have resolved ourselves to be a partner that provides consistent and outsized returns to our doctors for the long term. Our valuation methodology is determined by the fundamentals of the business and the caliber of a prospective partner… not a broker’s open auction process.
We’ve Been in Your Shoes –Twice
In 2017 Dr. V and MB2’s doctor partners retained an investment banker (i.e., a broker) to represent their group in a sale to a financial partner. It was a stressful and arduous process that distracted the management and the doctors from their primary job. We talked to dozens of potential investors in order to find the right fit and ultimately selected the partner that was the best fit for the doctor partners’ objectives. This partner did not give us the highest valuation.
Three years later, MB2 found its next investor without the help of a banker. This approach enabled MB2 to efficiently identify its ideal partner (without outside bias) based on culture, shared alignment of long-term goals, and long-term financial benefit.
The 2017 process took 10 months to complete, and the doctor partners paid substantial banker fees in the transaction. The 2020 process took only 4 months to complete and had a fraction of the banker fees. Our decision-making was grounded in clarity of purpose and confidence in our direction. No outside advisor could help us with that. In both 2017 and 2020, our motivations were the same as yours – we wanted to find the highest possible financial return for our doctor partners. We simply knew that in order to achieve that, we needed to have clear objectives and the patience to maximize our equity value over the long term.
The Bottom Line
The sale of your practice is a one-time event, but the financial gain that you will get out of that sale should not be viewed as a one-time transaction. You will have future economic upside (or downside) in any DSO transaction you consider. Don’t be solely focused on the financial outcomes from that initial transaction. There is so much more value to be gained over time with the right partner.
