Ep 527 How to Avoid an Earn-Out (Even in a Service Business)

Welcome back to Built to Sell Radio. Today’s story is a service-business unicorn: Dr. Michael Fallosi scaled a rundown two‑chair dental clinic in Adelaide to ten and sold it for 100 percent cash at closing. If you’re making great money on the tools but capped by your own capacity, listen for how he pulled himself out of the chair, de‑risked the business, and made an earnout unnecessary.

Michael, great to have you. Our listeners wrestle with staying billable at high rates versus building something scalable; walk us through how you bought the clinic and when you realized you didn’t want to be the clinician forever.

I bought the practice nobody wanted and decided to run it like a business, not a solo craft; from day one the goal was a top practice in Adelaide that didn’t depend on me.

When did that mindset flip actually happen, given all the time and money you invested in dentistry?

Reading Good to Great in Fitzroy Gardens, it hit me that my hands were serviceable but my brain lit up on business, so I chose to build the best practice rather than be the best clinician and committed to learning by doing.

Did you rip the bandaid off or taper your clinical time?

I phased down from four days to zero while hiring and shifting patients to others, because you can’t chase two rabbits, and I knew my numbers cold so the business could grow as I stepped back.

Cash flow scares people when the owner’s hours are the fattest margin; how did you avoid a dip?

Over years my billings went from about forty‑plus percent of revenue to eight, and by then most of my income came from the business itself, so I could afford to stop seeing patients without blowing up cash flow.

What about the ego hit of not fixing the toothache yourself?

I was running toward business, not away from patients, and I kept the human connection by being visible, checking in, and assuring people I was still around even if I wasn’t the one holding the sharp instruments.

Owners in some services have one mega‑client who insists on them; dentistry is many small clients, but did people resist being handed off?

Handled with care, most patients accepted the transition once they knew I wasn’t disappearing, and the intimacy of dentistry just means you must communicate clearly and stay accessible.

How did you value the tiny two‑chair practice when you bought it?

The seller’s rule of thumb was roughly half of revenue plus stock and equipment, and given the state of the place, I took the deal.

How did you finance it as a young dentist?

Student debt is lighter here, banks like lending to dentists, and after a decade working I had some capital, so the small price was straightforward to fund.

Name the biggest strategic moves that created value.

First, I removed key person risk; no clinician did more than seventeen percent of revenue, which made the business turnkey and validated the Built to Sell mindset.

Why did capable dentists join you instead of starting their own?

We targeted new grads and grew them fast with a robust intranet, clear standards, and hands‑on mentoring, and because I wasn’t on the tools I could drop everything to help.

How did you keep them once trained?

Keep their books full, pay well via activity, give them great gear and strong support, and remove reasons to leave.

What was the second high‑impact decision?

I secured the neighbor’s property via first right of refusal, pre‑approved plans, then built parking and expanded from six rooms to ten, which unlocked scale and drove value.

You borrowed and personally guaranteed it; how did you get comfortable?

I de‑risk like a boa constrictor by knowing the numbers inside out, so even big moves felt controlled and the bank backed a proven operator.

How did you and your spouse navigate the risk?

She’s a dentist too but not a businesshead; her support was letting me take big swings, trusting my judgment while I leaned on other advisors.

What challenges blindsided you on the way up?

Hiring experienced dentists often clashed with our way, we had an early legal scare over a name, and staffing in a tight market was constant work, so I watched the quality of complaints as a health check.

How did you handle people who just want a paycheck?

I set high standards both ways and showed up when it mattered, and I accepted I’m Vegemite—too strong for some, perfect for those who truly fit.

How big were you before selling, and how do practices like yours price?

We reached ten chairs and thirty‑plus team members, and typical dental deals land around three to five‑and‑a‑half times adjusted EBITDA that excludes the owner’s clinical income.

Why sell instead of riding the dividends?

We’d hit our site’s ceiling, and the work shifted from building to fixing, so I chose new hard, interesting, meaningful problems and some life back from 24‑7 vigilance.

Was the business flat and did you leave upside for a buyer?

We sold near peak on steady revenue and left blue sky like orthodontics and implants we didn’t offer.

Did you de‑risk personally outside the practice?

Yes, I took money off the table into unrelated assets and treated the building as a separate, durable bet to avoid concentration risk.

How did you run your sale process?

After emailing my accountant, I cold‑called corporate buyers, created competitive tension, hosted quick visits with data packs, and made it clear this was a turnkey sale with me not staying.

How and when did you tell your team?

I met buyers in plain sight, told my practice manager first, then the team, framing that selling was the easy call and choosing the right buyer for them was the hard one.

How did people react?

Many were rock‑solid and supportive, some weren’t thrilled, and I focused on telling people in the right order and leaving on excellent terms rather than trying to please everyone.

What did the offers look like, and what about the real estate and earnout?

Three offers landed within about five percent; I chose fit, nudged the number, kept the property with a long lease, and—unusually for dentistry—got 100 percent cash at close with no earnout by proving there was no key‑person risk and that they’d prefer me out of the way.

That’s a wrap for today’s conversation with Dr. Michael Fallosi and John. If you enjoyed the episode, hit subscribe. Huge thanks to Dennis Labataglia for the audio engineering and to our community of certified value builders for helping us share this work. I’m Colin Morgan, and I can’t wait to talk again soon.