Caber Hill Advisors very own Maria G. Melone was invited to speak on a panel to discuss the drivers and direction of consolidation in the dental industry at this year’s ADSO conference, a virtual event with a theme of “Boldy Evolving Dentistry.” A managing director on the firm’s healthcare team, Maria joined Caber Hill in early 2021, and was quick to share her expertise and viewpoint with over 100 attendees on March 24 (which was also her birthday!). Joining Maria on the panel were two other industry pros in M&A: Katie Douglas, a shareholder at Fredrikson & Byron; and Greg Wappett, a director of corporate development at 42 North Dental. Below, we summed up a few takeaways from their conversation.
1. More Deals Involve More Doctor Participation
In many recent deal structures, there’s been a focus to put in place programs that allow for doctor representation in the ownership of the business. In past years, most consolidation deals left owner dentists with no equity, or with a small minority position. But now, there’s more recognition to the importance of having the dentist fully aligned with the larger organization. Some of these programs include joint-venture opportunities and ownership models that go deeper to the doctor base.
2. Sellers Shouldn’t Expect an All-Cash Deal
As recently as February of 2020, many sellers expected to receive an all-cash deal for their sale. But with the challenges and uncertainty the pandemic has presented, there are few all-cash deals to be had. Now, buyers deploy other tools that might still give practices the valuations they held in 2019, but with some safeguards to the risk and uncertainty still present in the market. Some of these tools include deferred payouts, equity packages, and earnouts.
That said, little has changed for sellers as to the criteria buyers use when making valuations. In 2021, practices looking to consolidate should focus on delivering outstanding performance on these three core KPIs:
Growth. This can include revenue, customers, and locations.
Management Infrastructure. Who are the key decision makers? Are there systems in place?
Retention of Doctors. Panel members remarked that this might be the most important metric, particularly for larger groups looking to consolidate with a smaller practice. These groups look for stability at the provider base, which can be measured by whether dentists are adequately contracted, appropriately compensated, and happily employed at the practice.
3. Equity Packages are Becoming More Attractive
This trend seems to be especially appealing for two types of practitioners. The first is a practice with younger practitioners who think there’s a high ceiling for growth at their practice and are reluctant to sell at a current valuation. The second group is distinct for 2021: those practitioners who put in the “sweat equity” last year to adapt and persevere through the massive headwinds of COVID-19. Now that a post-pandemic world looks to be in sight, they’re hesitant to sell. Lucrative equity packages have been one way to entice these hesitant sellers.
4. Not All Groups Consolidating are the Same
Maria made a succinct distinction here. Among groups that are acquiring practices, there are consolidators and there are collectors. Consolidators are trying to build businesses, while collectors are trying to gather up locations. Some of the challenges of 2020 really exposed the stark difference between these two groups and their strategic approach. Many groups in the collectors camp grew too fast and got bit for it last year. Lockdowns and closures forced many to close locations or go into bankruptcy, since they didn’t have the cashflow to support the debt they incurred acquiring new locations.
5. Consolidation Helps a Practice Achieve Efficiencies of Scale
When it comes to the benefits of scale, the panelists discussed a pair of distinct advantages to consolidation:
Access to Capital. An individual proprietor can hit a limit on loans. Either they just don’t have the collateral to borrow more, or they’re uncomfortable taking on more debt.
Shared Resources and Strategy. The panelists said this can be realized with something as simple as securing necessary supplies, like N95 masks and other essential PPE in the last year. This can also include broader and more multifaceted help with the increasing complexity of running a practice. On the upper spectrum of the business scale, this is help navigating insurance claims. On the bottom end of the spectrum, it’s help handling equipment upgrades for technology like i-CAT machines or digital imagery.
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