shakespeare-with-skull

To Corporatise or Not to Corporatise, that is the Question

March 15, 2016

Mention ‘’selling your dental practice’’ ‘’and corporate group’’ in the same sentence and principals generally fall very much in the like it or loathe it category. For every 100 success story there is one failure and, as is human nature, this one story ends up having a snowball effect.

I wrote a blog about a year ago on corporatisation and if/when is a good time to sell. Since then, more groups have been created offering a range of EBIT / NPAT / EBITDA multiples, along with a multitude of earnout / clawback periods and cash / share options. All of the groups claim to offer backend, HR and Payroll support (as they quite rightly should) and various levels of management to set the principal free and enable him or her to focus on their clinician work.

The traditional model from a corporate group was a multiple of normalised EBIT (Earnings Before Interest and Tax), which basically refers to the profit a practice makes taking out any personal expenses and paying the principal a standard associate rate of 40% minus lab fees. There are more complex, and no doubt comprehensive, explanations than the above but this is how I like to explain it to principals whose eyes are already glazing over once we start talking anything financial.

EBIT multiples used to hover around the 3 times which basically meant if your EBIT figure was $500k, for example, then apply the 3x multiple and your practice is valued at $1.5M – simple! These days multiple hover around 4-5 times.
But there is a catch, or an ‘’earnout’’ period, in which you need to serve to receive all of money and/or shares for your sale. This earnout period used to be set at 5 years and during this time you would be expected to maintain your agreed ‘’EBIT’’ otherwise penalties (or clawbacks) would apply. Again, these days earnouts start from a very ambitious 1-2 years to a, more typical, 3-5 years.
You can quickly see how not maintaining your profit levels can lead to more angst, more stress, principals wishing they hadn’t sold and the snowball effect of the bad stories we hear and that put a lot of people off signing over to a group.

So is corporatisation the way forward for you and, if so, which group suits your needs and long term goals? Firstly, we strongly advise you speak to and engage a specialist broker to act on your behalf. It has been proven that business brokers obtain a higher purchase for principals with better conditions, even after taking their fee into account. They can be with you on every step of the corporatisation journey and make it as smooth and enjoyable for you as possible. After all, you are selling to make money and lose stress, not the other way around.

Secondly, if you are going alone, be careful of new groups offering unbelievable terms and multiples. As the old adage goes, ‘’If it looks too good to be true, then it probably is.”
A quick and basic checklist could be:

How many practices does the corporate already own?
Will they let you speak with principals who have already sold to them?
Who is funding their group and what is their end game, in terms of a stock exchange listing etc?
What is their directors’ track record in running large corporate groups?
Do the directors have a healthcare background?
How will they manage your backend support and practice post acquisition?
What multiples of EBIT / EBITDA / NPAT are they offering?
How will they assist you in not only maintaining your EBIT, but increasing it?
Will you receive any percentage of increased profit?
Are they buying you practice in cash, shares or both?
How long are you expected to stay on for during you ‘’earnout’’ period”
Do they have claw backs in their contracts and if not, are they still able to decrease your earnout if profit is not maintained
Can they offer cost saving measures such as cheaper or free lab fees and be able to refer to you or from you for specialist treatment within their group?
Are they going to rebrand your practice or is it ‘’business as usual’’

There are many more questions which I won’t list here. Ultimately, it is up to you to execute your own due diligence and gut feel. Most importantly, ask yourself do I trust the people in the group and are they the one you can work with, go along a joint journey whilst keeping your staff and patients happy.
At the end of the day, for the right size practice corporatisation IS the way to go, you’ve just got to find the right one for you.

Dental Prac Sales is a licenced business brokering company specialising in the dental industry. For further information please visit our website at www.dentalpracsales.com.au or contact Alex Barritt or Matt Taylor for further information and a confidential discussion.