Private Equity vs Private Buyer Sale: Understanding the Differences

Jun 7, 2024

Private Equity vs Private Buyer Sale: Understanding the Differences

When contemplating the sale of a dental practice, one of the fundamental decisions is choosing between a private equity buyer (i.e., DSOs) and a traditional private buyer. Both options come with their own sets of advantages and challenges, and understanding these differences is crucial for making an informed decision.

Higher Valuations from Private Equity

Private equity buyers often present higher valuations compared to traditional doctor buyers. However, the structure of these deals can be quite different. In many private equity transactions, less than 100% of the offering price is paid in cash at closing. Instead, sellers might encounter holdbacks contingent on the practice meeting specific financial goals and a significant portion of the payment in the form of “equity” in the purchasing entity. This equity has the potential for significant upside, but it comes with numerous restrictions on its sale, and its ultimate value is not guaranteed.

The higher valuations from private equity are driven by their target returns, typically around 15% to 20%. Conversely, private doctor buyers need a much higher return, often exceeding 40%, to support both the practice and their personal livelihoods. This necessity is why banks are cautious about loaning money to private buyers if the practice price is too high, potentially jeopardizing the buyer’s ability to service the loan while maintaining a reasonable standard of living. Therefore, while private equity offers may initially seem more attractive, they come with complexities that need careful consideration.

Tip: While private equity buyers might offer higher valuations, these offers often include future uncertainties like equity stakes and contingent payments. Carefully analyze the terms and compare them with the more straightforward valuation from a private doctor buyer to ensure you understand the potential risks and rewards.

Tip: Ensure that any potential buyer, especially a private doctor buyer, has solid financing. Ask detailed questions about their financing plans and debt management to confirm they can sustain the practice's profitability while managing loan repayments.

Financial Implications and Structure

A key financial distinction between the two types of sales is how accounts receivable are handled. In private equity sales, accounts receivable are typically included in the sale price. However, in traditional private sales, the seller usually retains the accounts receivable or arranges for the buyer to bill and collect them on their behalf. This difference can significantly impact the seller's immediate financial returns from the sale.

Tip: Understand your financial needs and goals before entering negotiations. Private equity deals often involve less upfront cash, with a portion of the price paid as equity in the purchasing entity. Be aware of holdbacks or contingent payments in private equity deals, which depend on the practice meeting certain financial goals post-sale.

Additionally, private equity deals often require the seller to remain as an associate within the practice, at lower wages than their previous earnings as an owner. The longer the seller stays on, the less favorable the financial terms may become. This arrangement might be suitable for doctors nearing retirement but is generally less appealing for those planning to practice for several more years.

Tip: Be prepared to negotiate the terms if a private equity buyer requires you to stay on as an associate. Consider whether this arrangement suits your long-term career plans and financial expectations. A private buyer might offer a cleaner break if you prefer to step away from the practice entirely.

Cultural Fit and Operational Changes

Cultural fit and operational philosophies are other critical factors to consider. Private equity buyers view practices primarily as investments and manage them to maximize returns. This approach can lead to significant changes in the practice's operations, potentially affecting staff and patient experiences. In contrast, private buyers often share similar philosophies with the seller, resulting in a smoother transition and a better cultural fit for both patients and staff.

Tip: Assess the potential impact on your practice’s culture and operations including your staff and patient retention. Private equity firms may implement significant changes to maximize returns, which can affect staff morale and patient satisfaction. Ensure you are comfortable with these changes before committing to a sale.

Tip: Prioritize a buyer who shares similar values and operational philosophies to ensure a smooth transition. This alignment can help maintain staff satisfaction and patient care standards. Ask potential buyers about their plans for the practice and how they intend to manage the transition.

Conclusion

Deciding between a private equity buyer and a private doctor buyer requires a careful evaluation of your financial needs, future involvement, and the potential impact on your practice’s culture and operations. Engage with financial advisors, accountants, and legal professionals to understand the nuances of each type of sale. They can provide a detailed analysis of offers and help you navigate the complexities.

Take the Next Step with Confidence

At Collier & Associates, we bring over fifty years of experience to help you navigate the complexities of selling your dental practice. Let us provide you with personalized insights and expert advice to ensure you make the best decision for your future. Schedule a consultation with us today and let’s explore your best options for selling your practice.

Talk to Collier & Associates Today

(216) 765-1199

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