Gary Kadi has observed firsthand the aversion many of his colleagues have to financial matters. Words like P&L and KPI can send even the most financially savvy dentist into a panic. The truth is, dental school didn’t equip our industry with the skills to navigate the business side of our practices, making the financial aspects seem overwhelmingly intimidating.
Many dentists are drawn to Dental Support Organizations (DSOs) because they offer a way out of the business quagmire. DSOs allow business professionals with financial expertise to handle the monetary intricacies, offering dentists the relief they crave. But here’s a little secret: to reach that non-business haven, you’ll have to grapple with some significant acronyms, starting with EBITDA.
EBITDA, short for Earnings Before Interest, Taxes, Depreciation, and Amortization, represents the cash remaining before taxes and interest payments. It serves as the standard measure for assessing a business’s profitability, employed by investors and banks alike.
The Emergence of DSOs
For years, dental practice valuation primarily relied on collections. However, with the advent of DSOs, a new financial paradigm has emerged. Private equity firms, interested in acquiring dental practices, shifted their focus towards evaluating profitability through EBITDA.
Whether we like it or not, DSOs are ushering dental practices into the world of business. Fortunately, the EBITDA acronym comes bearing some remarkable financial advantages.
Before the DSO revolution, most dentists sold their practices to other dentists, typically through bank loans. Banks typically lent private dentists only 80%-90% of their practice’s value, based on collections, leaving them with less than the practice’s true worth. It was far from ideal, but that was the norm.
The EBITDA Advantage
With private equity backing, DSOs have substantial financial resources and a keen interest in a practice’s overall financial health and profitability, particularly the EBITDA margin. Calculated by dividing total revenue by EBITDA and multiplying by 100, DSOs and their private equity partners are often interested in practices with a 20% EBITDA margin or higher.
EBITDA also plays a significant role in determining the DSO’s offer. Typically, practice owners can anticipate an offer of around seven times their EBITDA. For instance, if your EBITDA is $265,000, a DSO offer could be $1.855 million, while a private buyer might offer only $900,000. The higher your EBITDA, the more attractive your offer becomes.
Boosting Your EBITDA
You might wonder how to increase your EBITDA and secure that 7x offer. The answer, while multifaceted, boils down to lowering overhead and increasing net income. Your practice may already have an untapped revenue source hidden among your existing patients.
Achieving the 7x offer often lies within the realm of DSO 3.0. By banding together with like-minded practitioners and collectively selling your practices, you not only receive a payout for your individual practice but also a second payout when the group sells as a whole.
In essence, EBITDA can be the key to building generational wealth for your family. If your EBITDA is currently low, it’s crucial to dedicate time and effort to improve your practice’s profitability today.
It’s crucial to remember that navigating the complex landscape of Dental Support Organizations (DSOs) doesn’t have to be a daunting task. NextLevel Practice, led by Gary Kadi and his expert team, stands ready to guide dentists through the intricacies of DSOs, offering invaluable insights and strategic solutions to help you make informed decisions about your practice’s financial future.
Want to learn more about EBITDA and how you can raise it? Check out Gary’s free webinar: The EBITDA Accelerator: 3 ways practice owners are boosting growth by prioritizing EBITDA over collections. Together with Dr. Pam Maragliano-Muniz, chief editor of Dental Economics, Gary explains what EBITDA is, how to raise it in your practice, and the best way to leverage it in DSO negotiations.
Have questions about how to raise your practice’s EBITDA? Schedule a free consultation today to speak to an expert NextLevel coach and learn how NextLevel Practice can assist you in harnessing the power of EBITDA and optimizing your practice’s value, ensuring that you secure the best possible outcome for your career and financial well-being.
Don’t let financial uncertainty hold you back—let NextLevel Practice be your trusted partner on the journey to success in the world of DSOs.