Selecting the right private equity partner for your dental practice is like getting married
Many decisions in life call for careful planning and serious consideration. Marriage, and finding a private equity partner are among these serious decisions.
For a dental practice owner, partnering with a private equity firm can be compared to getting married. While there’s no clear consensus regarding how long people should date before tying the knot, the experts say – however long it takes to get to know someone thoroughly, to see someone’s best and worst sides, and to make sure future goals are in sync. This same advice applies to selecting the right private equity partner. With the dental market being a $125 billion industry, this provides a broad spectrum of dental companies who could be looking for a private equity partner – for better or for worse.
The due diligence process is sort of like dating – it allows time for both parties to get to know each other. It also provides time for a private equity firm to study certain financial, customer, product, and other data about a dental practice. But above all, the due diligence period is about making sure the partnership will work. No matter the reason you’re selling – retirement, diversification, or general liquidity – selecting the right partner can offer continued value creation for life.
So, what characteristics should a business owner look for when evaluating a potential private equity partner? Here are five areas that should be assessed during the “courting” process.
Open communication – Businesses should feel comfortable sharing thoughts and opinions about their company with a potential private equity buyer. Especially in the “getting to know one another” stage, it is vital to the health of the partnership to feel understood and appreciated. The basis for good communicationis trust and mutuality – and with trust comes the ability to speak honestly without feeling judged. If either party feels compelled to hide something because of fear of the other’s reaction, then this is not the right partnership. However, if a potential private equity partner can share information about the firm, people, habits, style, investors, successes, and challenges, then this may be the right partner.
Shared goals – We know that cash flow growth is a primary driver of value creation. While there are many ways to boost cash flowand profitability – working capital optimization, capacity utilization, and operational improvements to name a few – top line expansion either through organic growth or add-on acquisitions can drastically enhance investment returns. This is why private equity firms create a comprehensive financial forecast, which can come directly from management team input. Huron Capital Partners models the specific impact that many operating and sales initiatives will have on earnings, investment returns, and risk profiles. This financial model is used as the foundation for the investment thesis and growth strategy. Being in agreement about this strategy is important if you’re planning to reinvest or “roll” a portion of your ownership from the sale of the company and share in the future upside. Whether you choose to reinvest or not, establishing a shared vision for the company is crucial to moving a transaction forward.
Common values – Mutual respect, loyalty, and integrity – the extent to which a private equity partner embraces these core values drives team dynamics and, ultimately, cultural fit. One inappropriate interaction or personality can negatively impact the deal or kill it outright. If any of the firm’s representatives are missing one of these three values, communication stalls, distrust seeps in, and the relationship will deteriorate. Consistency and predictability are as valuable to personality as they are to business earnings.
The company you keep – It’s true; the group you surround yourself with says a lot about your values. So get to know a private equity firm’s team and network and decide if that’s the type of company you want to keep. Meet the operating partners, senior advisors, and portfolio company CEOs. Meet as many of the firm’s colleagues as possible during the due diligence process, and do it without the deal team in the room. A private equity firm’s “extended family” is also important when it comes to appointing a Board of Directors, as a firm will typically rely heavily on its network to fill outside director positions. Gravitate to a firm that involves an industry expert or operating executive during due diligence. Business owners tend to respond favorably to having a business owner peer involved early in the process.
For better or worse – As a business owner, you understand that not everything goes as planned. The loss of a major customer, a product recall, supply interruption, inventory issues, a facility fire – these unforeseen incidents can have a profound impact on the revenue and earnings of a business. It is important to understand how a private equity firm deals with these types of situations. Connect with the management teams of portfolio companies that have been faced with challenging situations and ask how the private equity investor reacted and how helpful they were in resolving the situation.
Does the dental industry offer good value to a private equity firm? The short answer is yes, based on the positive dynamics in the industry. According to the Center for Medicare and Medicaid Services (CMS) the dental industry is expected to continue growing as a result of an aging patient population, expanding insurance coverage, and improvements in technology.
At the same time, an American Dental Trade Association report shows that dental practice owners are retiring at a greater rate than the number of new graduates entering the field. Likewise, the number of aging dentist-owners is increasing, causing more owners to carefully consider their exit plans. Iincreased demand for services (and products serving the market) and positive demographics offer the growth potential that drive valuations up.
So, do your homework. While a potential private equity buyer is performing due diligence on the company and management team, dental practice owners should be doing due diligence on the buyer. What you learn during this process will very likely determine whom you choose to take to the altar. Sure, valuation and financial terms will always be important considerations, but you cannot ignore the one piece of advice relevant to both marriage and due diligence – life is short, choose wisely.
Heather M. Madland is vice president of business development at Huron Capital Partners. She is responsible for business development and investment sourcing activities. Heather has 15 years originating, structuring, and executing debt and equity transactions in the middle market. Prior to joining Huron, she was responsible for all West Coast new business development for SPP Capital Partners.