The headline offer is only the beginning: What a sale to a dental corporate really looks like

By Thomas Coates

If I had £1 for every time a dental practice owner has asked me whether they should sell to a corporate, I'd probably have retired by now. Although, knowing myself, I'd probably have become bored after about six months and ended up back in the office anyway.

It is one of the first questions almost every prospective seller asks. Should I sell to a corporate? Are they paying more? Are they better than selling to an individual? Is there a catch? The honest answer is that those are not quite the right questions.

The better question is this: what does selling to a dental corporate actually involve? Once you understand that, you are in a much better position to decide whether it is the right route for you.

Before I go any further, this is not an article criticising dental corporates. Far from it. Some are exceptionally well run businesses and we have acted on many transactions where our clients have had an outstanding experience. They have enjoyed becoming part of a larger organisation, welcomed the additional support and wondered why they had not sold years earlier. Equally, we have acted for sellers who have counted down every remaining month of their tie in with all the enthusiasm of somebody serving a custodial sentence. Neither experience is unusual. Like most things in business, there are very few absolutes.

When I refer to a "dental corporate", I simply mean an organisation that owns multiple dental practices. That might be a regional group with half a dozen practices or a national operator with hundreds of sites across the country. Whilst they differ enormously in size, culture and approach, the broad commercial principles behind many corporate acquisitions are remarkably similar. Those principles are what this article is really about.

The headline number is exactly that

One of the first things I say to clients is not to become too attached to the headline offer. That is not because the number is misleading. Quite often it is entirely genuine. The difficulty is that it is very rarely the whole story.

Most corporate acquisitions involve some form of deferred consideration. It may be described as deferred consideration, a retention payment or another piece of commercial terminology designed to sound slightly less alarming. Whatever label is attached to it, the principle is broadly the same. Part of your purchase price is paid on completion and part is paid over a period of years after the sale.

Those future payments are usually linked to the continuing performance of the practice. More often than not, the measurement is turnover rather than profitability, although every deal is different. We regularly see deferred periods lasting two, three, four and even five years. On occasions, we have seen even longer.

The important point is that you have not simply sold your practice and walked away with a cheque. You have sold your practice, but a proportion of your purchase price now depends upon what happens afterwards. That is not an accident. It is the commercial model.

The corporate has not agreed to pay you a substantial sum because it believes it is getting a bargain. It is paying that amount because it believes the practice will continue to perform well and, ideally, perform even better under its ownership. The deferred consideration is simply one way of ensuring that you continue to share some of that commercial risk.

There is nothing inherently wrong with that. Indeed, many sellers are perfectly comfortable with the arrangement. The key is understanding that you still have skin in the game, even though you no longer own the business.

The devil really is in the detail

This is where the legal drafting starts to matter. I appreciate solicitors have an unfortunate tendency to make everything sound more complicated than it needs to be, but this is one area where the detail genuinely makes a difference.

Suppose turnover falls during the first year after completion because a clinician takes maternity leave or a surgery unexpectedly closes for refurbishment. Is that reduction permanent, or can it be recovered during subsequent years? If you exceed the target in Year Two, can that overperformance be carried forward if Year Three proves more difficult? What happens if circumstances outside your control affect performance? Covid had a massive effect on the ability of sellers to achieve their targets and surprise surprise, you’ll now rarely see an earn out without a nod to future pandemics and resulting drops in turnover, being at the risk of the seller rather than the buyer.

A well negotiated agreement should seek, wherever possible, to allow shortfalls in one year to be recovered later. We have occasionally negotiated provisions allowing overperformance to be carried forward into future years. I would love to tell you that happens regularly. It does not. You are doing exceptionally well if you achieve it.

The point is that deferred consideration provisions are not simply accounting exercises. They can have a very significant financial impact over the lifetime of the arrangement.

You have sold the business, but not all of the risk

One of the biggest misconceptions amongst sellers is that completion marks the end of the transaction.  Legally, that is true. Commercially, it often is not.

Where deferred consideration forms part of the purchase price, your financial interests remain closely aligned with the future performance of a business that you no longer own. That is precisely what the buyer intended. Part of the commercial risk has effectively been transferred back to you. Again, that is not criticism. It is simply the commercial reality.

What sometimes catches sellers by surprise is how different it feels in practice. You remain heavily invested in the success of the business, but many of the decisions affecting that success are no longer yours to make. The lack of nimbleness when it comes to recruitment is a concern we do hear in the post completion period. Where key staff members have left because they don’t like the new regime and the seller feels that the new owners have not been as proactive as they could be in replacing those key people. That is something a seller is unable to fully control.

Five years can feel like a long time

On paper, agreeing to remain with the business for several years rarely causes much concern. Two years sounds manageable. Three years sounds sensible. Even five years can seem perfectly acceptable when viewed across a boardroom table. Living it is something rather different.

Some of our clients have genuinely loved life within a corporate environment. Administrative burdens disappear, support functions become available and they are able to concentrate almost exclusively on treating patients. For many clinicians, that is exactly what they hoped for. Others discover that they miss ownership far more than they expected.

Interestingly, the frustrations are rarely the big strategic decisions. More often, they are the small day to day changes that remind you the business is no longer yours. One seller told me that nobody had warned him he would have to change coffee supplier. Another was exasperated that he could no longer use the stock provider he had worked with for years. One lamented the disappearance of Radio 4 from the surgery. Slightly tongue in cheek perhaps, but anyone who has spent decades building a practice will understand that those little things often matter more than they appear.

The common complaint, however, is this.

"I've sold the practice, but everyone still comes to me when the boiler breaks."

That, more than anything else, probably sums up the reality of many post completion relationships.

Good leaver, bad leaver... Solicitors do love their labels

No discussion about selling to a corporate would be complete without mentioning what lawyers affectionately refer to as Good Leaver and Bad Leaver provisions. Lawyers have an uncanny ability to invent dramatic sounding names for concepts that are often relatively straightforward, but these clauses are genuinely important and deserve careful consideration.

In simple terms, they deal with what happens if you are unable to complete your agreed tie in. That may be because of serious illness, long term incapacity or, in the worst case, death. Equally, they deal with situations where a seller simply decides they have had enough and wants to leave early.

Life has a frustrating habit of refusing to follow even the most carefully drafted legal agreements. Illness happens. Families change. Priorities change. Circumstances that seemed unimaginable on completion day can suddenly become very real three years later. A well drafted agreement should recognise that and distinguish between somebody who genuinely cannot continue and somebody who simply chooses not to honour the commitment they signed up to. This is one of those areas where spending a little more time negotiating at the outset can save an enormous amount of heartache later.

Don't assume walking away is an option

One misconception I still encounter surprisingly regularly is the belief that if a seller leaves before the end of the agreed tie in, the worst that can happen is they forfeit any remaining deferred consideration.

“Between you and I Tom, I have no intention of staying for five years and if I forfeit some of the deferred to leave, then so be it…”

Unfortunately, that is not always the case. One particularly well known corporate has, for as long as I can remember, included what has become an almost infamous clause within its acquisition documentation. It’s a fabulously sneaky bit of drafting, as the effect of that clause is that in certain circumstances, it does not simply allow the buyer to withhold future deferred payments. It also gives the buyer the ability to pursue recovery of money that was paid on completion. So ultimately everything they paid you is “fair game” in subsequent legal proceedings if you walk away from your tie-in.

If you have absolutely no intention of remaining with the business for the duration of your agreed tie in, do not sign the agreement hoping you will simply deal with that problem later. It can become a remarkably expensive gamble.

Sometimes reality doesn't follow the spreadsheet

One transaction has always stayed with me because it perfectly illustrates why good drafting is about anticipating real life rather than simply filling pages with legal jargon. Shortly after completion, a corporate decided that one of the practice's strongest associates would be better deployed elsewhere within its own group. From the corporate's perspective, that may have been an entirely sensible commercial decision. It strengthened another practice within the portfolio and probably made perfect operational sense.

Unfortunately, our client happened to have an earn out that depended upon maintaining turnover at the very practice that had just lost one of its highest grossing clinicians. Excellent news for one practice. Rather less excellent for the seller.

The episode demonstrates an important point. If your future payments depend upon business performance, your agreement needs to anticipate situations that may be entirely outside your control. Good legal drafting is not about making the agreement longer. It is about making it work when real life gets in the way. Having said that, there will be certain situations that it is simply impossible to predict or to legislate for in the drafting (COVID!).

Don't forget about the property

Property is another issue that is often overlooked when owners first start thinking about a corporate sale.

If an outright sale of the freehold forms part of your retirement plans, a corporate buyer may not necessarily be the ideal fit. As a broad rule, corporates are in the business of operating dental practices rather than accumulating property portfolios. In many cases they will want to lease the premises from you rather than purchase the freehold itself.

That is by no means a bad outcome. Many of our clients have retained the freehold and continue to enjoy a healthy rental income for many years after selling the practice. For others, however, selling both the practice and the property forms an important part of their overall exit strategy.

Neither approach is right or wrong. The important thing is understanding which outcome you actually want before deciding who the right buyer is.

So, should you sell to a corporate?

After everything I have said, you might expect me to conclude that selling to a corporate is something to avoid. Quite the opposite.

Some of the happiest clients we have ever acted for have sold to corporates. They have received excellent prices, enjoyed working within larger organisations and successfully collected every penny of their deferred consideration. Many would happily make exactly the same decision again tomorrow.

Equally, we have acted for sellers who have found the experience frustrating, restrictive and altogether rather different from what they had imagined when they signed the Heads of Terms. The difference was rarely the corporate itself.

More often, it was whether the seller properly understood the deal they were entering into and whether that deal genuinely reflected their own objectives. The reality is that corporate acquisitions are simply structured differently. They frequently involve deferred consideration, longer contractual commitments and a greater degree of ongoing commercial risk than many sales to individual buyers. None of those things are inherently good or bad. They are simply features of a particular type of transaction.

My advice, therefore, is always the same. Don't ask whether a corporate buyer is better than an individual buyer. Ask whether the structure of the deal in front of you genuinely delivers the outcome you want, because the best transaction is rarely the one with the biggest headline offer. It is the one that still feels like the right decision five years after completion.