Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Dental Practice Sold at 11x EBITDA by Redoing Its Payer Mix
Transcript
- Lucas: Luna, I want to walk through a sale that closed just this past March. It's a single-location dental practice in a Chicago suburb, and it sold for 11 times EBITDA. Luna: 11x for a dental practice? That's well above the median. I've seen surveys that put the typical multiple around 8 to 9 times for a solid independent practice. Lucas: Right. The national median for a solo general dentistry practice is closer to 8.5 times trailing EBITDA. This one got 11. And the reason isn't that they had some fancy technology or a massive patient list. It's that they fixed their payer mix. Luna: Okay, that's the angle. What was broken about their payer mix? Lucas: The practice — it's called Lakeside Dental, I'm not using the real name — had been around for 27 years. The owner was 59, ready to retire in about 18 months. When he first talked to a broker, the broker looked at the books and said, 'You're at about 40 percent Medicaid and 25 percent uninsured discount plans. That's a red flag for any DSO buyer.' Luna: DSO being a Dental Service Organization — the corporate consolidators that buy up practices. They want predictable, commercial insurance reimbursement. Lucas: Exactly. A DSO buyer looks at a practice and says, 'Can I put a new dentist in this chair and get the same revenue?' If 40 percent of your revenue comes from Medicaid, which reimburses at maybe 50 to 60 cents on the dollar compared to a PPO plan, the buyer has to discount their offer because they're inheriting that low-margin mix. Luna: So what did the seller do? Did he just fire all the Medicaid patients? Lucas: No, he couldn't do that ethically or practically. But over 12 months, he and his office manager systematically renegotiated with the three largest commercial insurers in the area. They were on an old fee schedule that was about 15 percent below the market rate for that ZIP code. They got the fees up to the 80th percentile of what other local dentists were charging. Luna: That's the kind of thing a lot of dentists don't think to do. They just accept whatever the insurance company sends. Lucas: Exactly. It's a pain to renegotiate. You have to submit fee schedules, show data, call the rep multiple times. But the owner spent maybe 20 hours over three months on that alone. The result: average reimbursement per procedure went up about 12 percent across the board. Luna: But that doesn't change the payer mix itself. They still had a lot of Medicaid patients walking in the door. Lucas: Right. So step two: they introduced an in-house membership plan. It was essentially a discount plan for uninsured patients — $39 a month for cleanings, exams, 15 percent off other procedures. That moved about half of the 'uninsured discount' patients into a recurring revenue stream. The membership plan added about $42,000 a year in predictable income. Luna: And the Medicaid percentage? Did that shrink on its own? Lucas: It did, partly because they stopped accepting new Medicaid patients about six months before the sale. They didn't drop existing ones, but the natural attrition brought Medicaid from 40 percent down to 28 percent of revenue. Meanwhile, the commercial PPO share went from 35 percent to 52 percent. Luna: So the revenue per visit went up, the predictability went up, and the buyer could see a cleaner path to future earnings. That's worth a higher multiple. Lucas: Exactly. The broker ran a pro forma showing that a new owner — maybe a younger dentist hired by the DSO — could maintain that payer mix without much effort. The DSO that bought it valued the practice at 11 times trailing EBITDA of $420,000, so the purchase price was about $4.6 million. Luna: What was the initial broker estimate before they fixed the payer mix? Lucas: The first ballpark was around 8.5 times, which would have been about $3.3 million. So the seller gained roughly $1.3 million by spending 12 months on payer mix improvements that cost almost nothing out of pocket — maybe a few hundred dollars in membership plan marketing. Luna: That's a huge return on time. And it's replicable for any practice that's been coasting on the same insurance contracts for years. Lucas: Let's talk about the documentation piece, because that's the other thing that got the multiple up. The seller and his office manager created a 40-page operations manual covering every clinical and administrative workflow — from how to handle a new patient phone call to the exact steps for a crown prep. They filmed short videos of the hygienists doing their setup. Luna: That's the kind of thing that makes a DSO buyer comfortable. They're not buying a person; they're buying a system that can be handed to a new dentist. Lucas: Exactly. The buyer didn't have to worry about the owner retiring and taking the knowledge with him. The manual was a due diligence item that actually got flagged as a strength. The buyer's VP of operations told the broker, 'This is the cleanest handoff we've seen in a year.' Luna: So the multiple lift came from three things: higher reimbursement rates, a better payer mix, and a documented playbook. None of which required a big capital investment. Lucas: Right. And I think that's the lesson for any small business owner listening — it doesn't have to be a tech company with recurring software revenue to get a premium multiple. You just have to show the buyer that the revenue is defensible and transferable. Luna: What about the timeline? How long does this kind of prep take? Lucas: The seller started about 14 months before he wanted to list. He spent the first three months on the insurance renegotiation. Then months four through eight, he implemented the membership plan and started documenting workflows. The last three months, he had the broker run the process. The actual sale — from listing to close — took about 10 weeks. Luna: Ten weeks is fast for a healthcare practice. Usually you hear 4 to 6 months. Lucas: It was fast because the buyer had confidence. The financials were clean, the payer mix was de-risked, and the manual meant no key-person dependency. The DSO did a 30-day exclusive due diligence and then moved to close. Luna: I want to ask about one risk. If you renegotiate with insurers and raise fees, do you risk losing patients who are price-sensitive? Lucas: It's a real concern. In this case, the practice lost about 8 percent of its commercial patients during the renegotiation, but the per-visit revenue went up enough that overall revenue actually grew 4 percent year-over-year during the prep phase. And the patients who left were the ones who were only coming for the cheapest possible cleaning — they weren't the high-value crown and implant patients. Luna: So the seller effectively traded volume for margin. And the buyer valued that margin more than the volume. Lucas: Precisely. The buyer's model assumes they can maintain the patient count at the higher fee level. And because the documentation was solid, they felt confident a new dentist could walk in and continue the same standard of care. Luna: You know, this episode is exactly the kind of concrete, practical story that listeners tell us they get the most value from. And it's why we keep the show ad-free — we want to share these strategies without any sponsor pressure. Lucas: Yeah, we've heard from a lot of you that these case studies have helped you think about your own business differently. If that's the case, and you want to support the show staying independent and ad-free, we do have a buy me a coffee page. It's buy me a coffee dot com slash fexingo. Even a couple of dollars a month genuinely helps cover the hosting and the research time. Luna: And it keeps episodes like this one coming without any commercial breaks. No pressure, just if you've gotten something out of it. Lucas: Alright, back to the dental practice. One more thing that surprised me: the seller financed a small piece of the deal. About 10 percent of the purchase price was a seller note at 6 percent interest over five years. Luna: That's pretty common in Main Street M&A. The buyer wants the seller to have skin in the game for a smooth transition. Lucas: Right. And in this case, the seller was willing to do it because he had confidence the practice would maintain its cash flow. He stayed on as a part-time dentist for three months after close to introduce the new lead dentist to patients. Luna: So he got a premium price, fast close, and a relatively small note. That's a good outcome. Lucas: It is. And I think the key insight is that the seller didn't try to grow revenue by 30 percent or launch a new service line. He just made the existing revenue more valuable to a specific type of buyer. That's a strategy any business owner can apply. Luna: What's the one takeaway you'd want a listener to remember? Lucas: If you're thinking of selling in the next 18 to 24 months, look at your largest revenue concentration — whether it's one customer, one payer, or one product. Ask yourself: would a buyer see this as a risk or a strength? If it's a risk, start de-risking now. It doesn't take a lot of money, just focused effort. Luna: And a willingness to renegotiate contracts that might have been gathering dust for years. Lucas: Exactly. On that note, that's all for today. Next episode we'll look at a case where a landscaping company got a 10x multiple by building a recurring maintenance book — a different kind of de-risking. See you then.