In our June 6, 2023 blog post, we discussed rollover equity and the role that it plays in the proceeds from a possible sale of your dental practice. As discussed briefly in that post, recapitalization events are an important factor in the concept of rollover equity as it relates to a dental practice sale, specifically if you sell your practice to a dental support organization (“DSO”). If a portion of your purchase price is attributed to rollover equity, recapitalization events can provide substantial benefits to you in the future. Therefore, when reviewing the deal terms for a possible sale of your dental practice assets, it is important to understand recapitalization events as a possible benefit and what it could mean for your rollover equity.

What Is a Recapitalization Event?

Recapitalization events for DSOs refer to financial actions taken to strengthen the DSO’s capital base, improve its financial position, or support its growth and expansion plans. Recapitalization events involve various strategies to enhance the DSO’s financial stability and operational capabilities.

A recapitalization event usually refers to a significant restructuring of a company’s capital structure. It involves changing the mix of a company’s equity and debt, often with the aim of improving its financial position, including facilitating growth and expansion. Recapitalizations for DSOs can also provide the necessary capital to fund business expansion, acquisitions, or investments in new projects.

Recapitalization events are complex and involve many various legal, financial, and regulatory considerations. They are typically undertaken with the assistance of a myriad of consultants, including attorneys, financial advisors, and investment bankers to ensure that the restructuring aligns with the company’s goals and maximizes shareholder value.

Nardone Comment: From my perspective, the recapitalization event is what makes DSO transactions so attractive. For many dentists, it is a life changing event, and an amount of money received that you would have never imagined when you first placed your name on the door. It truly is a wonderful opportunity that needs to be seriously explored as one aspect of your succession plan.

What Are the Different Kinds of Recapitalization Events in the Dental Industry?

Here are some common types of recapitalization events for DSOs:

1. Equity Investment: DSOs may seek additional capital by attracting new equity investors or selling additional shares to existing investors. This infusion of equity funds helps increase the DSO’s ownership capital, providing resources for expansion, acquisitions, or debt reduction.
2. Debt Restructuring: DSOs may undertake debt restructuring to optimize their financial obligations. This could involve negotiating more favorable loan terms, extending repayment periods, or refinancing existing debt at lower interest rates. Debt restructuring can help reduce the DSO’s debt burden, improve cash flow, and create financial flexibility.
3. Acquisition or Merger: Recapitalization events may involve acquiring or merging with other dental practices or DSOs. This strategy allows DSOs to expand their footprint, consolidate operations, and gain economies of scale. Acquisitions or mergers can be financed through a combination of equity and debt, leading to recapitalization of the combined entity.
4. Private Equity Partnership: DSOs may partner with private equity firms or institutional investors. Private equity investors provide capital in exchange for a share of ownership and often contribute expertise and resources to support the DSO’s growth plans. This partnership can provide the necessary funds for expansion, acquisitions, or technology upgrades.
5. Debt Financing: DSOs can raise capital by obtaining loans from banks or financial institutions. Debt financing provides immediate capital injections that can be used for various purposes such as opening new dental offices, investing in advanced equipment, or funding working capital requirements. Debt financing options include traditional bank loans, lines of credit, or specialized dental practice financing.
6. Initial Public Offering (IPO): In certain cases, successful DSOs may consider going public by offering shares to the public through an IPO. This allows the DSO to raise substantial capital and provide liquidity to existing shareholders. Going public provides access to the public equity markets, potentially attracting more investors and increasing the DSO’s visibility.

Recapitalization events for DSOs are driven by the need to strengthen their financial position, fund expansion initiatives, and take advantage of growth opportunities in the dental industry. The recapitalization events may enable DSOs to enhance their service offerings, improve operational efficiency, and provide high-quality dental care to patients across a wider geographic area.

Nardone Comment: To be clear, DSOs are not for everyone. But, for some, DSOs are the right fit and provide the owning doctor substantial opportunities to plan for the next phase of their careers.

What Does This Mean for You?

As discussed in our previous blog post, rollover equity is a concept closely related to recapitalization events. The connection between these two concepts is what makes recapitalization events important to you. If you sell your practice to a DSO and a portion of the purchase price is paid out through rollover equity, this can give you an opportunity for significant additional benefits if the DSO goes through a recapitalization event in the future.

Rollover equity can be structured in different ways, depending on the specific terms of the agreement with the DSO. It may involve exchanging existing shares for shares in the newly formed entity, receiving preferred stock, or obtaining other equity-like instruments. The terms and conditions of the rollover equity are typically negotiated as part of the overall transaction. In today’s DSO landscape, rollover equity is usually structured as a portion of equity of the holding company that the DSO uses to acquire dental practice assets.

Rollover equity helps to align the interests of the dentists selling to DSOs, as it creates a motivation for the selling dentists to continue their practices’ success to increase the value of the platform. Increasing the value of the platform could increase the value of the rollover shares, as well as increase the amount of cash in the event of recapitalization event.

Depending on the type of recapitalization event, at the time of the event, as an existing shareholder, you may have the option to convert a certain amount of your rollover equity into cash and/or maintain equity in the entity that increases in value.

Conclusion

It is important to understand recapitalization events as a possible future way to earn additional cash in the sale of your dental practice in addition to the cash at closing. A consideration of prior recapitalization events, if any, of the DSO is important to understand the possibility of a future recapitalization event and what the profits may look like for you. Have questions? Call us, and let’s discuss.

Vince Nardone is a partner with Benesch, with a focus in Benesch’s healthcare practice, and specifically a leader in the dental industry. He is a thought leader and regular speaker in the dental industry. He may be reached at (614) 223-9326 or vnardone@beneschlaw.com.

Angelina Campin is an associate with Benesch, and focuses her practice on healthcare matters in both transactional and regulatory areas. She may be reached at (312) 506-3424 or acampin@beneschlaw.com.