My company, Tusk Partners, represents a sizable number of growing groups that want to partner with private equity (PE) groups to grow and scale their business. Over the course of the last 20 years, I have talked with hundreds of private equity investors and love to ask them, "What do you look for or consider when you're evaluating businesses?"
Sometimes you never know what kind of answers you'll get. Below are the top 10 responses I have gathered over a couple of decades in the dental industry.
- Be realistic about whether you're growth-oriented versus value-oriented. PE is almost always focused on growth-oriented opportunities, because initial valuation matters less if it meets growth strategy return requirements. The goal is to double or triple the size of the business in four to six years.
- Have a vision for the next few years. Can the founders articulate a vision for the next three to five years? And what are the strategic moves you need to make to get there? If you say you're growth-oriented, but you can't clearly communicate your vision or how you intend to make it a reality, then you may not have many investors who are interested in your business.
- Be able to effectively operate new locations. Are you aggregating for aggregation's sake, or are you aggregating to operate and build a platform? When it comes to being growth-oriented, you must be disciplined in your approach. And after you open new locations or acquire existing ones, you must prove that you have the ability to operate those businesses effectively.
- Effectively manage debt. Many entrepreneurs take on debt to fuel growth, but be wary of using too much leverage to get a deal done. Don't let your debt load constrain your ability to operate the business. You should be able to model these scenarios quantitatively.
- Know what makes you special. Can you accurately assess the competitive landscape, and can you clearly communicate your point of differentiation? In other words, what's your "secret sauce"?
- Have a strategy for clinical providers. Your clinical providers are the key to your growth and production. Do you have a strategy to attract clinicians to join you? What is your turnover rate compared to industry norms?
- Keep on top of your operations. What is your formal operating structure for your business? Do you have monthly reporting, quarterly board meetings, etc.? Or are you running your empire as if it were still a startup?
- Make sure you're compliant. Is your house in order from a regulatory compliance standpoint? Do you have established, documented, and monitored procedures in place to handle everything from a patient complaint to a state audit for billing fraud?
- Keep your leadership. Is your leadership team consistent, or do you have turnover at the C-suite level? The PE group wants to know what kind of leadership turnover they should expect over the four- to six-year span of their investment.
- Consider your ownership structure. How fragmented is your ownership structure overall? Do you have 100 owners each owning 1% of the business, or is equity concentrated in fewer individuals? Is decision-making based on a simple majority or a unanimous vote? This has a dramatic impact on how quickly decisions can get settled on major issues, but it also has an impact on smaller, day-to-day aspects. In short, who really cares about cost-cutting initiatives if they only own an inconsequential piece of the pie?
Additional advice for those considering private equity
I'm also often asked to advise someone considering a deal with a PE group. Here are a few gems:
- Get an adviser who knows the private equity landscape. There are certainly sharks and bad actors out there among the truly great PE groups. The real challenge is spotting the difference.
- Look for a partner with an industry focus in your space. Yes, they're going to buy your business, but they're going to want you to stay on to help grow and operate it, so you want a partner who can bring some experience to the table.
- Ask the PE firm for their references. Talk with those who have gone down your path and are "on the other side" now.
- The closing process is never smooth. Be ready for an emotional roller coaster that takes twice as long as you expect. Pick a trusted adviser to guide you through that process.
- Ask what the day-to-day life with a PE partner will be like after the deal closes. What's it going to be like? What's their playbook for the first 100 days after closing? Do they operate in a very formal manner, or are there more loose constraints? And can you function under that structure?
If you are considering a sale to a PE group, talk to a mergers and acquisitions (M&A) adviser who does deals with PE groups. Lean on their experience to help prepare you and your business for the sea of conversations that you are about to have.
How you answer these questions matters! Remember, PE groups are capitalists (like you and me) trying to find an edge and an angle to maximize their returns. Yes, great partnerships can result from PE, but many have signed up for headaches and heartburn because they partnered with the wrong group. An adviser can ensure that you make the right decision for your business and you!
Kevin Cumbus is the founder and president of Tusk Partners, an M&A advisory firm focused exclusively on large and group practices that want to partner with a dental service organization or private equity group.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.