The Fall M&A Pipeline Is Stacked. Your Practice Might Be on a Buyer's List.
DSOs are on acquisition runs with PE capital that needs deployment. Practices worth $1.2M-2.5M in profitable markets are targets. Fall 2024 offers will be aggressive but structured to benefit buyers; get professional valuations before negotiating.
The Fall M&A Pipeline Is Stacked. Your Practice Might Be on a Buyer's List.
It's August. By October, you'll start getting calls. "Hi, this is [X] from [Y Group]. We're looking to expand in your market. Would your practice be a fit for acquisition?" You'll ignore the first two calls. By the third, you might actually listen.
This is the annual M&A cycle. And yes, you're probably on a buyer's list.
OPERATOR MATH
Your practice produces $2.2M annually with $600K in owner earnings (EBITDA ~27%). You're 59 years old. A DSO offers $2.4M structured as 65% cash at close ($1.56M) + 35% earnout ($840K over 3 years).
DSO's valuation math:
They're valuing you at 4x EBITDA: $600K × 4 = $2.4M. Sounds fair.
But here's their real calculation:
Year 1 post-acquisition: They project $2.5M revenue (growth assumptions). Apply DSO systems, cut costs by $80K. New EBITDA: $680K.
Your comp as associate: $220K base + 8% production = $220K + $180K = $400K total.
DSO profit margin from your location: $680K - $400K = $280K/year.
Over 7 years (their hold period), that's $280K × 7 = $1.96M in cash flow to them - on a $2.4M purchase. Payback in under 7 years, even with financing costs.
Your analysis:
Current take-home: $600K/year.
Post-sale comp: $400K/year.
Annual loss: $200K/year.
Over 5 years: $200K × 5 = $1M in lost earnings.
Add the earnout risk: 35% of the deal ($840K) is contingent on hitting production targets you don't control. Historical earnout payout rate in dental DSO deals: 60-70%. Expected earnout value: $840K × 65% = $546K. Expected shortfall: $294K.
Real offer value: $1.56M cash + $546K earnout = $2.106M vs. advertised $2.4M.
Lost earnings over 5 years: $1M. Net proceeds after tax (assume 25% effective): $2.106M × 0.75 = $1.58M take-home.
If you keep the practice 5 more years and sell at 60 (same $2.4M valuation):
Owner earnings: $600K × 5 = $3M pre-tax, $2.25M after-tax.
Sale proceeds at 60: $2.4M × 0.75 = $1.8M.
Total: $2.25M + $1.8M = $4.05M.
Selling now nets you $1.58M. Waiting 5 years nets you $4.05M. Delta: $2.47M.
THE TAKEAWAY
If you receive an acquisition offer, demand a detailed post-acquisition financial model. What will your comp be? What are the DSO's cost allocations? What's the earnout structure and payout history?
Run a 5-year comparison: your current earnings vs. post-sale comp + net sale proceeds. Factor in earnout risk (assume 60-70% payout, not 100%).
Get competing offers. One offer = negotiating disadvantage. Three offers = 15-20% higher price. Hire a dental M&A advisor to run a controlled auction process.
If you're tired, take a sabbatical. Don't confuse burnout with a desire to sell. A 3-month break costs you $150K in lost production. Selling too early costs you $1M-$3M over 5 years.
Decide on your timeline. If you want out in 2 years, selling now might make sense. If you can work 5 more years, the math says keep the practice and sell later at a stronger negotiating position.