Direct Offers – A Brief Background
If you’re running a profitable clinic, you may have received a direct offer from a DSO / MSO, regardless of whether or not you’re considering a medical or dental practice transition. With private equity-backed DSOs and MSOs making record-high offers to profitable practice owners like yourself, the
- Direct communication,
- Affirmation of your practice leadership skills, and
- The simplicity of the offer
may seem like the easy button. (And perhaps it is in your case.)
But it’s not for everyone. Because some high-performing doctors aren’t interested in selling their practice to the first offer or even the second that comes in. They’re interested in
- Taking care of their staff and knowing which terms protect them.
- Negotiating a deal that allows them to double their enterprise value in the next five to ten years.
- Exiting on their terms.
If you are ready to cash out regardless of how much money you will leave on the table, you should consider taking the offer.
If you don’t want to take the first offer that comes along, keep reading.
In this article, we’re
- Defining the term “direct offer”
- Offering a mini dictionary – download below – of industry terms you need to know.
- Answering: Who makes direct offers?
- Giving an overview of the DSO / MSO industry.
- Outlining the pros and cons of saying yes to a direct offer without a dental practice transitions advisor.
- Proposing questions you should consider before saying yes to the offer on the table.
- Sharing a secret you may not know about referrals.
With some industry background, a list of pros and cons, and a little intel on how referrals work, you can evaluate a direct offer, even if it’s your first one.
What is a direct offer from a DSO/MSO?
A direct offer is a non-binding letter from a DSO or MSO that includes a price they are willing to pay for your practice. As private equity groups often fund DSOs and MSOs and have plenty of money to spend, the number will likely appear substantial. In addition, you may recall that doctors and dentists who retired just one generation ago did not have this opportunity.
Due to the high price tag and the history of practice transitions, you may feel stunned, full of gratitude, and depending on where you are in your practice ownership journey, ready to make a deal.
Note that this letter can also be called an offer-in-hand, though the letter doesn’t include an actual offer. The group, of course, doesn’t know enough about your practice to make an offer; how could they? They don’t have payroll, revenue reports, or any other data to do so.
That said, something tipped them off to believing that you were profitable – perhaps the services offered on your website or how many associates work with you.
Finally, the letter presumes you are not already working with a dental practice transitions broker or M&A Advisor, and the DSO or MSO will expect you to negotiate with them directly. They hope to introduce enough doubt about brokers to encourage you to move forward without representation. The choice is yours.
Curious about the terms in your offer? Download our Terms Sheet to learn more.
Who is making direct offers? An industry overview.
With plenty of cash and the potential to make incredible returns for their investors, private equity groups make direct offers to healthcare practices. And they are not waiting to find doctors who are ready to retire. Practice transitions – a term that used to define the industry – is now just one option practice owners have when considering a career shift.
(Doctors do not qualify for the financing needed to purchase the most profitable practices, so they do not make direct offers.)
Further, each specialty has unique characteristics regarding what’s attractive to corporate buyers. Here’s an overview of what buyers are looking for in the three most sought-after verticals.
ENT M&A
A small but growing number of private equity groups have targeted the ear, nose, throat, and allergy (ENT/allergy) space since 2015. For independent physicians, this group of firms has emerged as an alternative buyer to hospitals and other providers. Between 2010 and 2020, completed PE deals have grown from 34 deals closed a decade ago to a record 121 transactions conducted in 2019.
At less than 1% of ENT practices consolidated to date, there’s no shortage of dealmaking opportunities.
Plastic Surgery, Dermatology, MedSpa M&A
Over the past five years, ~200 medical aesthetics M&A deals have closed, mostly to private equity groups and mostly to roll-up plastic surgery and dermatology practices and medspas. Physician owners have been able to expand their marketing, improve their margins, and add services like telehealth appointments.
The North American region led the world with more than 39% of the growth of the global medical spa market in 2022. The total market is expected to increase by USD 63.4 billion by 2032, with a 14.7% compound annual growth rate (CAGR) from 2023 to 2032.
Dental M&A
The dental industry has been consolidating for the last ten years. Although financial forecasting is never certain, we believe there is still a lot of runway left for these clinics to be acquired.
Pros of Saying Yes to a Direct Offer
Saying yes to a direct offer has some perceived benefits.
- You don’t pay a medical/dental practice transitions broker. Some doctors are so opposed to paying a broker that they would rather say yes to a direct offer than maximize their sale price. And we don’t blame them. We believe medical and dental practice transitions brokers have a historically poor image as an industry because many do a poor job. They have a history of selling products and services to doctors instead of whip-smart providers or private equity-backed companies. Simply put, they have no idea what they’re doing. Practice owners unwilling to take a risk on selling their life’s work to an inexperienced salesperson will take a direct offer.
- It’s incredibly flattering. You have likely never sold a practice or invested in a private equity fund. Saying yes to the experts who speak the terms fluently, use impressive vocabulary, and know how it’s done makes you feel like you’re at the table with the big players. And you are.
- The transaction is seamless. You will know what reports they need and when with an expert buyer driving your deal. They will work on valuing your practice and pushing it through all of the legal milestones while you care for your patients and run the clinic that attracted them in the first place. No one on your side will suggest extra calls or submit answers twice. How could it get easier?
Cons of Saying Yes to a Direct Offer
- Your incentives are not aligned with the buyer. Given that corporate buyers are incentivized to get the best deal on a practice, it’s improbable that the offer you have in hand is the best offer you could get or even the best you could get from that specific buyer. As such, letting them drive what could be the biggest financial decision of your lifetime would be a mistake.
- There’s no one on your side of the table. Related to incentives not being aligned, PE investors acquire practices for a living. They are elite negotiators (and compensated as such). You don’t do this for a living. It’s not a fair fight. Even if you believe that the offer in hand is from a buyer that matches your philosophy as a provider, that doesn’t the buyer is on your side. You are not business partners until the deal is signed.
- Non-monetary concessions. We call it Christmas party money, but it can be a substantial sum. There are so many terms that can be negotiated for your benefit, including how long you stay on, what investment options you have access to, and of course, culture-building activities like quarterly bonuses and holiday dinners. An M&A advisor’s role is to work alongside you to clarify your vision post-sale so that your practice, staff, and career are all taken care of. Direct offers will not include benefits that will protect and sustain your staff, your career, and your practice culture.
Evaluating the Offer
If you’re a dentist or a doctor with an offer in hand, we believe asking yourself the following questions will help you better evaluate your direct offer:
- Is this a fair price? How do I know? (Note that high and fair are not always synonymous). A buyer’s primary concern is to buy your practice for a price that benefits them financially; however, the best deals are those where both parties benefit. This can be achieved when both sides are well-informed and agree to a fair price.
- What do I know about the market conditions for practices like mine?
- Do I care about selling for the highest price or am I okay with the first offer even if the buyer decreases it later? (DSOs and MSOs can and do walk back offers during underwriting with unrepresented buyers.)
- Do I know a medical or dental practice transitions advisor who can get me an offer that covers at least their broker fee and more?
Answering these questions will give you a framework for clarifying the value of the offer.
Finally, a Trade Secret –
Your friends get paid to refer you.
When a recent client found out the colleague who referred him to the DSO got paid more than $100,000, he decided to hire a broker. “There’s nothing wrong with that,” our client said. “But it made me wonder what the market might pay.”
As we mentioned before, DSOs and MSOs pay their business development team and their doctor partners high referral fees – often as much as a medical or dental practice transitions advisor or more. Of course, the referring doctor isn’t helping gather electronic medical records, writing Letters of Intent (LOIs), or negotiating compensation for you post-close. They are simply referring you in.
How are they paying for it? The same way they pay their business development team – by paying you the lowest possible price for your off-market practice. By using your colleagues and friends from medical school to appeal to you, they hope to appear like a trusted, clear solution and efficient pathway to selling.
In Summary
If you’re a profitable practice owner and have not already received a direct offer, it’s just a matter of time. As private equity groups evolve, they are making higher-than-ever direct offers to doctors for their practices. While this can seem easy and flattering, you should clarify your why and evaluate the offer before you sign an exclusivity agreement. Finally, download our Terms Sheet below to find out what you should be looking for.
