Case Study #3: The Boomerang Sale

boomerangIn 1986 David Phelps started a dental practice called the Gentle Dental.
20 years later, for a number of reasons, he decided to sell.

But before six months had passed, he was in litigation to reacquire the business, and 24 months after that, he sold the business again…this time, successfully.

“Boomerang” Sale?

This was a term David used to explain how he thought he’d sold his business, but it came back to him and he had to take it over and sell it again.

Some Background on David

When David’s daughter Jenna was 2 years old she was diagnosed with a high risk of leukemia. The stress of having to deal with the treatment and care of a very sick child led to the end of his marriage and eventually the treatment for leukemia led to liver failure for his daughter.

During the time he was helping his daughter recover from the liver transplant she received, he realized that he wasn’t capitalizing on the promise that all business owners seem to buy into: living life on their own terms. He needed his daughter’s illness to see that, and he made a decision to sell.

Valuation of Dental Practices

David shared that the formula is usually 60-75% of gross revenue or 1.4 to 2 times net revenue. The multiple is lower simply because the market sees dental practices very often as “technician-driven,” to use Michael Gerber’s terminology.  

Sale #1

Over the years David hadn’t brought on associates with an eye to selling the practice to them. This time he did and he found someone quite technically gifted in dentistry and moved into a sale process with him about 6 months later. Because the buyer had credit issues, he wasn’t able to obtain bank financing to make the purchase. He’d agreed to a sale price of about $1M but it was 100% seller financed by David. David was to find out soon enough that those credit issues were due to character flaws.

Litigation and Damage Control

The former associate had only made five or six on-time payments before missing a payment and, before long, he was in default. David spent eight months and over $100,000 in litigation costs to take back control of the business. That doesn’t even take into account the PR campaign he had to undertake to let the community know that the business was “under new (old) management.”  The revenues were down 50%!

Sale #2

Having gotten this far, David wasn’t going to give up easily. He re-assumed the technician role for 3-6 months, but then aggressively brought in associates – three in all – and expanded the hours of the practice. In 12 months he exceeded the revenues of the business for the previous “sale,” and 12 months after that, one of the associates who’d proven himself a leader in the practice went down to the bank and obtained 100% financing. David sold the business for 100% cash upfront this time, instead of 100% financing, and lived to tell us the story.

Key Takeaways

  • Don’t wait until a family tragedy to build your business to survive without you
  • Strongly reconsider a 100% seller financed deal
  • Make sure you trust your gut when it comes to judging the character of your potential buyers
  • It’s those with grit that survive botched business exits

To learn more details of this story and what David is doing now, click here.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.

Case Study #2: What to Be Aware of in an Earnout

Jason Swenk In 2012 Jason Swenk sold his digital advertising agency, Solar Velocity.

Solar velocity helped with websites and web applications for brands like Aflac, Coke, and LegalZoom. At the time, he took 50% of the sale in upfront cash and took the remainder in a 50% earnout.

What is an earnout?

An earnout is another way for a seller of a business to receive payment that is based on future performance of that sold business.

Why do some buyers offer them?

Sometimes they lack the cash or capital to buy the business for the entirety of the selling price, so asking the seller to, in a way, finance the deal through an earnout is a strategy. Many times there may be some skepticism as to the viability of the firm without the seller in position, the business may have customer concentration issues, or are using aggressive projections, so this helps “steady the ship” during the transition time as the seller is incentivized to do what he can to make his earnout provisions.

Why did Jason decide to sell the business in the first place?

It had been 12 years in the making, and at the $10M revenue milestone, he knew that the next level for the business would be $50M, and he didn’t have the desire to push on to that level. He wanted to do something new.

What were the terms of his earnout?

He had to stay on for two years and the company needed to hit certain markers throughout that time.

What went wrong?

The company that acquired Jason’s company was itself acquired nine months after Jason sold. The new company then construed the earnout timelines across those 9 months instead of the 24 in the original agreement, and he didn’t get any of the earnout.

The major failure here was from Jason’s lawyer and M&A firm that didn’t foresee the possibility of another acquisition and how the terms of the earnout would survive in such a transaction. That’s why it is so critical not only to get help in structuring your deal, but to think about every possibility, particularly in an earnout.

Before that, however, you must realize that when you’re bought, you no longer control the reins of leadership in the company, and when you make suggestions which will improve the likelihood of your targets being hit, those suggestions may be disregarded. Even if you have yourself covered on the contract side, you can’t control how management will work with you.

So if you have to do an earnout, what should you consider?

Given this experience, it’s not hard to imagine that Jason’s policy is “no more earnouts” should he sell a business in the future. But what if an earnout is part of a deal you are involved in?  You should realize that the best earnouts provide incentives for the buyer, not just the seller.  If you can make it equally beneficial for a buyer to hit an earnout marker, they may stay on the front lines with the seller to make sure those targets get hit.

And, as we noted above, make sure that you account for every circumstance during the earnout, including an acquisition of your acquirer.

Words of Wisdom

Jason’s gone on to bigger and better things since the sale, including authoring a book and creating a smartphone app, so this case study isn’t solely a cautionary tale.  “Build to sell, but treat your business like you never will” and “The grass is greener…on the side you water!” are quotes that indicate that Jason is the sort of person who learns from his mistakes. We hope you will learn his lesson, so you don’t have to re-learn it on your own.

To learn more about Jason, Solar Velocity, and this sale, click here.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.

Case Study #1: Build, Acquire, Roll-up, and Sell Out

Case Studies is a new series here at the APEX blog.  We study business exits and break down a few key points for you to keep in mind.  This month’s selection comes from the sale of Appletree Answers.

Appletree AnswersHow it started

John Ratliff started Appletree Answers in 1995 in a spare bedroom in his house, eventually grew it to over 600 employees and over $5M in annual EBITDA before selling to a strategic acquirer.  Appletree was (and is) an inbound high-touch customer service call answering service.  

From 2003-2011 John, in concert with his CPA and the bank that his CPA had a relationship with, completed 24 total acquisitions.  A lot of times acquisitions can be a mask for real growth, but John and his team wanted organic growth within existing locations as well as ongoing growth for new locations.  

Deal Structure

John arranged for the bank to put up no more than 80% of the total amount of the sale price, while convincing the sellers to put up 20% in a seller-financed note.  They were able to do these deals because they built and maintained a sterling reputation in the industry.  They were also very disciplined in their execution and after-action of the sales.

They would routinely pay between 3 and 3.5 times EBITDA for an acquisition.  In every deal, they stipulated that it could not be a turnaround, that no employees would be fired as a result of the deal, and ensured that tweaks were done in the first 60 days that freed up cash flow to cover the loan payment.

Time to go

By 2012 John had been at it for 18 years.  All his assets were tied up in the business, and because they had been so acquisitive there wasn’t a lot of cash coming out of the business, so he was thinking about going to market anyway.  At the same time, an S&P 500 publicly traded company stated to pursue a roll-up in the same industry and so there was an opportunity for a strategic rather than financial valuation of the business.

Despite having personally done 24 buy-side acquisitions, and having acquired a possible buyer on his own, John still hired an M&A firm because, in his words, “we were emotional” and he wanted “space and perspective,” in doing the deal, which a third party gives.  While he admits he paid plenty in fees, he is certain that it was far more than recouped in the added value that firm brought to the table.

Moral of the story?  No matter how many business transactions you’ve been through, you can always benefit from the objective view of a 3rd party who isn’t emotional about the valuation or the sale.  And often, they’ll get you far more than you could have gotten on your own.

Obviously, we know a few people who can help you sell your business or buy one you will love.  Schedule an appointment with us today.

The information in this case study was taken from here.