How a 20% Equity Roll Changed a Dental Practice Sale

DentalDex · Deal teardowns · 2 min read · Methodology

The same $5M offer produced outcomes roughly $1.1M apart depending on what happened to the 20% of the price paid in rollover equity, which is why rollover deserves its own analysis rather than being counted as cash. This teardown is fictionalized and illustrative.

The offer

Pediatric practice, $800K normalized EBITDA, $5.0M enterprise value at 6.25x. Cash at closing $4.0M. Rollover equity $1.0M into the DSO's holding company, at the same valuation the DSO's private-equity sponsor had paid 18 months earlier. Three-year employment.

What the seller was told

"You'll get a second bite of the apple. Our sponsor targets a recap in four to five years at a higher multiple. Your $1M could be worth $2M or more."

What the seller asked, after reading the DentalDex rollover guide

• What entity? The holding company, not the seller's own practice.
• What class? Common units, behind the sponsor's preferred equity and the senior lender.
• Any distributions before exit? No.
• What if I leave employment early? The company could repurchase at the lower of cost or fair value.
• Any information rights? Annual summary only.

Scenario 1: the recap goes well

The DSO grows from 40 to 110 locations. The sponsor sells at a higher multiple in year five. After the lender and preferred equity are paid, common units are worth 2.1x cost. The seller's $1M becomes $2.1M, received in year five. Total proceeds: $4.0M plus $2.1M.

Scenario 2: the recap is delayed and the DSO carries more debt

Growth stalls at 65 locations. Two acquisitions underperform. The DSO takes on additional debt to keep acquiring. The recap happens in year seven at a multiple similar to entry. After the lender and preferred equity, common is worth 0.6x cost. The seller's $1M becomes $600,000, received in year seven. Total proceeds: $4.0M plus $600,000.

The swing

	Scenario 1	Scenario 2
Cash at closing	$4,000,000	$4,000,000
Rollover outcome	$2,100,000 in year 5	$600,000 in year 7
Total	$6,100,000	$4,600,000
Difference		$1,500,000

Discounting the year-five and year-seven amounts to closing-date dollars narrows the gap to roughly $1.1M, but the point stands. One-fifth of the price was worth somewhere between $600K and $2.1M, and the seller had no control over which.

What a competing offer looked like

Another buyer offered $4.7M all cash, no rollover, 6.0x. On the headline it was $300K lower. On a risk-adjusted basis, with the rollover haircut to 70% of face, the two offers were within $100K of each other, and the all-cash offer had no exposure to the DSO's capital structure.

The lesson

Rollover equity is neither a trick nor a gift. It is an investment in a private, leveraged company, made at a valuation the seller did not negotiate, with limited rights and no liquidity date. Sellers who want that exposure should take it deliberately and with their own advisers reviewing the equity documents. Sellers who do not should price the rollover as what it is and compare accordingly.

This teardown is fictionalized. Practices, buyers and figures are constructed to illustrate deal mechanics and do not describe any real transaction. Market ranges on this page are illustrative planning ranges, not offers. Involve qualified legal and tax advisers on any transaction.