Deal Mechanic: Synova Capital & DBG

In just three years, Synova Capital helped reposition dental services business dbg, tripling EBITDA in the process and generating a 77% IRR on exit. By Vicky Meek

In April, UK-based Synova Capital sold dental support services business dbg to The Carlyle Group and Palamon Capital Partners for an undisclosed sum. It was an impressive first exit for the lower mid-market firm: after just three years of ownership, it generated a 5.8x return on its original investment and a 77 percent IRR.

Back in 2009, Synova had identified the dental services market as attractive, not only because of its size – the UK market is worth around £6 billion a year, according to market research firm IBISWorld – but also as a result of new regulations coming into force. “We could see that there were changes coming down the line,” explains David Menton, managing partner at Synova. “The government was putting in place annual inspections of dental practices through the Care Quality Commission, and we knew there would be winners in the outsourcing space.”

As it conducted its research into the market, the firm came across what was then called The Dental Buying Group and contacted the owner. The discussions led to a deal in 2010 that enabled the original founder to exit the business and retire, with John Rochford, the chief executive at the time, leading a management buyout.

Back then, dbg was providing a number of mainly subscription-based services to the dental sector, centred around engineering services (equipment repairs) and selling products and materials to customers. This was a 20-year-old business with an annual EBITDA of £1 million, a strong reputation and high levels of repeat business (95 percent of customers renewed their membership to dbg’s services annually) – but it wasn’t set up to take advantage of its growth potential.

Fast forward three years, and dbg is now making annual EBITDA of £3 million. It has also expanded into new areas, such as providing services to medical GPs, online training and other web-based services. Membership numbers have doubled: it now counts more than 10,000 practices as members. And it’s eyeing further expansion in areas such as veterinary practices. podiatrists and chiropodists, as well as expanding its existing services.

 Here are the key changes under Synova’s ownership that made this possible:


1. STRENGTHENING MANAGEMENT

At the time of the deal, dbg was solid and profitable. However, the founder was retiring and the chief executive was also looking for an exit in the not-too-distant future. So the plan was to bring in a new chief operating officer who could take over the reins at a later date. The candidate chosen was ex-Capita executive Kanesh Khilosia, who brought with him experience of running outsourcing services to corporates – an area that dbg was looking to tap into. Over time, Khilosia took up the CEO postion, with Rochford moving to a non-executive role.

In addition, Synova brought in David Carman as chairman. An experienced hand at acting as bridge between private equity and business, Carman could see that cultural change was essential to ensuring dbg could expand rapidly. 
“One of the key areas for us to work on was getting employees, many of whom had been at dbg for several years, to understand the impact their actions had on the business,” says Carman. “We had to create a culture where people understood that in a small business, everything they did affected the bottom line.”

2. IMPROVING SYSTEMS 

As with many smaller, founder-led businesses, dbg needed investment in new systems and processes. “The employees had a great customer-service ethic,” says Carman. “Yet few understood the potential the business had, because the data wasn’t readily available to analyse.”

Synova and management set about restructuring dbg in the first nine months and then spent the next 18 months investing in IT, including new CRM systems. “The business often knew more about an individual practice than the practice manager,” explains Carman. “The problem was that the records were spread over several databases and so it was very difficult to keep track. An IT upgrade was essential if we were going to start offering compliance services to customers.” 

It was also essential if dbg was to start offering services to larger, corporate dental practices. 


3. REPOSITIONING THE BUSINESS

When Synova invested in dbg, half of revenues came from engineering services, such as repair and maintenance of equipment, and the other half from materials and product sales. Synova felt this was a low margin, highly competitive business – and that there was much more potential in offering services, in particular to new, larger clients. “The corporate market was an important area for dbg to go for,” explains Menton. “These made up around 10 percent of the market.”

Having overhauled the IT infrastructure, the owners then got their Rolodexes out. “Once we had the right systems and people in place, we had the credibility to take our offering to the corporate practices. These were mainly private equity-backed businesses and so we knew the owners. We could effect introductions through our contact base.”

In addition, dbg trimmed the number of products it offered, moving to a smaller range that included the items most important to customers. This freed up more time and resource to focus on outsourced services, such as payroll, compliance (to help customers ensure they were meeting CQC requirements) and online or onsite training. “We built our online capabilities, as previously the business did not even have an e-commerce platform,” says Carman.

“We put in place a virtual compliance suite and then used that as a fulcrum around which to build other services.” 
The result is that 80 percent of dbg’s revenues now come from services, boosting EBITDA margins from 15 percent to 30 percent. And its customers now include many of the nationwide chains of dentists, in addition to the individual practices it already served.

4. ACQUIRING NEW BUSINESS LINES

Once dbg had built the right platform from which to offer its services and to expand within dentistry, it started to think about exporting its model to other relevant types of practice. This allowed organic growth to be complemented by acquisitions. 

“We relied on Synova to help us identify the right business to acquire – they knew and understood the strength of our offering and to which markets it was applicable,” explains Carman. 

In 2010, the opportunity arose to acquire TAG Medical, a Nottingham-based tester of medical equipment that focused on GPs, hospitals and pharmacies. The acquisition brought with it a whole new market into which dbg could cross-sell its compliance and training services: TAG served a third of GP practices in the UK.

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For Synova, one of the key reasons for the deal’s success was the company’s latent potential. “We saw a business that could grow,” says Menton. “It was clear that it had a robust business model with a diverse membership. From that we could roll out new services. In addition, it had strong recurring revenues and high cash generation – dbg converts over 100 percent of cash to EBITDA.”

And for dbg, the “hands-on interest Synova brought to the business was invaluable,” says Carman. “It was a true partnership between Synova, dbg management and me. The strategy for the business was clear from the outset and the exit was well planned even in the early stages. There was a constant dialogue with potential buyers so that when it came to exit, they knew and understood dbg’s unique characteristics.”