Three Innovative Growth Strategies for Emerging Group Practices: Equity Rolls, Mergers, and Affiliations

Most entrepreneurial dentists who want to build a group practice look to expand their footprint through acquisitions. And almost all of them view acquisitions in only one way: acquiring 100% of the target practice and buying it outright.

This approach is short-sighted.

It requires the most risk due to the outright reliance on debt leverage.

And it only avails the entrepreneur of a very limited segment of the overall target market opportunity.

Do you only have one bur in your block? Of course not. Different burs are used for different procedures that produce different outcomes. If you’re going to build a successful group practice, you must have different tools in your toolbox when it comes to executing growth strategy because these different tools produce different results for different segments of the market.

Every member of every Business Development Team in every enterprise-level DSO knows this. It’s time you started playing the acquisition game at a higher level.

Outright Acquisitions

The positives are that you’re going to own the business outright after the sale and 100% of the equity therein resides with you. The negatives are that you’re most likely going to have to borrow 100% of the funds to buy the business and you’re most likely going to have to replace the seller dentist relatively soon – both of which mean that you’re holding 100% of the risk.

This strategy is very confining because you’re essentially limiting yourself to the pool of dentists who are ready to sell their life’s work outright.

Equity Roll

There are a lot of people who have built successful practices who want to “de-risk” their position but aren’t ready to outright retire. Furthermore, they’d like to somehow participate in the economic upside of everything that’s happening in our industry, but they’re not willing to take on the debt or the risk to do it. Enterprise-level DSOs solve this through buying 60%-80% of the seller’s business, but allowing them to “roll” the remaining equity into the parent company. When and if the parent company recaps, the original seller realizes some added value increase off of what they rolled in the first sale.

There are positives to this in that you don’t have to take on debt in the full amount of the value of the practice (only the 60%-80% you’re purchasing). Additionally, the typical sellers in this context want to stay on and continue working for a while, so you’re pretty secure in terms of a committed and motivated “associate” in that practice. The negatives are (potentially) that you have a minority partner at some level (DSO, sub-DSO, or Practice) who has voting and distribution rights (when declared), so you have to govern the business appropriately.

Things to consider in this context are: legal structures, formalized DSO with an MSA, valuation multiples and methodologies (for your business as well as the seller’s), ongoing cap table management, and more.

The real key to consider in terms of this solution is that it opens up a segment of the market that has not publicly declared its intentions the way it would by listing the practice for sale with a broker.

Affiliations Through Profits Interest Units

Another tool in your toolbox should be an Affiliation structure. The word “Affiliation” (or “Affiliate”) is used by different groups in different ways – mostly to soften the ego blow to someone who sold his or her business to an enterprise group. “Partner” sounds better than “Seller” just like “Affiliate” sounds better than “Acquisition.”

We think about “Affiliation” completely differently.

If you can build a truly effective DSO that helps practices grow revenues (marketing, associates, days and hours, expanded treatment, etc.) while reducing costs (employee benefits, legal and financial reporting, clinical and office supplies, lab, etc.) and increasing overall efficiencies (collections and cash flow, patient retention, minimizing schedule openings, etc.), then you have legitimate business capabilities that would benefit almost any practice – not just those under your ownership.

How do you think those capabilities might positively impact someone who has built a successful practice, but has taken it as far as they can? And what if that owner still has 10-20 years to practice ahead of them? They’re basically “stuck” at their level, but don’t want to take on any risks to make changes – and they certainly don’t want to add another day or 10 more hours to their schedule every week. They’ve “stalled” in terms of their personal income, their practice-valuation, and probably their level of professional fulfillment. Could you help them unlock something greater?

If you did, what would it be worth to them? And what would it be worth to you? If you helped them unlock another $500,000 or even $1,000,000 worth of valuation in their business, would you and they be willing to split it evenly? “Profits Interest Units” is a “shared equity” structure that allows for future equity (valuation) that is created above a threshold to be split between parties. The valuation up to the threshold accrues to the founder who took the risk and created it without your help; however, the upside beyond the threshold is shared because it is created through mutual collaboration.

For example, if a practice values today at $1,000,000 and you help the founder grow revenue, reduce costs, and improve efficiencies, all of which help increase the value of the practice to $2,000,000, then possibly you split that increase 50%-50%. Upon the sale, the founder pockets the original $1,000,000 plus half of the second $1,000,000 for a total of $1,500,000 and you pocket the remaining $500,000.

And you took on no additional debt to do it.

Our concept of “Affiliations through Profits Interest Units” is an innovative, no-debt growth strategy that is ideally suited for the mid- to late-career dentist target who has taken their business as far as they can go, but they still want to create greater outcomes.

There are a lot more points to consider in terms of candidates, legal structures, legal agreements, valuation, and exit strategy, but hopefully you get the basic concept.



Cap Table Mergers

A third growth strategy to consider is an outright merger with another group. This could be two specialty groups coming together (like pedo and ortho), or it could be a smaller specialty group merging into a larger general dentistry group, or it could be two similar-sized groups in different geographies coming together to increase or consolidate market share. This is probably a highly unique opportunity, but we’ve seen it happen all up and down the industry over the last 12-24 months (Heartland and ADP, Smile Brands and Decision One, etc.).

If you’re going to build a successful group of some level of size, you’re most likely going to be involved in a lot of competitive acquisitions where your upside will be based mainly off of your ability to integrate and improve the newly acquired practices.

That being said, merging another successful business into yours creates massive opportunities to increase EBITDA through cost synergies and internal revenue generation through shared “best practices.” The arbitrage on EBITDA multiples can be extremely beneficial as well.

For example, if your $3,000,000 EBITDA group values at 8X, then it would be worth $24,000,000.

And if their $2,000,000 EBITDA group values at 7X, then it would be worth $14,000,000.

However, the combined $5,000,000 group might value at 10X, so it would be worth a combined $50,000,000 – not the sum of the two individual valuations of $38,000,000 (hypothetical examples only here).

So, if your normal acquisitions are ~$700,000 in revenue at a 15% EBITDA margin, then they’re generating ~$100,000 in EBITDA individually…and you’d need to acquire 20 of them to generate that same $2,000,000 that the merger would bring. How long is it going to take you to acquire and integrate 20 practices…?

There are a lot of aspects to consider in terms of merging businesses together (debt reconsolidation of both entities, shareholder buy up and sell down, leadership roles and responsibilities, etc.), but hopefully you get the concept.

Concluding Thoughts

If you’re going to build a successful group practice, you’re competing with professionally trained and professionally managed enterprise-level groups that are typically private-equity backed. They’re trained to look at different market segments quite differently. These groups typically start with the perspective of seller mindset (desired outcome) and tailor a solution to fit the opportunity.

On the other hand, if all you have is a hammer, then all you’re looking for are solutions that require a nail. Screws are pretty useful. I have an 8-year-old daughter who has taken a liking to Gorilla glue. And being from NASCAR country, I’m personally a big believer in
duct tape.

Isn’t it time to put some different tools in your toolbox?

If you’re wanting to learn more about these different strategies, I would encourage you to enroll in one of our “Mergers, Acquisitions & Affiliations” MasterClasses. You can find more information here.

About Perrin DesPortes

Perrin DesPortes is one of the Co-Founders of Polaris Healthcare Partners. He attended Washington & Lee University for undergrad and earned his MBA from the Darla Moore School of Business at the University of South Carolina. Perrin has over 25 years of experience in the business side of dentistry, having started as a 4th generation family member of Thompson Dental Company, then as a General Manager of 15 years with Patterson Dental Supply where he ran three different businesses for them. In 2017, he left Patterson and along with two others launched TUSK Partners. In 2021, he and Diwakar Sinha departed to launch Polaris. Perrin is happily married and has an 8-year-old daughter. In his spare time, he is an avid cyclist and tennis player; enjoys cooking and reading; and loves good red wine and strong coffee.  

Polaris Healthcare Partners is a Strategic Consulting and M&A Advisory firm that focuses exclusively in the group dental practice space. Their purpose is to help entrepreneurial dentists build and exit successful group dental practices. They do that by helping their clients: develop and execute their growth strategy; negotiate and obtain committed sources of growth capital (debt and/or equity); build and implement associate equity partnership structures; guide and fulfill their exit strategy through their marketed sales process.

They do not work with solo dental practices and do not work with Private Equity-backed DSOs. They’re hyper-focused in that they only work with “doctor-founded and debt-funded” group dental practices.