TUSK Partners works with clients all over the U.S. and inevitably hears comments like: “My five-location group generates about $12,000,000 in revenue. I’d like to build it up over the next five years and sell it for $50,000,000.”
OK…if you say so.
Do you want to borrow $49,000,000 to make that happen? I kinda doubt it.
What do you care more about: the amount of the sale or the amount you put in your bank account? If your answer is the latter, then you need to pay more attention to the amount of debt you take on and the impact that the tax rate will play because both of those will be paid off before the sale proceeds are deposited into your account.
Put another way, if you worked that hard over five years to build your business and sold it for $50,000,000, but only put $1,000,000 into your bank account, would it have all been worth it? Doubtfully.
Let me be more direct in an effort to change your thinking: you’re interested in the “net” number (after debt service and taxes) when you sell your business.
This is actually the number you need to start with, so instead of saying you want to sell your business for $50,000,000, say that you “want to net $20,000,000 for the sale of your business.”
OK…so how do you plan to get there? “I’m going to grow by acquiring practices.”
If you’re going to make acquisitions over the next five years, do you know:
1. how much revenue on average they should each be generating?
2. how much you’re going to pay for a typical acquisition?
3. how many acquisitions you’ll have to make each year?
4. how much you’ll need each of those practices to grow after you’ve acquired them?
If you haven’t really considered the answers to those questions, let me put this another way: if your business is generating $12,000,000 in revenue today at an EBITDA margin of 15% and you want to sell it for a net $20,000,000 in five years, you’re probably going to have to grow your business at a rate of around 30% annually. GDP is roughly 2.5%. The dental industry overall is forecasted to grow at around 6% in the coming years and middle market DSO growth is forecasted to be around 12-15%.
So, can you grow your business two to three times as fast as the segment you’re in and five times as fast as the industry overall? Is that realistic?
Here’s what the numbers look like:
You can download this calculator HERE and use it to help you define your number.
One of the most important things we do in working with our growth clients who are intending to sell their business is to help them set rational expectations around exit and realistic expectations around growth.
As if the compounded annual growth rate (“CAGR”) isn’t daunting enough, many of these clients tell us they plan to acquire practices generating $500,000 in revenue (which is probably $50,000 to $75,000 in EBITDA). We plug their assumptions into our economic model and produce an output that goes something like this:
“The good news is that you won’t end up paying much for those $500,000 revenue practices because they’re not worth much based on the EBITDA they’re generating, so you won’t have to take on a lot of debt to do it. However, the sale of your business will be predicated on the amount of EBITDA you’re able to create, so to hit your exit multiple to generate your net number, you’re going to have to buy ten $500,000 revenue practices every year and grow them all at 20% annually. And you’re going to have to do that for five years in a row. Are you up for that?”
When it comes to growth, “hope” is not a strategy.
Define your target. Sometimes you’re better off in acquiring larger revenue practices even though you might pay more for them because they are more profitable and make a greater, more immediate impact on your overall EBITDA.
You can grow any way you want: de novo startups, acquiring small practices, acquiring larger practices, or a combination of all of the above. However, you need to begin with your “net” sale number and then work your growth model backwards with defined targets.
The sale price of your group dental practice will be based on the amount of EBITDA the business generates. Your goal is to increase the amount of EBITDA your business generates and do it at a faster rate than the growth of your revenue. Put another way, it does you little good to grow your $10,000,000 revenue and $1,000,000 EBITDA business to $20,000,000 in revenue and $2,000,000 in EBITDA because the EBITDA percentage of revenue is still 10%.
Taking your business from $10,000,000 in revenue and $1,000,000 in EBITDA to $20,000,000 in revenue and $4,000,000 in EBITDA is the mark of a savvy entrepreneur who can execute. And those people get paid more at the deal table.
If you’d like our help in defining your own exit strategy or to discuss any other topics related to trends in our industry, please feel free to contact me at Perrin@TUSK-Partners.com. TUSK provides industry-leading resources for Group Dental Practices and DSOs. We help our clients START, GROW and SELL their DSO or Group Dental Practice. For more details, download our Overview of Services or visit our website HERE.
TUSK will be a featured presenter at the 1-800 DENTIST DSO Leadership Summit in Los Angeles, CA on March 16th where we will share “Bank Debt & Growth Strategy: the Numbers You Must Know to Grow.” We hope to see you there as well!