The second bite of the apple is the best sales pitch in dental M&A, and the strange part is that it is often true. Take part of your price in equity, the pitch goes, and when the platform sells again in a few years, you get paid on that stake a second time. Sellers have done very well on second bites. Sellers have also discovered at the second bite that their stake was worth far less than the first bite implied, and the difference between those two outcomes was written into documents they signed years earlier.
For a little over four years I ran the M&A team on the buy side at one of the country’s largest DSOs, through more than 50 transactions and over $500 million in deal value. Structuring the equity piece of consideration, and then living with how those structures performed after close, was part of the job. So this post is not an argument for or against taking equity. It is the math and the mechanics from the side of the table that builds the offer. If you are earlier in the process, start with our complete guide to selling your dental practice and come back to this when a structure lands in front of you.
First, Which Equity: HoldCo or JV
“Equity” in a DSO offer is not one thing, and the two main shapes behave nothing alike.
HoldCo equity is ownership at the parent level. Your shares ride on the entire platform: every practice in the group, the management company, and the debt that finances all of it. This is the equity the second-bite pitch is about, because it pays when the platform itself is sold or recapitalized.
JV equity is a retained stake at the practice level, usually a minority interest in the entity that owns the practice you just sold. Its value rides on that practice’s performance, and depending on the operating agreement it can pay distributions along the way rather than waiting for an exit.
Most offers with an equity component use one or the other; some use both. Everything below applies to HoldCo equity first, because that is where the second-bite math lives, with a section on JV equity where it differs. If an offer just says “equity” without naming which kind, at what level, with what rights, that is a problem on its own, and one I covered in the LOI red flags post.
Why Buyers Offer Equity at All
Start with the buyer’s reasons, because they explain every term that follows. Equity in the consideration mix does three jobs for a DSO.
It conserves cash. A practice bought with 70% cash and 30% equity costs the platform 30% less cash today, which means the same capital buys more practices, which is the entire growth model.
It transfers risk. The cash portion of your price is certain. The equity portion’s value now depends on how the platform performs, and you have become one of the people bearing that risk. From the buyer’s chair, converting a slice of a fixed obligation into shared outcome is simply good underwriting.
And it aligns the person who matters most. The dentist who just sold is the single biggest variable in whether the practice performs after close. An owner with meaningful equity upside runs the practice like an owner. When I worked through how buyers evaluate an acquisition, post-close motivation of the selling doctor was always part of the picture, and equity is the standard tool for it.
None of this makes equity bad for you. Alignment cuts both ways, and plenty of sellers wanted more equity, not less. But notice what the pitch language does: it presents as a gift something the buyer has strong structural reasons to want. You should evaluate it the way you would evaluate any investment someone is eager for you to make.
The First Bite Funds the Second
The equity does not arrive on top of your price. It comes out of it. A practice with an agreed value of $4 million might be paid as $3 million in cash and $1 million in HoldCo equity, with those numbers purely illustrative. The pitch frames the $1 million as an opportunity. It is also $1 million you did not receive, invested into a private company on the buyer’s terms.
Two things follow from that. First, everything that determines your total price still determines it here: the EBITDA the deal is priced on, and which add-backs survive diligence, size both the cash and the equity. A weak first bite cannot be rescued by an exciting second one, because the second is a percentage of the first.
Second, the price you pay for your shares matters as much as the shares themselves, which brings us to the number almost nobody interrogates.
The Entry Mark: The Most Important Number in the Second Bite
When you take $1 million of HoldCo equity, you are buying $1 million of the platform’s stock. At what price? At the value the platform puts on itself. That number is set by the buyer, tested by no market, and it is in the buyer’s interest for it to be high, because the higher the platform’s stated value, the smaller the ownership percentage your $1 million buys.
This is the piece of second-bite math that the pitch never includes. The story is always about the platform’s value growing between now and the next sale. Your actual return depends on the gap between the value you bought in at and the value the platform eventually sells at. If you buy in at an optimistic internal mark, the platform can grow and your equity can still go nowhere, because the growth was already priced into your entry.
You cannot negotiate the platform’s self-valuation. You can ask how it was set, when it was last tested by an actual transaction, and what has changed since. A platform that recently raised money or recapitalized has a real, market-tested mark. A platform quoting you a value with no transaction behind it is quoting an aspiration.
The Waterfall: Who Gets Paid Before You
Here is the mechanic that decides more second-bite outcomes than any other, and the one I have never seen a listing broker explain. When a platform sells, the proceeds do not get divided among shareholders pro rata. They flow through a waterfall, and your shares stand in a specific place in line.
Debt gets paid first, always. DSO platforms are leveraged; that is how private equity builds them. Whatever the platform sells for, the lenders are made whole before any shareholder sees a dollar.
Preferred equity usually comes next. The private equity sponsor’s capital often sits in a preferred class that must get its money back, frequently with an accrued minimum return, before common shareholders participate. Seller equity is almost always common.
Then the common shareholders split what remains, after dilution from every share issued since you bought in: later acquisitions paid partly in equity, management incentive pools, additional fundraising rounds.
With illustrative numbers, not a prediction: suppose a platform is valued at $500 million with $250 million of debt, and it later sells for $600 million. The headline says the platform grew 20%. But the debt is repaid first, and if leverage grew alongside the platform, and preferred capital accrued its return, the pool left for common shareholders may have grown far less than 20%, and your slice of that pool is smaller than the day you bought in if new shares were issued along the way. The platform did fine. The sponsor did fine. Your second bite can still land well below what the growth story implied. The reverse is also true: a platform that grows strongly without stacking on proportional debt can deliver a second bite that outruns the headline. The point is not that the waterfall is rigged. The point is that the waterfall, not the growth story, is what you are actually buying.
Ask for the capital structure. How much debt, what preferred classes exist, what return they accrue, and where seller common sits. A buyer who will not walk you through the waterfall is asking you to invest in a company while declining to show you its capital stack. No one on the buy side would ever accept that, and they know it.
The Timeline Nobody Controls
The second bite arrives when the platform sells or recapitalizes. You do not decide when that is. The sponsor does, and sponsors sell when conditions favor them: when the credit markets cooperate, when the platform’s numbers support the story, when their fund’s own timeline demands it. Hold periods stretch. Recapitalizations get postponed. A seller who was told the next event was “probably two or three years out” can still be holding illiquid shares long after the associate buy-in they planned around, or the retirement date they picked, has come and gone.
While you wait, the shares generally pay you nothing. HoldCo common rarely carries distributions. So the honest way to think about the equity portion of your price is as a private, illiquid, minority investment with no yield and no exit date you control. That can still be a good investment. It is not deferred cash, and any plan that treats it as cash with a delay is mispriced from the start.
Two more provisions decide what you actually hold, and both live in documents that usually arrive after the LOI. Repurchase rights: what happens to your shares if you leave, retire, lose your license, or die. Some agreements let the platform buy your equity back at a formula price that is a fraction of the mark you bought in at, and the difference between “fair market value” and “as determined by the board” is the whole game. And transfer restrictions with drag-along rights: when the sponsor sells, you sell too, at their price and time, which is standard, but you should know you hold shares you can neither sell on your own nor keep when the sponsor exits.
JV Equity: The Different Math
JV equity replaces the platform bet with a practice bet. Your retained stake rides on the practice you have run for twenty years, which is a business you actually know, and well-drafted JV structures pay distributions from practice profits along the way. For sellers who plan to keep practicing for years, that current income can be worth more than a distant second bite.
The math to check is control. After close, the DSO manages the practice and typically charges it a management fee, sets its fee schedules, and allocates shared costs. Every one of those decisions moves the profit your distributions are calculated from, and you are a minority holder in an entity whose expenses your partner controls. The operating agreement is the whole investment: how the management fee is set, what cost allocations are permitted, what distributions are mandatory versus discretionary, and what your stake converts into if the platform recapitalizes. JV equity done well is the most owner-like structure in dental M&A. JV equity done carelessly is a minority position in a business someone else prices the expenses for.
The Questions That Separate a Real Second Bite From a Pitch
Every question below is one the buy side can answer easily if the answer is good.
Which equity is this, HoldCo or JV, and at what level in the structure? What value am I buying in at, and when was that value last tested by an actual transaction? What is the capital structure above my shares: debt, preferred classes, and their accrued returns? What has happened to the equity of dentists who sold to you in prior years, through your last recapitalization, in percentage terms? What are the repurchase provisions if I retire, leave, or die, and at what price? What are the transfer restrictions, and what are my rights when the sponsor sells?
That last set matters most as a diagnostic. A platform with a strong equity story volunteers it; their prior sellers’ outcomes are their best marketing. Vagueness about the one number that proves the pitch is an answer in itself.
None of this makes the second bite a trick. I watched deals where the equity component was ultimately the best financial decision the seller made, and the platforms that deliver those outcomes are usually the ones most willing to show you the math in advance. The sellers who do well on equity are the ones who priced it as an investment instead of accepting it as a bonus, and who negotiated the terms above while they still had leverage, which means before the LOI was signed, not after.
If you are weighing an offer with an equity component, or want to know what your practice is worth before anyone frames the mix for you, start with our free practice valuation. Knowing your own number first is what makes every structure conversation an evaluation instead of a reaction.