How to Maximize the Value of Your Business Upon Exit

Have you ever heard someone say: “I want a 10X multiple for the sale of my business”?

Please don’t do that.

Maybe you’ve had a bad week or a rough month and you’ve thought to yourself: “I’m worn out and about ready to just sell the entire thing!”

Don’t do that either.

Or possibly one of your colleagues mentioned: “I spoke to ABC broker from XYZ company and they said, ‘the market is white hot; valuations are at an all-time high; and now’s the time to sell….’”

Of course they did—they’re a broker. They get paid on the closing of a transaction. What did you expect them to say?

It’s alarming when we see people focused on the completely wrong aspects of the sale process. And it’s incredibly concerning when we hear people being given guidance around “timing” that arguably isn’t in their best interest.

“Everyone else is doing it” hopefully wasn’t the reason you took the risk to build a group practice in the first place, and it shouldn’t be the compelling reason to sell it right now.

Two Important Points to Understand

The two most important points to understand long before you start any exit process are:

1. Deal structure is more important than total sale price.
2. Deal valuation is a function of cash flow and risk.

There’s an old adage in the world of M&A that goes as follows (from the context of the Buyer): “I’ll let you name the price, but I get to determine the structure.”

So, if you want a 10X multiple for your $1,000,000 EBITDA business, then I’ll agree to that. How would you feel about structuring the transaction as 10 equal annual earn-outs of $1,000,000 based around performance metrics? You got your 10X, but surely no one would ever want—much less agree to—a transaction structure such as that. Granted, it’s an extreme example, but hopefully you get the point on what your priority should be.

Working with an advisor before you go to market to thoroughly understand your desires around structuring the deal will impact the multiple directly. Get clear on that ahead of time.

The second critical point here is basically this: how strong and consistent are the cash flows in your business and what are the risks to them continuing into the future? Cash flow can be impacted negatively by a myriad of risk factors, such as:

• Provider risk in terms of percentage of total collections
• Referral concentration risks (in a specialty group)
• Payer mix concentration by government payer, limited insurance payers, or fee-for-service
• Capacity constraints of the facilities
• “Exotic Procedures” that are non-standard or technique sensitive.

Every business has some element of risk to it. If yours does, then you need to be objective about what the risk(s) actually are, and you need to be able to show how you mitigate against those risks to create confidence in the mind of the buyer.

“How Long Will It Take?”

People reach a point when they’re ready to go to market, that then they want it to be done. This is dangerous because impatient people make mistakes. You’ll go through an initial phase where your advisor will market your business to prospective buyers and work through a process to get to a Letter of Intent (LOI). The LOI has some big dollars tied to it and you just want the money to be in your bank account…by the end of the day.

The Marketing phase typically takes 2 to 4 months, but the Due Diligence and Closing phases could take anywhere from 3 to 8 months—and there’s no guarantee of a successful outcome. Plan on a minimum of 5 months and something probably closer to a year. Keeping a level head with your emotions in check is vitally important. Everyone is hopefully working toward the same outcome, so patience comes at a premium.

Two key things to keep in mind when the process is seemingly taking forever: don’t start “spending the money in your mind” before the deal is done and do not take your foot off the gas in your business.

Check out our recent podcast episode on this topic here.

Starting the Process Before You Start the Process

Is your business perfect? Ours isn’t either. They don’t exist.

That being said, it’s important to work with an advisor who can give you insights into where your business is solid and where there might be areas of potential risks to shore up.

Your business is a living, breathing, cash flowing organism…sort of. It’s made up of people and patients. You may own 100% of it, but that doesn’t mean that your desires are outright going to get it across the finish line. There are a multitude of things that can derail the best laid plans.

Creating a smooth process that results in maximum value involves two aspects prior to going to market:

• Cleaning up the business.
• Potentially improving the business.

Deal Killers

Sure, every business has some element of “clean up” involved, but a few of them can actually result in a deal falling apart late in the closing phase—after you’ve spent a lot of time and money. Work with an advisor to identify these elements ahead of time.

Here are several to research:

1. Associates who are 1099 when they should be W-2 employees.
2. Key Providers who are not owners but may need a “retention bonus.”
3. Leases that are not assignable.
4. Current debt levels plus estimated tax rates compared against potential cash proceeds.
5. “Poison pills” in the partnership Operating Agreement (example: sale requiring unanimous approval, thereby creating a hold-out by a minority partner).

You do not want to deal with any of this a few weeks before closing. Your advisor should help you identify aspects such as these and help you deal with them before you start the process. It could add a few months to your timeline.

Defining Your “Net Walk-Away” Number

If your business generates more than $1,000,000 in EBITDA, the transaction will most certainly have some allocation between cash and an equity roll. An equity roll can be incredibly valuable, but not for a few years, so it’s important to understand what you want your “cash in the bank number” to be. Work with your advisor and your CPA to understand a basic framework for the transaction that would indicate: EBITDA, Multiple, Valuation, Cash, Equity, Taxes, Debt payoff, Advisory fees, etc.

If the “cash in the bank number” doesn’t make it worth your while, then you may need to take a second look at your business and determine where there is low hanging fruit for margin improvement (revenue generation or expense reduction). Have your advisor re-rack your walk-away number to determine the amount of improvement you need to create, then get to work. This could realistically add anywhere from 6 months to 2 years onto your timeline.

That’s the lead up and the sale process, but what about the post-sale process?

How Important Are You?

We’re all important…I get it. The point here is that you play some role in your current business, but how “mission critical” are you to the growth in cash flows of the business? If you’re truly important, the Buyer will want you to stay on for a few years to maintain that continuity. For this reason, it’s important to think through with your advisor what you want your role to be “post-sale” before you start the process.

If you want to sell and get out immediately, that shifts the risk onto the Buyer and will result in a lower multiple and transaction amount.

On the other hand, if you would stay on for a few years, that will help mitigate their risk, which would probably result in a slightly higher multiple and larger transaction value. Working post-sale probably adds 2 to 3 years onto the back end of the timeline.

Insider Trading…That’s Legal

Depending on your age, risk tolerance, income needs, and probably 100 other factors, you might elect to “roll” as much of the transaction into equity as the Buyer would allow (usually up to ~40%). Most Buyers share conservative projections on the internal rates of return on equity rolls in the 2-3X range within 3 to 5 years of a holding period.

I haven’t had many public company stocks or other investments triple in value over 5 years, so if you believe in the Buyer (and yourself), this could be a tremendous investment opportunity. Take the time with your advisor to model all of this out because it can absolutely create the difference in which Buyer you go with. If you roll a lot, then you should plan on a longer hold period before the parent company “recaps” and distributes out the return on your investment. This “second bite of the apple” could add anywhere from 1 to 5 years or more onto your timeline.

Concluding Thoughts

So, how long will it take to sell your business? The short answer that hides the truth is 5 to 12 months.

The real intent behind the question is: “How long will it take to sell for maximum value so I can be free and clear to be sitting on a beach or playing golf?” And the honest answer to that is likely somewhere between 2 and 8 years:

• 6 months to 2 years to clean up and improve the business to increase the valuation
• 1 year to actually complete the sale process and transaction
• 1 to 5 years on post-sale commitment and the release of any equity roll.

So, if your desire is to be “free and clear” in another 5 years, then you should probably start the discussion with your M&A Advisor…NOW. For more information on the sell-side process and what you can expect when you work with Polaris, click here to learn more.

About the Author

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 fourth-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-funded and debt-funded” group dental practices. Visit www.PolarisHealthcarePartners.com for more information.