M&A Update: PE Deals Down 37%, But Not Dead

M&A Update: PE Deals Down 37%, But Not Dead

private equity dried up in 2024. Everyone knows it. Dental DSOs had a hard year: Aspen Dental cut 800 jobs. Pacific Dental Services spun out of Berkshire. Heartland Dental went quiet. The exuberance of 2020-2022 is gone.

But here's what the headlines missed: PE is consolidating, not exiting. The game is changing, not over.

OPERATOR MATH

Let's model what a 2025 practice sale looks like versus a 2021 sale at peak PE valuations.

Your practice profile:

Annual revenue: $2.5M

EBITDA: $750,000 (30% margin)

Location: Suburban market, stable patient base, 2 doctors, 3 hygienists, strong referral network.

Scenario 1: Selling in 2021 (peak PE boom).

Acquisition multiple: 6.5x EBITDA (aggressive PE bidding war).

Enterprise value: $750,000 × 6.5 = $4,875,000.

Cash at close: 70% ($3,412,500).

Earn-out (3-year, contingent on hitting EBITDA targets): 30% ($1,462,500).

Seller continues as employed dentist for 3 years at $250,000/year salary.

Total potential proceeds: $4,875,000 + ($250,000 × 3 years employment) = $5,625,000 over 3 years (if earn-out is achieved).

Scenario 2: Selling in 2025 (post-correction market).

Acquisition multiple: 4.2x EBITDA (conservative, debt-constrained buyers).

Enterprise value: $750,000 × 4.2 = $3,150,000.

Cash at close: 55% ($1,732,500).

Earn-out (4-year, more conservative targets): 45% ($1,417,500).

Seller continues as employed dentist for 3 years at $220,000/year (lower comp due to tighter DSO margins).

Total potential proceeds: $3,150,000 + ($220,000 × 3 years) = $3,810,000 over 3 years (if earn-out is achieved).

Difference: $5,625,000 (2021) - $3,810,000 (2025) = $1,815,000 in lost value.

That's a 32% reduction in total exit value by waiting 4 years.

But wait - what if earn-outs fail?

Earn-outs are contingent on hitting EBITDA targets post-acquisition. Industry data shows 40-55% of DSO earn-outs are only partially paid due to integration challenges, patient attrition, or margin compression.

2021 earn-out (assume 60% achieved): $1,462,500 × 0.60 = $877,500 paid.

Realized 2021 exit value: $3,412,500 (cash) + $877,500 (partial earn-out) + $750,000 (employment) = $5,040,000.

2025 earn-out (assume 50% achieved due to tighter integration): $1,417,500 × 0.50 = $708,750 paid.

Realized 2025 exit value: $1,732,500 (cash) + $708,750 (partial earn-out) + $660,000 (employment) = $3,101,250.

Adjusted difference: $5,040,000 (2021) - $3,101,250 (2025) = $1,938,750 in lost value.

That's 38% less money in your pocket by selling in a down market.

Counterargument: What if you hold and grow the practice?

Instead of selling in 2021, you keep the practice and grow it organically.

Revenue growth: 4% annually (realistic for well-run independent practice).

2021 revenue: $2.5M → 2025 revenue: $2.5M × (1.04^4) = $2.92M.

EBITDA margin improvement: You implement efficiency improvements (better insurance negotiations, lower overhead). Margin grows from 30% to 32%.

2025 EBITDA: $2.92M × 32% = $934,400.

If you sell in 2025 at 4.2x: $934,400 × 4.2 = $3,924,480 enterprise value.

But you also kept 4 years of profit: $750,000 + $780,000 + $811,200 + $843,648 = $3,184,848 in cumulative EBITDA (after-tax at 25% rate = $2,388,636 cash).

Total value realized by holding:

2025 sale proceeds: $3,924,480 (assume 55% cash at close = $2,158,464).

Cumulative after-tax profit (2021-2025): $2,388,636.

Total: $2,158,464 + $2,388,636 = $4,547,100.

Compare to 2021 sale realized value: $5,040,000.

By holding, you're down $492,900 compared to selling at peak.

But: You maintained autonomy, avoided earn-out risk, and kept 100% of the cash flow. That has intangible value (quality of life, control, no DSO employment contract).

Breakeven analysis: When does holding beat selling?

If you can grow revenue 6% annually instead of 4%, and maintain 32% EBITDA margins:

2025 revenue: $2.5M × (1.06^4) = $3.16M.

2025 EBITDA: $3.16M × 32% = $1,011,200.

2025 sale value at 4.2x: $1,011,200 × 4.2 = $4,247,040.

Cumulative after-tax profit (2021-2025, higher growth): $2,650,000.

Total realized value: $4,247,040 × 0.55 (cash at close) + $2,650,000 = $5,985,872.

Now holding beats selling in 2021 by $945,872.

The key variable: Can you grow faster than 4% annually? If yes, holding wins. If no, selling at peak was the right call.

THE TAKEAWAY

Action items:

1. Know your practice's sustainable growth rate. Pull the last 5 years of revenue data. Calculate your CAGR (compound annual growth rate). If it's below 3%, selling now at 4-5x may be your best option. If it's above 5%, holding and building may generate more wealth over time.

2. Model both scenarios before deciding. Use a spreadsheet: (a) Sale at current 4-5x multiple, (b) Hold for 3-5 years, capture profit, then sell at future multiples. Factor in taxes, earn-out risk, and quality-of-life preferences. The math will tell you which path creates more wealth.

3. If selling now, negotiate hard on cash-at-close. Target 60-70% cash at close, minimize earn-out exposure. In today's market, buyers want to shift risk to sellers via earn-outs. Push back. A 60% cash-at-close deal is worth more than a 40% cash deal with a large earn-out that may never pay.

4. If holding, invest in margin expansion. Every 1% improvement in EBITDA margin increases your exit value by $25,000-$30,000 (at 4-5x multiples). Renegotiate PPO contracts, cut underperforming services, automate admin tasks. Small margin gains compound over time.

5. Set a decision deadline. Don't drift. Decide: "I will sell by [date] if I receive [minimum acceptable offer]," or "I will hold and build for [X years], then reassess." Indecision kills value. Commit to a strategy and execute.

PE cycles are cyclical. Multiples will recover eventually. The question is: Will you be around to capture them, or will you sell now and move on? Know your number. Know your timeline. Act accordingly.