As sell-side advisors, we are often asked, "What is the key to maximizing the value of my business?" The simple answer is that EBITDA is the primary factor that influences value from a DSO/private equity buyer perspective. It’s critical to design your business in a way that allows you to maintain an EBITDA margin that's 20%–25% of revenue.
Here are strategies to increase revenue and control overhead—both of which will lead to a more efficient business and ultimately maximize your EBITDA and valuation.
Strategies to increase revenue
- Implement a staff bonus plan to align incentives.
- Negotiate more favorable reimbursement rates with payors.
- Consider dropping PPO plans with the lowest fee schedules.
- Increase production capacity by expanding your operating hours and/or facility.
- Expand your service mix to include specialty procedures.
- Add additional providers, specialists, or hygienists.
- Ensure all cash collections are being reported.
- Improve/streamline your accounts receivable collection process and/or offer additional patient financing options.
- Develop new or optimize current external and internal marketing processes to encourage patient referrals and reviews.
Initiatives to decrease overhead
- Review your profit and loss statement monthly to ensure your expenses are in line with industry benchmarks (% of net revenue):
- Staff salaries, payroll taxes, benefits: 20%–28%
- Occupancy costs (rent/utilities): 5%–8%
- Dental supplies: 5%–7%
- Lab: 6%–8%
- Marketing: 1%–3%
- Office supplies: 1%–2%
- Analyze ROI from marketing activities and other variable expenses on an ongoing basis.
- Centralize/outsource admin tasks.
- Curb discretionary/personal write-offs one to two years prior to the sale (or categorize all personal/discretionary expenditures into a specific expense category for easy tracking).
- For multilocation practice owners, consider off-loading underperforming practices.
Factors that drive the EBITDA multiple
In addition to maximizing your EBITDA, it’s important to understand the factors that impact your EBITDA multiple at exit.
- EBITDA level: Practices with EBITDA of $1–$5 million are acquisition targets for both financials and strategic buyers, and therefore tend to trade for the highest multiples.
- Reputation, culture, and long-term sustainability: This speaks for itself.
- Key person risk: Bifurcating production between multiple providers will decrease key person risk, so long as all providers are able to continue working long-term postclosing.
- Growth potential: Buyers love to hear that your business is positioned for growth, and this can incentivize them to offer a top-of-the-market EBITDA multiple given they have a strong path to increasing EBITDA postclosing.
- Seller’s postclosing plans: Be prepared to have a vested interest in your business for three to five years postaffiliation. Typically, the longer the seller’s runway, the higher the EBITDA multiple.
- Payor mix: Demand and valuation are typically adversely impacted when Medicaid exposure reaches over 20% (pediatric dental practices are the exception to this rule).
- Number of locations: Multisite practices typically trade for slightly higher EBITDA multiples than single-site offices, but it’s important to keep in mind that more locations equals more overhead and a lower EBITDA margin. In other words, make sure you scale with intentionality. More locations do not always equal higher EBITDA/higher valuation.
- Facility/equipment: Just like in real estate, the curb appeal of your offices can influence the valuation. Investing in new equipment/technology and a modern, attractive facility will result in revenue growth and operating efficiencies as well as decrease future capital expenditures.
Editor's note: This article appeared in the June 2024 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
