Whether you’re buying or selling a practice or a dental service organization (DSO), you need to know your numbers and their implications. Doing so will help you navigate the dental mergers and acquisitions (M&A) environment with confidence.
Typically, buyers or investors would analyze data from the past 12 months to determine a practice's financial health and long-term viability. However, at the start of the pandemic, many practices experienced a few months with no or low income. Then, a revenue spike when they reopened.
This unprecedented irregularity is causing some investors to write off 2020 altogether and turn to pre-pandemic EBITDA. Meanwhile, others would ask for 15 months of data and discard the three outlier months. Another alternative is to evaluate a practice's revenue before and after the lockdown periods to determine the average.
During this extraordinary time, there’s no one standardized approach to determine the valuation of a dental practice or DSO. The good news is that practice values have been holding steady, and deals have even been accelerating since 2020.
To take advantage of this environment, sellers must cover the bases. Be prepared to provide the data that buyers need so they feel confident about the deal. Here are the financial data and documentation that a buyer or investor would look for:
When you prepare to sell your practice, invest in a formal practice valuation prepared by a qualified third party. This valuation will use several methodologies to demonstrate the revenue and profitability of the business. (Here's how to increase your practice's valuation)
Cash Flow Model
By analyzing a practice's cash flow, the buyer can evaluate if the business is viable in the long term. The cash flow model typically projects into the next 5 to 10 years after the acquisition. It considers growth rates, operating expenses, and the debt service required to finance the purchase.
Aged Account Receivables
This data illustrates how well the practice collects payments from insurance companies, other payers, and patients. It’s also an indication of the effectiveness of its collections policies and processes.
Lease Agreement or Real Estate Appraisal
This information will help the buyer ensure that the facility for operation is secured for the expected duration. If the buyer wants to purchase the real estate, a certified appraisal will be required. If the buyer plans to continue the lease, they’d need to know about the term of the lease, the renewal options, the annual escalation amount, and other costs paid by the tenant.
Productions and Collections Reports
The data shows how much each provider within the practice (e.g., seller, associates, and hygienists) produces and collects. The information will help the buyer determine which provider will stay on after the transition and how to maintain the practice revenue. The buyer will also want to see productions and collections by procedures to understand how each treatment contributes to the business's cash flow.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
EBITDA measures a practice’s overall financial performance. It's sometimes used as an alternative measurement to net income. It shows earnings before the influence of accounting and financial deductions. However, it doesn’t account for capital investments such as property and equipment. Overall, it’s a good indication of the profitability of a dental practice or DSO.
Employee Salaries and Benefits
Potential buyers will often request a detailed list of the current staff’s pay rate and benefits to understand the practice’s overhead expenses. The information also allows the buyer to know the employees’ roles and how they’d fit into the new organization after the merger. However, it’s not advisable to cut your tenured staff just to make the numbers look good.
Get Your Practice Ready With the Right Data
When selling a dental practice, you should have three to four years of tax returns ready, so you can produce the data needed to demonstrate the financial performance and stability of the practice.
Many buyers would consider the inability to produce such information a red flag. If you haven’t already, you should implement cloud dental practice management software to centralize the management of productions, collections, and other data so you can compile the data needed to support the M&A process.
Request a demo to see how tab32 can help you gather the data you need for a successful M&A.
No Comments Yet
Let us know what you think