So a DSO showed interest in you, gave you a letter of intent, and started all their due diligence.
But then …
They decided NOT to proceed.
Why would that happen?
In this email I’ll breifly talk over the first main reason, and then I’ll get into the second main reason in the next.
The first is about how the earnings analysis holds up.
If initial assumptions regarding the numbers fail to hold up during the Qualify of Earnings analysis.
Usually if this happens, it leads to a re-pricing discussion.
But, the outcome of this discussion is typically found to be unsatisfactory by one of the two parties involved.
The Quality of Earnings analysis is a deeper dive and more comprehensive review of your financials and usually adjusts from a cash basis method of accounting to accrual.
So if the numbers presented initially aren’t in alignment with their analysis, in order for the DSO to proceed, they would need to make some kind of adjustments to their preliminary analysis.
Depending on how great those adjustments are, you may not like what they have to say …
And if you and the DSO can’t come to an agreement then they may walk away.
Honestly, if you aren’t going to get the deal you want, then that may be the best thing anyway.
But you also may want to consider your perspective and expectations.
Just food for thought.
More in the next email.
“When should I sell my practice?”
I’m going to give you the often frustrating answer of …
“It depends.”
Ok, that’s probably not all that surprising.
But the question of when to sell your practice depends largely on you, your practice, and your goals.
And then you also take into consideration the environmental factors (what’s going on in the economy, etc).
Understanding yourself and what you’re trying to accomplish is an important first step.
As far as the second …
The biggest mistake I see practitioners make is to try to time the market with the sell of their business.
I talk about that more here.
If you’re still considering a DSO, I’d like to take you through what your path to a deal can look like.
If you’d like to read this more in depth, I recommend my book “Everything DSO” - {link}
(Or just schedule a call with me and I’ll walk you through based on your situation)
How you got HERE is likely because of one of three events …
You, as an owner dentist, have decided to explore a transition in your career/business/life and a DSO sounded like a good possibility to get what you want.
The most common error I see dentists make, when it comes to looking for DSO offers …
Is to focus on the “the number” too much.
They get an offer, and then quickly flip to the final page to see what “the number” is.
So what’s the problem with this?
Well I see two problems:
While it’s easy to find DSOs who are hungry to buy dental practices …
And who may show interest in yours …
That doesn’t mean you’ll land a successful deal.
Take Dr. Crane for example …
He had a great offer on his practice.
But as soon as the buyer started to perform their “due diligence,” things really fell apart, FAST.
Dr. Crane had been trying to sell his practice and retire for a number of years but he wasn’t able to find a buyer that would offer him the price he wanted.
When he DID find a buyer giving him the offer he wanted … the details didn’t add up.
This is one of those situations where you can really find out why some DSOs will back out of an offer.
Read here to find out more.
There’s one more category which DSO’s sometimes use in their deal structures …
It’s called “Contingent Earn Out”
This category is used when there is some ambiguity around the expected future performance of your practice is fast-growing.
The point is that the DSO wants to avoid penalizing you by giving you a pathway to full value IF certain benchmarks are achieved.
(This also protects the DSO if those benchmarks aren’t achieved)
This has become much more popular since the pandemic disrupted business.
So far we’ve covered some of the more straightforward, and some of the more lucrative categories which DSOs use in their deal structures.
A common element used is a Seller Note.
This is used when the DSO whish to pay some portion of the purchase price over time through a note.
Typically this includes some specified interest rate.
For you, it’s pretty straightforward.
If the DSO is offering this, you need to understand the principle amount of the note, the interest rate, and the term or schedule of payments.
There also may be other conditions to the note.
For example, I have seen notes termed to run concurrently with the initial term of the seller’s employment agreement with the condition that if the seller violated the terms of the employment agreement then some portion of the note would be forfeited.
Why would you take this as part of your deal?
Well depending on the DSO, this can be a route towards ultimately earning a lot more through the deal over time.
Hopefully you read my last email where I briefly went over the opportunity for keeping “skin in the game” and what that means for your long term financial benefit.
There’s another type of Rollover Equity …
Where you don’t receive a percentage of your practices value, but rather the DSO offers you a percentage of the overall DSO enterprise.
The nice thing about this kind of equity is that it puts you in complete alignment with the DSO and their financial sponsor, and your financial benefit is not solely dependent upon how well your practice grows.
Its becoming more common these days for DSOs to pursue partnerships where the selling dentist retains equity interest …
Thus continuing their “skin in the game.”
This aligns incentives between the DSO and you as the lead dentist in your practice.
If the DSO does well, then you do also.
When revenue and profit grows, so does the equity value of your retained interest.
This is one of the categories used in deal structures for DSOs …
