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Examining the Impact of Private Equity on Dental Practice Valuation

In recent years, private equity has emerged as a formidable player in the dental industry, bringing with it new dynamics and complexities when it comes to dental practice valuation and dental practice sales and acquisitions.

Knowing the truth about private equity’s impact on the dental marketplace can help you to make informed business decisions.

The Rising Impact of Private Equity

Private equity's involvement isn't restricted to the dental sector. It is also making waves in medical practices, veterinarian clinics, and the professional services world.

Cash availability is a significant attraction when private equity is involved. Sellers can expect upfront payments, a deviation from the traditional model where deals could involve seller financing or installment sales.

Rollover equity is also something to consider when dealing with private equity. Sellers might retain some equity in the larger private equity entity as a condition of the sale, with the hope that the value of this equity grows significantly over time.

Practice Values and EBITDA

Private equity typically offers higher valuations than traditional transactions. The valuation of a dental practice by a private equity firm is generally based on its EBITDA. The current rate of this multiple ranges between four to eight times EBITDA.

Private equity firms don't just look at the current EBITDA. They “normalize” it to reflect what they believe is the real-world EBITDA. This could involve adjusting for how the practice owners pay themselves, looking at distributions, and more. The key is to understand the adjusted or normalized EBITDA.

Several factors can influence the multiple a practice can command, including:

  • The overall revenue and volume of the practice
  • The number of practice locations
  • The specific specialty of the practice, if any

Owners should also be prepared for a potential reduction in their annual compensation post-sale, known as the income scrape.

Private Equity Deal Structures

Private equity deals, especially in the dental industry, can be intricate. Under the traditional model, revenues from the practice flow to the owners or operators. However, under the private equity model, there are a few options.

Rollover Equity

Another intriguing aspect is the concept of rollover equity. Post-sale, sellers might retain a portion of equity in the overarching private equity entity. The anticipation is that this equity burgeons over time.

Income Scrape

A significant point to ponder is the potential "income scrape" post-sale. Sellers might see a dip in their yearly earnings, even if they reap the benefits of an immediate, hefty sale amount.

Deal Complexity

Transitioning to a private equity model can introduce complexities. Typically:

  • A fresh practice entity is created.
  • A new managerial company might surface, which operationalizes and levies a fee to the practice.

(Download Video Transcript)

Private equity's presence in the dental industry is growing, with more practices likely to consider it when planning their futures. To learn more, contact one of SVA's professionals.

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Biz Tip Topic Expert: James Emmerich, CPA

James Emmerich, CPA

James is a Principal with SVA Certified Public Accountants with expertise in the dental and veterinary industries. James advises his clients on budgeting, cash flow management and tax savings strategies. He is experienced in developing compensation models, buy-in and buy-out agreements, and benchmarking.

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