The Retrade That Wasn't: When the Multiple Fell and the Price Didn't

DentalDex · Deal teardowns · 17 min read · Methodology

The multiple fell from 6.0x at LOI to 5.5x at closing while the enterprise value stayed at $3.6M, because due diligence raised the normalized EBITDA from $600K to $655K and the buyer held the price rather than the multiple. This teardown is fictionalized and illustrative, and it is the reason DentalDex records the EBITDA basis alongside every multiple.

The four stages

Stage	EBITDA basis	Multiple	Enterprise value	Notes
Asked	$640,000 (seller's CPA, aggressive add-backs)	6.5x	$4,160,000	Included $85K of add-backs the buyer later rejected
IOI	$600,000 (buyer's preliminary normalization)	6.0x	$3,600,000	Buyer rejected personal-vehicle and family-payroll add-backs; accepted one-time legal
LOI	$600,000	6.0x	$3,600,000	Signed on the IOI basis
Closed	$655,000 (quality of earnings)	5.5x	$3,600,000	QoE found $55K of understated collections from a payer posting lag

What happened in diligence

The quality of earnings review found that collections had been posted with a lag on one payer, understating trailing-twelve-month revenue. Normalized EBITDA rose to $655K. The seller's attorney expected the price to rise proportionally to about $3.93M. The buyer's position was that the LOI price was $3.6M and that the multiple was a derived number, not a commitment.

Who was right

Both, depending on what the LOI said. This LOI stated a purchase price of $3,600,000 "based on normalized EBITDA of approximately $600,000" and contained no mechanism to adjust price for a diligence-confirmed EBITDA change in either direction. Had EBITDA come in at $550K, the buyer would almost certainly have sought a reduction; the document was asymmetric in practice if not in text.

The seller's outcome

The seller closed at $3.6M. On the closed EBITDA, that was 5.5x. Reported in a market survey as "closed at 5.5x," it would look like a soft deal. Reported as "closed at $3.6M, LOI at $3.6M, no retrade," it looks like exactly what it was: a price that held. The multiple is meaningless without the denominator.

What the LOI could have said

A purchase price expressed as a multiple of final normalized EBITDA, with a collar (for example, price adjusts within a band of plus or minus 10% of the LOI EBITDA and is renegotiated outside it). That protects both sides symmetrically.

The lesson

When comparing offers, and when reading anyone's published "market multiples," ask what EBITDA the multiple was applied to and at what stage. A 6.0x IOI on the seller's EBITDA and a 5.5x closing on the buyer's EBITDA can be the same dollar figure. DentalDex captures the asked, IOI, LOI and closed multiple with the EBITDA basis at each stage for exactly this reason.

A strong DSO acquisition target combines durable EBITDA with provider stability, patient retention, operational quality, growth potential and a realistic transition plan. The cheapest practice is not necessarily the best acquisition, and the largest is not either. The practices that create value after closing are the ones whose earnings survive the owner's departure.

Quality of earnings before quantity of earnings

Start with normalized EBITDA, then ask how repeatable it is. Two practices can each show $600,000 of EBITDA and be very different businesses:

	Practice A	Practice B
Collections	$2.4M	$2.4M
Normalized EBITDA	$600K	$600K
Owner share of doctor production	85%	35%
Associates	None	Two, 4 and 6 years tenure
Hygiene share of collections	17%	29%
Three-year collections trend	+1%	+8%
Lease remaining	22 months, no option	9 years with options

Practice A's EBITDA disappears if the owner does; Practice B's survives. A buyer paying the same multiple for both is mispricing one of them. In practice, A should carry a lower multiple, a longer employment term, or a larger earn-out, and the difference should be priced explicitly rather than hoped away.

Provider durability

Measure owner share of doctor production, associate tenure and productivity, recruiting difficulty in the market, specialist dependence and the seller's stated transition. A single number does most of the work:

Owner dependency = owner doctor production ÷ total doctor production

Below 40% is transferable. Between 40% and 70% is manageable with a two-to-three-year employment term. Above 70% requires a replacement plan before closing, not after: an associate already hired, a recruiter engaged, or a seller commitment long enough to cover the search. A high-performing practice becomes a weak acquisition the day nobody can produce.

Patient engine

Review active patients (seen in the last 18 months), new patients per month, hygiene share of collections, hygiene reappointment rate, case acceptance, cancellation rate and recall effectiveness. Acquiring a durable patient engine is more valuable than acquiring one strong year of production. Useful screens:

• Hygiene reappointment above 85% signals a recall system that works without the owner.
• New patients above 25 per month for a single-doctor general practice signals demand the buyer can grow into.
• Active-patient count divided by collections gives revenue per active patient; a number far above local peers can mean a small base being worked hard.

Growth capacity

Look for open chairs, hygiene capacity, schedule utilization, specialty leakage (referrals out that could be kept in-house), extended-hours opportunity, marketing opportunity and associate capacity. An eight-operatory practice using five chairs three days a week contains more growth than a five-operatory practice at full utilization, even at lower current EBITDA.

Integration fit

A practice can be financially attractive and strategically wrong for a specific DSO. Consider geographic density (does it share a market with existing locations, or will it be an island?), payer overlap with existing contracts, recruiting infrastructure in that market, specialty support, management bandwidth and technology compatibility. Islands cost more to support than their EBITDA suggests.

A screening checklist

Before committing diligence resources, confirm:

1. Normalized EBITDA above the platform minimum, with add-backs the seller can document.
2. Owner dependency known, and a plan for it if above 70%.
3. Hygiene above 20% of collections.
4. Collections flat or growing over three years.
5. Lease with at least five years remaining or options the landlord will assign.
6. Seller transition stated and consistent with the dependency level.
7. No single payer above 40% of collections.
8. Strategic fit: within a supported market, or a deliberate new-market entry.

Any two failures should move the opportunity to the bottom of the pipeline until they are resolved.

Purchase discipline

The goal is not simply to grow locations. The goal is to acquire businesses that create sustainable enterprise value after integration. A DSO that acquires ten practices at 6x and loses the owners of four of them has paid far more than 6x for what it kept.

Provider dependency measures how much practice revenue depends on one dentist, usually the selling owner, and therefore how much revenue could be at risk if that provider reduces production or leaves. It is the single most common reason a DSO's post-close EBITDA falls short of the LOI.

The core metric

Owner dependency = owner doctor production ÷ total doctor production

Hygiene is excluded from both numerator and denominator; it is measured separately because it usually transfers with the practice.

Example: total doctor production of $2,000,000, owner production of $1,500,000. Owner dependency is 75%. That practice carries materially more transition risk than an otherwise similar practice where the owner generates 30%.

What the number does not tell you

Two practices at 60% can be very different. Also examine:

• Procedure mix. An owner producing 60% of bread-and-butter restorative is replaceable by a competent associate. An owner producing 60% of the practice's implants, full-arch or sedation cases is not, because the replacement must have the same skills and the referral base must trust them.
• Schedule. An owner at 60% working two days a week is a different problem from one at 60% working five. The first has capacity to hand over; the second is already at the limit.
• Patient loyalty. Patients who identify with the practice, the location and the hygienists will stay. Patients who followed this dentist from a prior practice may follow again.
• Associate bench. Associates with three or more years of tenure who already carry their own schedules are the strongest mitigant available.
• Local recruiting. In a metro with a dental school, an associate search takes months. In a rural market it can take two years.

Sizing the value at risk

A simple way to price the risk is to model post-close EBITDA under a replacement scenario:

1. Remove the owner's production.
2. Add back the associate compensation the owner was drawing (or the market rate you would pay).
3. Estimate how much of the owner's production a replacement recovers in year one (60% to 80% is typical when a replacement is in place at closing; far less when the search starts after).
4. Recompute EBITDA.

	As presented	Replacement year 1
Owner production	$1,500,000	$0
Replacement production recovered (70%)	—	$1,050,000
Lost production	—	$450,000
Lost margin on that production (~35%)	—	$157,000
EBITDA	$650,000	$493,000

The buyer is not really buying $650,000 of EBITDA; it is buying $493,000 with an option on the rest if the transition goes well. That difference is the honest basis for the earn-out or the employment term.

Dependency is not automatically a deal killer

A high-dependency practice can still be attractive when the seller remains several years, strong associates exist, the recruiting market is favorable, demand exceeds current capacity, or the DSO has proven recruiting infrastructure. The key is pricing the risk and solving the transition rather than assuming it away.

Linking structure to the risk

Owner dependency	Typical structural response
Under 40%	Standard terms; two-year employment is usually enough
40% – 70%	Three-year employment; modest earn-out or retention bonus at year two
Over 70%, replacement in place	Three-to-five-year employment; earn-out tied to retained production
Over 70%, no replacement	Reduce price or shift a larger share to earn-out; make the associate hire a closing condition

Diligence requests

Ask for production by provider by month for 36 months, the owner's procedure-code mix, the associate agreements, the hygiene reappointment report, and the owner's clinical schedule. Cross-check reported owner production against payroll: a large gap between what the owner produced and what they were paid usually means the normalization schedule has an error.

Dental acquisition due diligence should test financial quality, provider stability, patient durability, legal risk, payer exposure, facility condition and the assumptions supporting the purchase price. The checklist below is organized by workstream with an accountable owner for each, because diligence fails most often when everyone assumes someone else is checking the lease.

Financial (owner: finance or quality-of-earnings provider)

Request three years of tax returns, monthly P&Ls, balance sheets, bank statements, production and collections reports, AR aging, payroll registers, and the seller's normalization schedule with support for every add-back.

Tests to run:

• Reconcile collections to bank deposits. Differences above 2% need an explanation; payer posting lags are common and legitimate, unreported cash is not.
• Tie normalized EBITDA to the LOI. Every add-back must have a document behind it. Owner personal expenses and one-time costs are usually fine; "we could save 20% on supplies" is a buyer synergy, not seller EBITDA.
• Confirm the replacement-salary adjustment. If the owner produces $900,000 and the schedule assumes a $200,000 replacement, the EBITDA is overstated.
• Look at trailing-twelve-month trends by month. A practice that had a strong first half and a weak second half is not the same as one growing steadily to the same annual number.

Provider (owner: clinical or recruiting lead)

Request production by provider by month for 36 months, associate agreements, compensation history, restrictive covenants, and the owner's procedure-code mix.

Compute owner dependency (owner doctor production ÷ total doctor production) and decide, before signing definitive documents, how it will be handled: employment term, earn-out, or a hire made a closing condition.

Patient and clinical (owner: clinical director)

Request active patient counts (18-month definition), new patients per month, hygiene production and reappointment rate, recall effectiveness, case-mix reports and cancellation rates. Where appropriate and lawful, a chart audit on a sample of records tests diagnostic consistency and documentation quality.

Do not request patient-identifiable information outside a proper legal and privacy framework; aggregate reports answer nearly every diligence question.

Payer (owner: revenue cycle)

Request the payer mix by collections, fee schedules for the top five plans, credentialing status for every provider, and the assignment and termination provisions in each contract. Flag any payer above 40% of collections. Confirm whether the DSO's existing contracts will apply post-close, and what the reimbursement change would be.

Employees (owner: HR)

Request the employee census with roles, tenure, compensation and benefits, open positions, and any employment agreements. Identify key-person risk (the office manager who has run the practice for 20 years is often as important as an associate). Confirm PTO and bonus liabilities that will transfer.

Facility and equipment (owner: operations)

Request the lease, all amendments, options, rent schedule, CAM charges, and the landlord's consent requirements for assignment. Walk the space with an equipment list: age, condition, and replacement cost of chairs, imaging, sterilization and IT. Deferred capital spending above roughly 5% of collections should be priced or negotiated.

Item	Red flag
Lease term remaining	Under 3 years with no option
Rent vs. market	More than 15% above market
Landlord consent	Discretionary, or requires a personal guarantee
Equipment	Any core system past its service life

Legal and compliance (owner: counsel)

Counsel reviews entity structure, contracts, licenses, litigation, OSHA and HIPAA compliance posture, controlled-substance registrations, and the transaction structure itself, including whether the state requires a dentist-owned professional entity and how the management agreement is documented.

The final question

Diligence should answer one question: is the business we are buying economically and operationally the business represented in the LOI? If the answer is "mostly," the gaps should be listed, priced, and either negotiated or accepted deliberately before closing.

A winning dental-practice LOI combines competitive economics with clarity, credibility and terms that address the seller's personal concerns. The highest enterprise value does not always win; the LOI the seller can understand, trust and see themselves living inside usually does.

Make the economics legible

Sellers compare offers by whatever number is easiest to see. If yours leads with enterprise value and buries the split, a competitor whose cash at closing is higher will win the comparison even at a lower headline. State, in one table on the first page:

Line	Your LOI
Enterprise value	$4,500,000
Cash at closing	$3,600,000
Rollover equity	$675,000 in [entity], at [valuation basis]
Earn-out	$225,000 over 24 months if collections hold at $2.3M
Holdback	$100,000, 12 months
Doctor compensation	32% of collections, 4 clinical days
Employment term	3 years

A seller who can read that in thirty seconds is a seller who trusts you. One who has to reconstruct it from six paragraphs assumes you are hiding something, and sometimes is right.

Address transition on page one

Uncertainty about what happens Monday morning after closing creates more seller anxiety than any single financial term. State the expected employment term, schedule, compensation formula and basis (collections or adjusted production), benefits, and any leadership role. If the seller has said they want to retire in two years, do not send a five-year structure without explaining why and what it is worth to them.

Answer the autonomy question before it is asked

Most sellers have heard a story about a DSO that changed the labs, materials and treatment protocols in month one. Say what your model is. Who controls diagnosis, treatment planning, labs, materials, referrals and scheduling? If the answer is "the doctor, within a formulary," say that. If some functions are centralized, name them. Vagueness reads as bad news.

Demonstrate that you can close

A seller values certainty. Include the diligence process and timeline, approval requirements (investment committee, lender consent), funding source, expected closing date, and the material conditions. If you have closed twelve practices in the last two years, say so and offer two references. If this is your first, say that too and explain how the transaction is funded.

Personalize it

The seller has told you, or told DentalDex, what they care about. Use it.

• Seller emphasizes staff: state retention, benefits continuity, and who controls hiring.
• Seller wants equity upside: explain the rollover entity, valuation basis, rights and the expected liquidity path, honestly, including the risks.
• Seller wants out in two years: build the structure around a two-year term and price the dependency risk into an earn-out rather than forcing a longer commitment.
• Seller cares about the brand: state whether and when the practice name changes.

The best LOIs read as if they were written for that dentist, because they were.

Common ways to lose

• Leading with the multiple and burying the structure.
• Sending a comp formula on "adjusted production" without defining the adjustments.
• Requiring 20% rollover with no description of the entity or its capital stack.
• Making the earn-out all-or-nothing on a growth target the seller will not control.
• A non-compete that outlasts the employment term by five years and covers a 25-mile radius.
• Silence on staff.

Every one of these is a term a competing buyer can beat without spending a dollar more.

The first 100 days should stabilize employees and patients, preserve production, establish trust with the selling dentist and integrate only the functions that create immediate value without disrupting clinical operations. Most value destruction in dental acquisitions happens in this window, and most of it is self-inflicted.

Before day 1

Integration starts before closing. Have the payroll transition, benefits enrollment, credentialing applications, banking and insurance changes ready to execute on the closing date. A team that is paid late in week one, or a doctor who cannot bill a major payer because credentialing started at closing, will not trust anything that follows.

Days 1–30: stabilize

Priorities, in order: payroll runs correctly, benefits continue without a gap, every employee has heard from a real person what changes and what does not, the selling dentist's schedule and compensation work as described in the LOI, patients experience no visible change, billing continues, and cash is managed.

Avoid unnecessary visible change. The practice name, phone system, scheduling software, labs, materials and hours should stay as they were unless there is an operational reason to move now and the seller has agreed.

Metrics to watch weekly:

Metric	Concern threshold
Production vs. trailing 12-month average	Below 90%
Hygiene reappointment rate	Below pre-close rate
Cancellations and no-shows	Above pre-close rate by 3+ points
Staff resignations	Any
Seller clinical days worked vs. agreed	Any shortfall

Days 31–60: diagnose

With operations stable, measure the practice against the acquisition thesis: production by provider, collections, hygiene, staffing, schedule utilization, treatment acceptance, payer performance, supply spend, AR aging. Compare each to the diligence package. Where the numbers differ, understand why before acting; a 10% production dip in month one is often the seller's vacation, not a trend.

This is also when to hold the first structured conversation with the seller about what is working and what is not, and to fix anything promised in the LOI that has not happened.

Days 61–100: improve

Begin implementing the opportunities the acquisition thesis depended on, sequenced by disruption:

1. Revenue cycle. Clean claims, faster posting, denial management. Invisible to patients and staff, and usually the fastest EBITDA gain.
2. Procurement. Move supply and lab purchasing to platform pricing without changing the materials the doctor uses.
3. Hygiene optimization. Recall outreach, reappointment discipline, perio diagnosis consistency. Coordinate with the hygienists rather than mandating.
4. Scheduling. Fill open capacity before adding days or providers.
5. Payer contracting. Move to platform contracts where reimbursement improves; time it around credentialing.
6. Marketing. Restart or expand new-patient marketing once the schedule can absorb it.
7. Recruiting. If provider dependency was flagged in diligence, the associate search should already be underway.

Leave for later: practice management software conversions, rebranding, and changes to clinical protocols. Each is a project in its own right, and all three at once is how a practice loses its front-desk lead and two hygienists in the same quarter.

What not to do

Do not treat integration as an IT deployment. Dental acquisitions involve people, patients and clinicians who did not choose the buyer. A technically perfect integration that causes the seller or the team to leave can destroy more value than any synergy recovers. The measure of a good first 100 days is not how much changed; it is how much of the EBITDA you paid for is still there at day 101.

A DSO acquisition scorecard should consistently evaluate financial quality, provider risk, growth, geography, patient durability and strategic fit before significant diligence resources are committed. Without one, corporate development teams chase the largest practice or the most persuasive broker rather than the best fit.

Suggested scorecard

Six categories, weighted to reflect where post-close EBITDA is most often lost. Each category is scored 0–10 and multiplied by its weight; the total is out of 100.

Category	Weight	What to evaluate	Scoring anchors
Financial	30%	Normalized EBITDA, margin, three-year trend, quality of add-backs	10: EBITDA above platform target, margin 25%+, growing, clean books. 5: at minimum, flat, some normalization needed. 0: below minimum or declining
Provider	20%	Owner dependency, associate tenure, recruiting market, seller transition	10: owner under 40%, tenured associates, seller stays 3+ yrs. 5: 40–70% with a plan. 0: over 70%, no associate, exit at close
Patient and hygiene	15%	Active patients, hygiene share, reappointment, new patients	10: hygiene 25%+, reappointment 85%+, new patients above market. 0: hygiene under 18% or reappointment under 70%
Strategic fit	15%	Market density, specialty alignment, payer overlap, referral opportunity	10: inside a supported market with payer overlap. 0: island market with unfamiliar payers
Growth capacity	10%	Open operatories, schedule utilization, specialty leakage, provider capacity	10: 30%+ unused capacity that existing demand could fill. 0: at capacity with no room to expand
Transaction risk	10%	Lease, capex, seller expectations, diligence quality, regulatory	10: 5+ year lease, current equipment, realistic asking, clean data. 0: short lease, major capex, asked multiple far above market

Worked example

Category	Weight	Score	Points
Financial	30	7	21
Provider	20	4	8
Patient and hygiene	15	8	12
Strategic fit	15	9	13.5
Growth capacity	10	6	6
Transaction risk	10	5	5
Total			65.5

A 65 is a real opportunity with a clear problem: the provider score. The scorecard tells the team what the LOI has to solve (employment term, earn-out, or an associate hire as a condition) before the number goes any higher.

Using the score

• Above 75: proceed to full diligence; the question is price and structure.
• 60–75: proceed only with the low-scoring category addressed in the LOI.
• Below 60: decline or hold; revisit if the seller's circumstances change.

Bands should be set per platform, since a group entering a new market will tolerate a lower strategic-fit score than one densifying an existing one.

Why scorecards matter

Without a scorecard, corporate development teams become emotionally attached to opportunities, chase revenue rather than quality, or let the loudest broker set the pipeline. Standardization enables better pipeline comparison, faster screening, more disciplined pricing and stronger post-close analysis, because the score at acquisition can be compared to the outcome two years later.

Closing the loop

Over time, the scorecard should be tested against actual acquisition performance. Keep the score at LOI alongside the closed EBITDA and the 24-month EBITDA, and ask which categories predicted retention and which did not. That is where proprietary data becomes valuable: a DSO that knows its own provider-score threshold from thirty closings prices provider risk better than one that guesses.

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.