Too many dentists leave money on the table. Kevin Cumbus, founder and president of the mergers and acquisitions advisory group TUSK Partners, returns for an encore presentation on how dental practices can understand their options and maximize their valuation before selling to a dental support organization (DSO).
In his previous interview, Kevin explained how dentists have more choices than ever for a financial exit from their practice and the importance of evaluating multiple DSOs before committing to a deal. Now, Kevin returns to the Prosperous Doc® podcast to unpack common industry jargon so every dentist can have an informed conversation about private equity and corporate-owned dentistry.
In the early 2000s, only dentists were interested in buying dental practices. Now that DSOs backed by private equity have created a more competitive market for dental practices, demand outweighs the supply, driving up prices. Dentists today have an unprecedented opportunity to secure their financial futures — but the devil is in the details. Without understanding the terminology of a DSO’s offer, dentists could end up locked into an unfavorable deal that saddles them with too much risk.
“Where you actually realize the value from the sale of your business,” Kevin explains, “is in the enterprise value and how that enterprise value is received through structure. And the structure is made up of a couple of key components.”
What are those key components? Kevin joins host Shane Tenny, CFP® to define nine terms related to selling your dental practice that every dentist should know. From EBITDA to joint venture and holdco equity, Kevin puts economic concepts in layman’s terms so dentists can be prepared before they even start the conversation. .
💡 Featured Guest 💡
Name: Kevin Cumbus
What he does: Kevin is the founder and president of TUSK Partners, an M&A firm that exclusively represents sellers in transactions with DSOs. He has valued and sold over 120 dental practices, managed over $100MM of revenue in a DSO, and is the co-owner of a startup dental practice, Mundo Dentistry.
Company: TUSK Partners
Words of wisdom: “We encourage folks, especially around retirement planning, to think about that cash at close as being the linchpin or the victory lap to your retirement. But do not sell your largest income-producing asset without knowing that the cash at close is going to get you to financial independence.”
Connect: LinkedIn
💰 On the Money 💰
Top takeaways from this episode
- Valuations are higher than they were in the past. Twenty years ago, dentists had fewer options for selling their practices. Now, there’s more demand from private equity groups via DSOs. With higher numbers on the table, dentists may be tempted to sell at the first offer, but it’s prudent to wait.
- Deal structure matters more than multipliers. Someone could offer to buy your practice at 25x its value — but if that deal isn’t structured favorably, you won’t realize a cash payout. Dentists must understand how private equity transactions work.
- Investments are inherently risky. Just like buying a publicly traded stock, holding equity in a dental practice comes with some financial risk. Kevin urges dentists to know a DSO’s leadership team and understand their strategy before agreeing to sell to them.
- Don’t negotiate on your own. DSOs backed by private equity will naturally prioritize their own interests. Kevin advises dentists preparing to sell their practices to be patient, do their research, and partner with an advocate who can help them structure a deal that leads to financial independence.
⚡ Prosperous Insights ⚡
[02:38] Who’s buying?: The marketplace has changed in the past 20 years. Kevin explains the differences between selling a practice to a dentist and selling it to a DSO.
[04:42] Think like Wall Street: DSOs set valuations based on EBITDA. Kevin and Shane break down the significance of “earnings before interest, taxes, depreciation and amortization.”
[07:37] X-men: Corporate dentistry often talks about multiples — offering 5x your EBITDA, for example — but Kevin cautions against overemphasizing the multiple and forgetting about structure.
[10:05] Structure is everything: An unfavorable deal structure can leave dentists in the lurch. Kevin introduces three common tools for structure and explains how private equity works, noting that each state has different regulations for DSOs.
[17:40] Good debt vs. bad debt: Private equity groups want to invest in a diverse portfolio of businesses while accessing their cash quickly. What’s advantageous to the private equity buyer may not be in the best interest of the dentist selling their practice.
[20:36] Cash, JV equity, and holdco equity: Every dentist looking to sell must know these three terms. Cash is the money that hits your checking account once the practice is sold, but what are the types of equity? Kevin explains how they work and the risks involved.
[26:00] The second bite of the apple: Monetizing your rolled equity is supposed to be a second big payout, but it’s vital to know the leadership team of the DSO and their investment strategy to feel confident in your return.
[28:44] Seller beware: There are millions of dollars at stake in a rolled equity deal. Dentists should be careful who they partner with.
[30:31] Words of wisdom: Be patient, read as much as you can, and talk to a trusted advisor before making a decision to sell. Don’t go up against a private equity firm alone. Kevin invites listeners to contact TUSK Partners to learn more.
💵 Financial Wellness Tip 💵
Understanding where your cash flow is going every month is essential to creating an actionable plan for your financial goals. Use our monthly cash flow worksheet to give you clarity about where your money is going and help you create a budget.
Disclaimer: Prosperous Doc podcast by Spaugh Dameron Tenny highlights real-life stories from doctors and dentists to encourage and inspire listeners through discussions of professional successes and failures in addition to personal stories and financial wellness advice. Spaugh Dameron Tenny is a comprehensive financial planning firm serving doctors and dentists in Charlotte, NC. To find out more about Spaugh Dameron Tenny, visit our website at www.sdtplanning.com. You can also connect with our host, Shane Tenny, CFP at shane@whitecoatwell.com or on Twitter.
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