During my years in investment banking, I worked with a series of private equity (PE)-backed companies across multiple industries. Their business models were always the same:
- Buy one large platform business with adequate infrastructure and solid leadership.
- Buy additional businesses in the same industry and roll these companies into the larger one.
- Ultimately sell the business to a larger private equity company.
These PE investors bought acquisition targets at the most affordable prices possible and sold the resulting platform at the highest price possible, thus making money on the spread, defined as arbitrage. Sound familiar?
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The investors behind these businesses prided themselves on buying at the lowest possible prices from uninformed owners. They kept score of how many deals they sourced on their own (these were always much more affordable) and how many they bought from brokers or advisors (these deals always came at a premium). I always found it interesting that they labeled the companies that they were thinking about buying as “targets” internally, but called them “partners” publicly.
A “target” is hunted and taken down—it is the prey. An acquisition “target” feeds a higher economic purpose. It has a strikingly different connotation than the word “partner.”
Back in 2007, when I began brokering dental practices, DSOs were just beginning to take shape in the US. As DSOs began to grow in number, I saw these concepts and vocabulary enter the vernacular of the dental economy. As I saw DSOs look to acquire targets, it dawned on me that there was a way to turn the hunted (i.e., the target) into the hunter.
The hunted
DSOs have a mandate from their PE partners to make money for their investors. The fastest way to grow the value of the business is through acquisitions. Oh, and the less they pay for their acquisition targets, the more money they will make. Today, there are hundreds of business development people around the nation working for DSOs whose sole job is to source acquisition targets, then woo them over steak dinners and bottles of $100 wine in hopes that the target will sell to them directly rather than take their business to a broader pool of buyers. There are some groups that will even send a private jet down to pick buyers up for a trip to their corporate headquarters. The best business development guys make the “target” feel as though they are getting a great deal and have the doctor sign a letter of intent without asking too many questions. This is capitalism in its rawest form.
For dentists and groups who sell to the first buyer they meet, I believe that they will forever wonder, “Could I have gotten a better deal?”
The hunter
Alternatively, practice owners who elect to go through a marketed sales process are able to become the hunters. In working with an advisor, they prepare the business for sale, decide when to go to market (it matters), tell the story that they want buyers to hear, and dictate what they want out of the deal (e.g., economics, postsale employment, associate equity opportunities, deal structure).
Advisors truly partner with their clients to hunt for the right culture, price, and deal structure. Bringing multiple offers to the table creates leverage and negotiating power. This is a seismic shift that leads to richer economic outcomes, stronger partnerships, and client satisfaction. By the time clients sign a letter of intent, they can rest easy knowing that they have surveyed the entire market and have made a well-informed decision. Clients who go through a marketed sales process exit without regret.
Engage an advisor and enjoy peace of mind
My guess is that most of you have already received an offer from a local group or DSO and have been viewed as a “target.” If you are contemplating taking that deal, I encourage you to ask the potential buyer, “Would you ever sell your business to another PE company without representation?” I’m confident that the honest answer would be no. DSOs don’t want to leave a single penny on the table when it is time for them to sell, but are more than comfortable if you do. If you are considering a sale, engage an advisor, take control of the process, and exit at the top with the right partner at the right price. Otherwise, you will always wonder, “Was I the hunter or the hunted?”
Editor's note: This article appeared in the November 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
