The Rise of Invisible DSOs
This episode is sponsored by:
In this episode of Decisions in Dentistry magazine’s podcast, host Art Wiederman interviews Chip Fichtner, cofounder and principal of Large Practice Sales, and a renowned expert in the DSO market. With billions of dollars in closed transactions, Chip shares insights on the ever-changing landscape of DSOs and their impact on dental practices. The discussion delves into the unique approach of Chip’s company in maximizing practice valuations and attracting younger dentists to the DSO model. The episode explores the implications of recent election results on dentistry, highlights the benefits of invisible DSO partnerships, and sheds light on the opportunities for growth and autonomy that these partnerships offer to dental practices. Chip’s expertise unveils the advantages of aligning with invisible DSOs, including increased revenue, improved buying power, and heightened leverage with payers. Tune in for an in-depth discussion on the transformative role of invisible DSOs in the dental industry’s evolution.
Transcript:
On behalf of Decisions in Dentistry magazine, my name is Art Wiederman.
And today, I am speaking with Chip Fichtner, who is the cofounder and principal of large practice sales.
I’ve known Chip for a long time, and he is one of the premier experts in the DSO market. And this is a big, big topic these days with dentists.
Today, we’re gonna discuss the ever changing DSO market, and how Chip, and his company have a unique approach to taking dental practices, both general and specialty, to market and getting the highest possible multiple. Now this is interesting.
In the last twenty four months, large practice sales has closed transactions of about one billion, that’s b, one billion dollars.
And the interesting thing, which I’m sure we’ll talk about today with Chip, is that a hundred and fifty million dollars of those transactions were actually with doctors in their thirties. So we’re seeing doctors of all different age ranges take a look at the DSO option. So, Chip, nice to talk to you. How are you doing today?
I’m doing great, Art. Thanks for having me today.
Well, you’re welcome. And and you and I were chatting before the show. Let’s get started by talking about I I I hear we, we have this election thing that happened a couple weeks ago. And, how do you see the election results? We now have a and, again, we we don’t, we don’t talk politics here, but how do you see the election results, with a republican president, republican congress?
How do you see these election results affecting the the DSO, and the other markets that are involved with dentists?
You know, I think there are actually some very significant, impacts on dentistry, virtually all of them positive, based on the election results. And let’s start with what I think is probably one of the most important, and that is that, president Trump or president-elect Trump, has committed to not, raising taxes. Under the other administration, they had proposed that, for twenty five tax rates for the sale of your practice and the proceeds on that would go from what are today twenty percent long term capital gains tax rates, and you would not pay the three point eight percent Obama tax to the, last administration who proposed that, the sale of your practice would result in a forty four point six percent federal tax bill, plus, of course, the various states. So I think that, little increase is off the table, and I think that’s a huge plus for Dennis.
The second thing that I think is, potentially even more important is that on May the twenty third, the current administration’s Federal Trade Commission and US Justice Department launched what they call an inquiry into health care roll ups. And what we do or what a DSO is, is a health care roll up in which a larger entity acquires individual practices.
And the, justice department and, the Federal Trade Commission launched this inquiry, basically trying to achieve the fact that they wanted the feds to have the right to block those transactions.
And, fortunately, I think, the head of the justice department and the head of the Federal Trade Commission, Lena Khan, will both be unemployed shortly. And, therefore, I think that, that inquiry will go nowhere.
Interestingly, a very similar bill passed the California legislature and was sitting on the desk of Gavin Newsom to sign on September thirtieth, and, he vetoed that bill. And it was basically giving California the exclusive right to say yes or no to any practice transaction, including small practice transactions where the buyer was big. And so dodging both of those bullets, I think, is very important for for dental practice growth. I do think one of the negatives that’s potentially being overlooked, by the industry is that a number of the supplies that, are used in the dental practice today are manufactured in China. And if Trump is successful in implementing the tariffs that he’s talking about, it’s gonna have a dramatic impact on your cost of supplies and, frankly, on the cost of everything. So I think that’s, one of the negative potential outcomes that we have. But overall, I think it’s a good thing.
I mean, he’s talking about a sixty percent tariff on, imports from China. And, yeah, that’s a I mean, that’s a that’s another podcast that we don’t have time to do today.
But, no. Great insight about that. And, I mean, I I’m a c you know, CPA, and I see this going on all the time. And, I think I heard a statistic, Chip, there’s, like, two point six trillion dollars in private equity money out there. So the these these DSO roll ups are are not only not going away, but they’re they’re they seem to be stronger than ever. And I know that you and and what you do in your work is you have a, you work with what’s called an IDSO, an invisible DSO.
And, you’ve written articles on it, and you’re the biggest expert on this that I know. So why don’t you tell our audience, you know, what is an invisible DSO and, you know, why why should doctors care why is it important?
Yeah. Great great question. So the invisible dental support organizations are those which want to become a doctor’s partner by buying anywhere between fifty one and eighty percent of a practice for cash upfront with the doctor retaining ownership in the balance and continuing to lead the practice as an owner for years or decades into the future. And the Invisible DSOs, if you choose the right one and keep in mind, there are over a thousand Invisible DSOs in the US today. This is not a new concept. Invisible DSOs have been around for over thirty five years. But the invisible DSOs want to partner with great practices that can benefit from their resources.
So doctors get the opportunity to monetize a part of their life’s work and yet get a strong silent resourceful partner to help them grow their practice, expand their practice, and do it without risk, but yet with considerable upside.
So the Invisible DSOs do not generally own a hundred percent of any practice, and they partner with doctors who want to have what we call full autonomy. And when I say full autonomy, meaning the invisible DSO partner is there to support the doctor, but they’re not there to tell the doctor who to hire, who to fire, what supplies to use, what labs to use, what payers to take, how to set their schedule, etcetera.
The invisible DSOs want to become your silent partner, but they do not want to homogenize your practice to fit some corporate standard. They do not wanna micromanage your practice. They’re not gonna put any people in your practice. They’re not gonna tell you what softwares to use.
And, it’s, it’s a very beneficial partnership that ultimately can result in the retained ownership piece that the doctor keeps in one of these transactions becoming extraordinarily valuable over time, far more valuable than what an independent doctor might make on his full ownership today.
You know, my my experience, Chip, I’ve seen this, is when one of these invisible DSOs buys a doctor’s practice here’s a perfect example. Let’s say that they’re contracted with several, PPO plans. I mean, depending on the size of your invisible DSOs, and some of them are pretty large, they have incredible buying power in the marketplace where that practice sometimes gets a significant increase in revenue just because, you know, they’re they’re gonna go from, they’re gonna go from, you know, maybe, you know, sixty percent of UCR on a on a propi to seventy five percent the day that the practice changes hands. I mean, there are a lot of economy of scale and advantages to working with these groups. Right?
Yeah. Absolutely. The larger groups have been able to root to, obtain higher reimbursement rates from payers, including federal government for Medicaid and including things like Delta Dental who swears that they don’t do that.
And the reality is if you have enough leverage, you’re gonna get higher reimbursement rates. I’ll give you a good example. There’s one invisible DSO that has seventy practices in the Phoenix metro area. And I can assure you that they are getting, reimbursed at higher rates than the independent dentists in Phoenix. And they’re paying thirty to thirty five percent less for supplies. They’re paying fifty percent less for implants. They’re paying ten percent less for better team benefits.
But some of the other resources that they have are recruiting. You know? There’s, I was with an invisible DSO on Friday that has twenty seven full time employees in their headquarters just recruiting team members for their partner practices across the country.
That same group had two dozen people in their marketing department driving new patients into their partner practices across the country.
I mean, the number one I I mean, the the the two biggest challenges in dentistry that I see today are finding and retaining staff members. I I was just talking to a doctor about a half hour ago who’s telling me, I can’t even get people to show up for interviews.
And number two is the the fact that PPO reimbursements are not going up. They’re going down. But, again, when you go with these invisible DSOs so I I I talked to a a a doctor, who I’ve known very well for a long time who who did go with, one of these DSOs, and his comment to me was, are I’m making more money now after I sold part of my practice than I was before. So there’s a lot of advantages to doing this. So, Chip, who are the investors in these, ideas? So who’s who who’s who’s behind all of this?
That’s that’s a great question, and that’s the the interesting answer to that is that investors in the first half of twenty twenty four invested over five billion dollars into the invisible DSOs, not the traditional branded DSOs, but the invisible DSOs.
The invisible DSOs have been able to attract that kind of capital because they work. When you have a practice that’s run by an owner doctor that has skin in the game, they perform better than an employee doctor does in one of the branded DSOs who’s not an owner. But the money that’s coming into dental consolidation today is not just private equity. A lot of doctors are of the opinion that it’s just private equity, and the reality is it’s not.
Let’s talk about some examples. The sovereign wealth fund of Abu Dhabi, which is the third largest sovereign wealth fund in the world after, China and Norway invested a billion dollars in one of the oldest invisible DSOs in the US. It’s been around for thirty five years, and they have given them the capital to accelerate their growth. And that group is currently over four hundred practices.
Another investor that most people don’t think is in this, fray is BlackRock. BlackRock is the world’s largest asset manager.
Right.
They have over eleven trillion dollars of, money under management.
And they, in the last two years, have bought two invisible DSOs. And, therefore, they have provided those invisible DSOs with virtually unlimited capital to grow their businesses.
And on top of that, you have venture capital firms and you have, family offices. Family offices are a significant piece of the Invisible DSO growth over the last five years. We’ve done hundreds of millions of dollars of partnerships for our clients with family office backed invisible DSOs.
So if you think it’s just private equity, you’re missing out on a lot of the capital that’s driving values up today. And interestingly, you know, a lot of doctors are of the perception that high interest rates, have caused invisible DSOs or DSOs for that matter, to reduce practice values in a partnership or a purchase. The reality is last quarter, we did almost two hundred million dollars of these partnerships, and over a hundred and ten million dollars of that was done at over nine times EBITDA.
So many doctors are of the opinion that, values are down when in fact, we have set new records in the last hundred and twenty days.
Well, at the at the end of the day, couple things. You had mentioned high interest rates.
I everybody says to me, oh my gosh. Interest rates are so high, and and everybody’s used to three percent. Well, three percent is ridiculous.
Interest rates yeah. There’s, what, six, seven percent. I mean, that I mean, that’s normal. I bought my first house in the eighties at I think it was fifteen or sixteen percent.
I mean so interest rates are actually good right now, and we have an administration that’s coming in that is business friendly, that wants to deregulate, and that that’s good for for these. And and for doctors that wanna take some chips off the table and maybe, hand off some management responsibility and get some back office help, it’s gotta be the right, invisible DSO, of course. But but that’s I mean, there’s there’s opportunities out there. Now, Chip, I I, you know, I get doctors who call me up and say, well, I’m doing you know, my practice does four hundred thousand a year.
Can I be a candidate? So I go, well, I don’t know. But, talk to us about kinda what size of a practice will qualify, for for a high valuation in the DSO market. What are they looking for?
So, typically, the high value practices are gonna have a couple of common elements. Number one, they’re gonna have an EBITDA or operating profit after paying the doctor. Keep in mind, the after paying the doctor is critical.
They’re gonna have an EBITDA of at least five hundred thousand dollars.
Right.
And that’s typically gonna translate into specialty practices that at least have, a million and a half dollars in collections and GP practices that are gonna have a million eight or more in collections.
That’s gonna depend upon, a lot of things. And but number one thing that the groups are looking at for high values today is growth rate.
There is there is less relevance as to geography than there was a year or two ago.
We’ve done some very high value deals in the upper Midwest.
Certainly, the highest values are still Florida, Georgia, Tennessee, South Carolina, Texas, Arizona, Utah, Idaho, Colorado.
But we’ve done ten x deals in Michigan in the last hundred and twenty days. So where you are doesn’t really matter as long as you’re growing. And if you have a personality, a passion for dentistry, and a plan, I’m gonna get you a high value.
Well, let let me ask you a question, Chip, about we got a doctor who’s do doing two, two and a half million, but he’s just not doing a great job managing the practice, and the overhead is really high. And when you see the overhead really high and then you calculate the EBITDA after paying the doctor, it’s not great. Do you go to a doctor and say, hey, doc. You’re a candidate. We can do this, but your valuation is not gonna be as high because your profit’s low, and here’s some things we can do about it. How how do you deal with somebody like that?
Yeah. Absolutely.
And that’s why we urge every doctor to go through our process. And what I always say is in the worst case, you’ll learn something.
So absolutely. When we talk to a practice where we see that their margins are not where they could be, we will give them an idea of areas that they should take a look at. We’re not in the consulting business. However, because we look at a hundred sets of practice financials in detail every month, we’ve got a pretty good idea of, ways that practices can enhance their profitability and therefore increase their value.
Because the math is pretty simple. If you can increase your EBITDA or operating income by a hundred thousand dollars and your practice is valued at, let’s use, seven times EBITDA, that’s an increase in value of seven hundred thousand dollars. So another way to say that is for every dollar you don’t spend, you’re gonna get seven dollars in value when you do an invisible DSO partnership. So it’s it’s important, and we’re we’re happy to give doctors pointers, when they’re, let’s call it not meeting, the, the value that they could achieve.
Now down the road, I’ve heard this term of recapitalization.
So in the invisible DSO, we sell off the fifty fifty one percent. Right?
Is it Yeah.
You’re gonna sell anywhere between fifty one and eighty percent of the value of your practice for cash upfront.
And then we retain the balance. And then what is the exit strategy for the doctor on the balance? Is that a is that a recap down the road? Is that we can get buyouts sold to somebody else? How does that work?
You know, that’s that’s an important part of how you structure a transaction. Many doctors are of the belief that the only exit for that equity is when their partner completes a recapitalization, which is just a fancy term for saying the doctors and their current investors sell typically to a larger investor.
And, certainly, a recapitalization can be a very lucrative way to exit that retained piece of equity that you have in your practice.
But we’ve structured hundreds of deals where the doctor has the, right to force his partner, his or her partner, to buy that retained piece of equity at a set date in the future at a predetermined value, which is typically tied to the profitability of the practice, at the time of, that prenegotiated exit date. So you can have a known defined exit if that’s what you want. On the other hand, if you choose the right partner and participate in one of their recapitalizations, the values can be extraordinary. Good example, two weeks ago, one of the largest invisible DSOs in the country recapitalized, meaning they sold to a new investor, for the third time in seven years.
And at their first recapitalization, that group was valued at three hundred and thirty million dollars. And at their second recapitalization in January of twenty one, it was valued at a billion two, so almost a four hundred percent increase in the value of the equity for the doctors who were there thirty eight months previously.
And two weeks ago, they recapitalized at a value of over three point eight billion dollars, which means they increased the value of that invisible d s o by twelve times in seven years.
And those are the kind of partners that you want to partner with because our doctor, the first practice we partnered with them seven years ago, saw that ten times or twelve times return on his retained equity. Unfortunately, we had fifty other clients that we had partnered with that group over the last seven years. But it recapitalization is not the only exit option if you structure it correctly.
No. I happen to know who that DSO is, and they’ve done very, very well. Thank you very much.
Yes, sir.
So, Chip, let me I want you to give out your contact information, and I want to make sure that our listeners know how to get ahold of you. And then I wanna talk a little bit about your process and how you work and everything. So first of all, if if doctors, if if you are interested in learning about this market, learning about the opportunities, I know you’re talking to your friends at the dental society meetings, and you’re talking on the blog. And you you you’re everybody’s talking about this because it’s a big deal, and you wanna find out if this is right for you.
I mean, there there’s nobody better on the planet than Chip to talk to as far as getting an idea of are you right for this? Is this right for you? So, Chip, how what’s the best way to get ahold of you?
So I’m easy to reach. My email is Chip, like a potato chip or a computer chip, at large practice sales dot com. And our website, large practice sales dot com, has plenty of resources to learn more about this. But I urge every doctor to contact us, and let’s have a conversation.
Now worst case, we’re gonna both learn something. I promise.
No. I’m I’m sure you are. So let’s talk about the process. Well, let me let me I wanna go a different direction here.
Let’s start talking about the why. You’d we’ve mentioned in the opening that, a hundred fifty million, dollars of your, of your sales were doctors in their thirties. So talk a little bit about the why. Why why would an invisible DSO be right for somebody, and maybe why would it not be?
Yeah. Great question. So the the answer as to why a hundred and fifty million dollars of doctor practice value partnered with an invisible d Invisible DSO in the last twenty four months varies based on the doctor. So let’s go through a couple of examples.
I’m a young doctor. I’ve built a great practice, and I’m eager to expand it either through opening additional offices or buying competitors, and that takes some personal risk. I’m gonna have to go to the bank and borrow money and personally guarantee that, and there’s a lot of risk in growth.
So in the case of many of these young clients of ours, they were eager to have their invisible DSO partner put up the capital necessary for them to grow. And so these doctors, were able to sell fifty one percent of the value of their practice today for cash at twenty percent federal tax rates. They retained forty nine percent ownership in the practice, and they now have a partner who’s gonna take a hundred percent of the risk to grow their practice as long as the doctor is willing to go execute that growth strategy. So your invisible DSO partner is taking a hundred percent of the risk, and yet the doctor gets forty nine percent of the ownership of whatever he builds or buys in the coming years.
So it’s a low risk, high value way to grow a practice. So if you’re a young, eager doctor, these partnerships are a phenomenal opportunity to build something bigger, faster, and with no risk. So there there’s answer number one. Answer number two is, the opportunity to monetize a part of your life’s work, which is probably your largest personal asset, and it is very risky.
I had a client recently who was in their forties, was diagnosed with terminal cancer, and that doctor’s practice value, has been decimated.
So it’s a great opportunity to create liquidity at relatively low tax rates and diversify your portfolio. And this has not been a bad year to be diversified. Gold’s up twenty seven percent year to date. S and P’s up twenty five percent. Nasdaq, who knows?
But the reality is, monetizing part of your practice and diversifying your investment portfolio is not necessarily a bad strategy.
No. Absolute absolutely not. And we’re seeing it happen.
All this talk about the younger again, the younger doctors. Someone in their thirties who’s maybe got a twenty or thirty year bandwidth. Why would this be right for them?
Well, a couple of answers to that. So number one, I I have a theory that during the COVID shutdown, these young doctors went home and played with their young kids while they could not go to the office, and they realized, you know what? Having family time is very valuable. And if I partner with an invisible DSO, I’m gonna gain a half a day a week back in my life that I can spend with my family because I’m not dealing with all the administrative minutiae, which my new invisible DSO partner is now handling. So I believe part of what’s driven the younger doctors to these opportunities is the ability to spend more time with their young families while they’re still young.
On top of that is the potential equity returns when you can participate in multiple recapitalizations over time. So, that group that just recapitalized for the third time, that my my clients in that deal who, got to experience two of the three recapitalizations, they saw over a seven year period of time, they saw the value of their equity increase by about nine times. And, they did not sell all of their equity at this recapitalization because that group will recapitalize again.
So if you have a ten or fifteen year horizon, you potentially can participate in three, four, or more recapitalizations, which is functionally multiplying your equity value. So I use a slide in my webinar, which is archived on our website, by the way. And in that slide, if a doctor took a million dollars in equity in a transaction day one and that DSO or Invisible DSO recapitalized, every five years, three times, so fifteen years, the value of that million dollars in equity just using a three x multiple return and keep in mind all of these groups will talk about three times to five times returns, but we’re gonna use three to be conservative.
That million dollars at the first recapitalization becomes worth three million. At the second, it becomes worth nine. And at the third, it becomes worth twenty seven million dollars. And if you don’t think that’s real, let me introduce you to some of my clients who have experienced that.
It’s real. It’s absolutely real. Oh, yeah. No doubt about it. Do you ever see any of these groups ever going public?
You know, that’s an interesting topic at the moment. The only publicly traded dental group in North America is Dental Corp of Canada.
There have been others decades ago. Today, the only publicly traded dental group in the US is Dental Corp of Canada, and their performance has not been the greatest. It’s not been bad, but it hasn’t been the greatest. So, ultimately, yeah, I think, potentially, you do see some of these larger groups, go public, and I think they’re gonna wait until the window of IPOs opens up.
And that’s certainly something Wall Street is talking about today, thanks to the election that the IPO window, which has been virtually closed for the last five years, will reopen, and therefore, there are potentially some interesting liquidity opportunities. We’ll see.
Now now the interesting thing about owning, let’s just say, in in our example, forty nine percent is the doctor who sells to the invisible DSO, that he or she is gonna get not only a salary, a fair salary for what their work that they’re doing, but they’re getting forty nine percent of the profits.
Isn’t that how it works, Chip?
Yep. That’s one of the structures. So, typically, the doctor is gonna get paid for what they do every day, at a comparable rate to what an associate in the area might be, might cost. So in some areas, it might be thirty percent of collections if you’re a GP up to thirty five percent of collections if you’re a GP. If you’re an ortho, it’s typically gonna be an annual salary or a day rate. It’s not gonna be a percentage of collections.
In oral surgery, the compensation rates range from thirty to forty percent, and it’s pretty much the same in perio, endo. Pedo is a little different because compensation is determined on whether you’re getting paid on hygiene or not. But you’re gonna get paid a a market rate for what you do every day. And then if you choose a structure where you retain the ownership directly practice level, you’re gonna get paid your pro rata piece of the practice’s profits, typically monthly or quarterly. And so you’re gonna have a direct benefit from the growth of your practice.
In other structures, instead of keeping an ownership interest in the practice, you may take an ownership interest in the parent. And at that point, you’re betting on the success of the group, not just the success of your practice. And And when you choose that structure, it will typically have a higher upside in that ownership interest. And the third option is, and this is happening a lot today, the doctors are retaining ownership at both the practice and the parent. By retaining ownership in the practice, they’re getting access to the cash flow. And by retaining ownership in part in the parent, they’re getting access to that potential, significant upside.
So for a second shift, talk about the advisers that these doctors who are looking at selling the need. Obviously, attorney account. But when you’re when you’re counseling them, obviously, people that have done this before, they need to be working How important is that?
You know, today, within a a thousand invisible DSOs out there who are eagerly contacting larger practices directly, urging urging you to do a deal directly with them and not get into the type of bidding contest that we generate.
Yeah. I wanna talk about that with you in a minute here. Yeah.
Yeah. They they they wanna do a deal directly with you, and oftentimes, they are paying their current partner doctors to refer their friends to the group. And these are not insignificant payments. In many cases, they are six figures.
And sometimes your friend who’s referring you into the group may tell you that he’s getting paid six figures or she, and in some cases, they won’t. But the Invisible DSOs would much rather do a deal directly with you than to hear that I’m involved. Because when I’m involved, I’m gonna bring multiple bidders. And as the CEO of one of the largest Invisible DSOs told me last week, face to face not recorded, he said, yeah.
You cost us an extra one and a half times EBITDA in the multiple, but we appreciate the fact that your transactions actually close. When we deal directly with the doctors, we pay less, but, that can be very painful for us.
So And and and I wanna point out, Chip, and point out to our audience, is that I can guarantee you, doctors, if one of these invisible DSOs go directly to you, they’re not going to make the highest and best offer.
They have in their models correct me if I’m wrong, Chip. They have in their models that that maybe fifty to seventy percent of who they call are gonna bite, and the number they’re gonna throw out to them is gonna sound life changing. But what they don’t realize is that, you know, it’d be like putting your house up for sale and having one bidder on, and that’s it. You know?
So talk about the advantage of working with somebody like you who, you know, who who’s gonna do this. And by the way, doctors, I wanna make one more point to you. If you get an offer individually and they they send you an offer and they send you a letter of intent, don’t sign it. Because once you right, Chip?
Once they sign that letter of intent, I don’t know how much you can do to help them. But, you know, the the process am I am I on point here?
Yeah. No. It’s every doctor deserves to have multiple bidders, not just because you wanna use multiple bidders to increase the value of your practice, but more importantly so that you can figure out who it is, who’s the right cultural fit for you to spend the balance of your career with. This is like a marriage. You wanna make sure you look at all of your options.
And we have doctors who come to us, and this happens every couple of days. But they say, well, I’ve been talking to so and so, and they’ve made me an offer. And do you think you can beat it? And I’m like, not only do I think I can beat it.
Let’s go through your numbers, and I’ll put it in writing that if I can’t get you a higher number net of my fee, then you can pay me nothing. And we just don’t lose on those deals. Because when a doctor has not had multiple bidders, they’re missing a lot of options to get higher values and the options to consider other potential partners, and they’re all very different. You know, some of these groups have eleven thousand employees and some have a hundred.
And sometimes it’s better to go with the smaller groups because the upside in their equity may be greater than the bigger groups. It all depends on what you want.
So, you know, one of the things that I think about, you know, being someone who has just reached Medicare age is that, doctor, if you’re in your fifties or sixties as a CPA, I would be seeing health insurance premiums for you and your group of five or seven people.
Might be two to three thousand dollars a month, but going with one of these, you right there. I would think that someone in that age before Medicare is gonna save a significant amount of money in in health care costs, right, and benefits?
Yeah. I mean, the benefits cost today are crazy, and it’s important that you offer offer team benefits. Every single one of the invisible DSOs is offering team benefits to their team members, and it’s key to recruiting great people. The other thing that’s happening that most people don’t realize is that many of the invisible I won’t say many, but some of the invisible DSOs are now offering equity upside opportunities to team members, to non doctors. So if you have a key office manager, for instance, who’s been with you for twenty years and you don’t ever wanna lose, they’re gonna set it up so that she has equity upside just like you do. And that is one of the greatest retention tools ever in invented, not just for your associates because they’re gonna want your associates to become owners, but some of the groups are taking it even further to key nonclinical employees. So you wanna talk about fixing your turnover problem, this is a great way to do it.
Talk for a minute, Chip, about geography. In other words, I know here in California, the invisible DSOs have been a little slower to develop, but they’re they’re coming in here strong now.
Where are is this phenomenon all over the country? Are there places that are stronger than others, weaker than others?
Yeah. There are. And so the population growth states, a practice will generally, but not always, be more valuable than a negative population state. We did a sixty two million dollar deal for a practice last quarter in New York, in New York City, actually. And so the answer is geography two years ago was more important than than today. The number one driver of value today is growth rate. We did a blockbuster value deal in Michigan last quarter.
Our one of our top deals size wise year to date was a fifty five million dollar deal in Vermont.
So the answer is the Invisible DSOs are looking outside of the hot states of Florida, Georgia, South Carolina, Tennessee, Texas, Colorado, Arizona, Utah, Idaho, and they’re looking elsewhere.
And we’ve done ten x deals in Michigan for GPs recently. Now is every every GP gonna qualify for that? No. Absolutely not.
You need to be young. You need to be growing. You need to be in a population area that’s growing. But geography is really less of a factor today than it was two years ago.
You you once you join an invisible DSO, do they look at adding services? Like, if you’re a GP and you’re maybe not placing implants or you’re not doing sleep dentistry, or or you’re not doing cosmetic, do they help you in adding those, revenue, centers into your practice?
Yeah. If you want to. You know, we have plenty of doctors who say, I don’t wanna do implants. You know what? That’s great. Don’t do implants. They are not gonna force you to do anything.
They’re gonna show you a menu of options that you can choose from if you are interested in growing your practice in various segments, but they’re never gonna force you to do anything. So a good example is AI in diagnostics.
The biggest DSOs and invisible DSOs in the US have already adopted it, and they adopted it a) because it’s better patient care and b) because it’s more profitable.
So the technology curve today is getting steeper and doctors need to understand what it is and whether they want to participate or not. But I can I can tell you the old argument of the big DSOs and the big invisible DSOs don’t provide the best care? Not true anymore. They are outracing independent dentists with technology and, in many cases, providing better care than independent dentists are capable of providing because they’ve not adopted the new technologies.
No. That’s that’s a good point. Yeah. Here’s another thing that I’m hearing in the DSO market.
Obviously, it’s not what it was five years ago, and a lot of these entrepreneurs have popped up, and they bought two, five, ten, twenty practices.
And I know that a lot of these folks are not doing well. They might be financed by investor money or whatever. And the advantage of of coming to you is you know the good players and the bad players. So if someone says, I’ve been approached by x y z DSO, you can say to them, doctor, you know, I know what’s going on inside that company, and that may not be the best place. Isn’t that an advantage of working with someone like you too?
Yeah. Absolutely. We we maintain, something called the blacklist. The The blacklist is the nine hundred invisible DSOs that we won’t allow to bid on our clients. And the blacklist changes. Groups go on and groups come off more recently have been going on than coming off.
And I’ll give you a great example.
There’s a an extraordinarily well capitalized invisible DSO that is sitting on about a billion dollars of dry powder, and we will not let them bid on our clients because that billion dollars of dry powder and the the money that brought that, changed out the entire management of the Invisible BSO.
Everybody that had a c in front of their title, is no longer there. And until we see what this new management group is going to do, we don’t think it’s worth taking risk of partnering our practices with a group with an unknown track record. Now the Invisible DSO itself, corporately, has been around a long time, but this is ten new c level executives that are now running it, none of which have any dental experience.
That’s scary.
Yeah. So it it’s important to fully understand exactly who you’re gonna get in bed with, and we’re gonna do as much due diligence on your potential partner as they’re going to do on you long before they get the opportunity to bid on you. And that due diligence is gonna include not just their balance sheet and their access to capital for growth because if you’re not growing, you’re not creating equity value for your partner doctors. But we’re also gonna look at something that’s really key, and that is who is the investor and what is their track record in health care consolidation.
Have they done it before? And best of all, have they done dental consolidation? There are some investors out there. We had a client in the second quarter, a three office GP practice, very charismatic young doctor.
And we went to an investor that has created and successfully monetized five invisible DSOs over the last ten years and returned billions of dollars to their doctor partners and said, look. Here’s our client. He’s in a great place. He’s a charismatic doctor. He’s a great platform to start a new Invisible DSO.
And so he became the fourth new Invisible DSO that we started with our clients in the last two years.
So it’s important to fully understand not just the operations of your potential partner, but also who’s the money behind it and what’s their track record. Do they have experience in this? Because there’s plenty of money out there. The key is to choose the right money.
Yeah. Now if I have a doctor who’s doing a million a year, you’re gonna tell them EBITDA isn’t probably gonna get to the five hundred that you’re talking about. But, I mean, you can encourage them to kinda be on the the wait I’ll call it the wait list and say, doctor, you bring a consultant in, maybe add some services, maybe raise your fees, maybe you do some get off of some of those low paying p p I don’t know, whatever it is, and you get to a million five, a million eight, two million, then we can talk. Have you done that with doctors also?
Oh, we do that all the time, because we’re planting seeds for the future. I signed a client Friday that I’ve been talking to for six years. They, they finally got to the profitability level, and we we’ve been talking for six months every six months of the last six years, and they finally got to the profitability level that they would achieve the value that they wanted, and so they became a client. So, yeah, we we have ongoing relationships with practices, you know, for years and years until they’re ready because not everybody’s ready yet. But at some point, before you turn fifty five, this is something you need to consider. Because if you’re over sixty, it becomes challenging unless you’re a multi doc practice with lots of young associates.
So let’s put a bow on this conversation, Chip, and this is incredible information for our listeners, is someone picks up the phone and they call you. Talk about your process. In other words, they I call, hey. I my name is doctor Wiederman.
And, Chip, I hear I heard you on the on this podcast recording, and, I’ve heard some really great things about you. And I I’d like to talk to you about, is my practice a candidate? What would that look like? What is your process? Walk through that, and then we’ll we’ll put a bow on this.
And, so our process starts by contacting us by going through our website at large practice sales dot com, and we have a form that you can fill out. And, if you’re of the right size for what we do, then they’re gonna schedule a call for you and me. And we’re gonna have a twenty to thirty minute call just to talk about your practice and your goals. And at that point, I’m gonna be able to give you a pretty good idea of whether an Invisible DSO partnership is an option for you or not. And if it is, then I’m gonna ask to take a look at three years of profit and loss statements, no tax returns, and we’re gonna do that under a nondisclosure agreement that’s gonna bind each of us to nothing other than confidentiality.
Once we have those numbers, one of my analysts will give you a call, ask some questions, figure out where the bodies are buried, add back the personal expenses, and we’re gonna come up with an EBITDA for your practice.
And then you and I are gonna have a conversation about what’s possible, the number of bidders I think you’ll have, the type of structure options you’ll have, and, ultimately, the value that we think we can achieve for your practice. And at that point, you will have invested a little bit of time. You’ll invested no money. You’re not obligated to do anything whatsoever.
But in the worst case, you’ll learn something. Because if your margins are subpar, I’m gonna be able to say, you know what? In looking at your financials, it looks like you’re spending way too much on your labs and supplies. You should go talk to your vendors and negotiate because you can right now.
Now. Or, it looks like you’re overstaffed by three people. Other practices of your size in your region that we’ve looked at recently are doing your same collections level with three fewer people.
So we’re we’re gonna have a conversation, that tells you what is the value of your practice in an invisible DSO partnership. And you’re either gonna like that number or you’re not. And if you don’t, that’s okay. You got a free practice valuation, and you’ll learn something.
And if you do like the number, then the next steps are, a doctor engages us. And then when you engage us, it costs you absolutely nothing until there’s a closing. And if there’s a closing, we’re gonna get paid a percentage of the value of the transaction at closing. But if we go through this entire process and don’t find you a partner that you love and a value that you like, you’re never obligated to do anything.
So in the worst case, you’re you’re gonna have seen a lot of options, and, it will have cost you nothing if you don’t ultimately end up closing a deal.
And every time, Chip, that we’ve talked that I I hear the stories about, okay. Well, I’m signing, and I’m gonna pay this brokerage fee. Oh, gosh. But when you pay that brokerage fee, you’re gonna get, what, three times or more than you would have gotten had you did this on your own. Right?
Yeah. Maybe not three times more, but I I I can give you plenty of examples where doctors came to me with, initial offers of x, and we ended up at one point five times x or in some cases, two times x.
But, you know, it’s a function of who’s interested in what, when, where, and why because these invisible DSOs goals change on a regular basis. And so we’ve we’ve had practices that I knew were approaching their next recapitalization event. So I knew that they could afford to pay high prices because they were about to monetize their group, at a bigger number. And so that insider knowledge, let’s call it, can be very valuable, to clients. And it’s not something that a dentist would know because you’re busy creating beautiful smiles, and me and my thirty four team members are busily trying to find the best value we can for our clients across the country.
Exactly. Chip, anything else you wanna tell our audience before we call it a day? I mean, you’ve given us some really great insight into what the market looks like and what people should be thinking about, and why it’s important to work with a specialist. You know? I mean, you you know, doctors, if you have a, you know, a complex implant case or a big reconstruction case, you’re sending it to a periodontist or a prosthodontist, you have a, you have a desire to sell to a a a big company, which might be the biggest transaction of your life, you should use a specialist. Any last kind of words of wisdom before we put a wrap on this?
Yeah. No.
And this is a shameless plug, but we’re bigger You’re allowed at least one of those.
Okay. So here’s my shameless plug. We are bigger than the next four advisers in this business combined.
We did almost two hundred million dollars in transactions last quarter for our clients, and there’s not another adviser in this business that did two hundred million dollars in transactions all year. And our size adds value because we have a much broader reach and understand where the bidders are coming from and who is financing them and what their goals are. And so we’ve done many transactions where the practice might have been worth seven times EBITDA, but we knew the right buyer at the right time who was looking for somebody great in that region who ended up paying ten times EBITDA or a fifty percent increase over the doctor what the doctor might have gotten by themselves.
And the other shameless plug for us is that we’re different from all the little guys and probably why we’re the big guys is we don’t get paid by the buyers. We are only paid by the doctors.
So our sole interest is to achieve the highest value with the right partner for our doctor clients. Part of the reason we get the high values is because when we’re not out there with our hands out to the bidders asking them to pay us on top of the doctor, we get to bring more bidders to the party because, there are lots of groups that won’t pay advisers a fee. So the little advisers, you know, they might bring you one, two, or three bidders. And, you know, in our case, we generally won’t take a client unless we can identify at least six qualified bidders.
And that’s how we get the higher values for our clients, but more importantly, they get more options to choose from.
Alright. Last last time, Chip, you give out your contact information. How can people get ahold of you?
People can email me at chip at large practice sales dot com, and our website is large practice sales dot com.
Yep. That’s nerve.
President, c CEO, chief cook, and bottle washer, whatever we wanna call you of large practice sales, thank you for your time and expertise. And on behalf of Decisions in Dentistry magazine, my name is Art Wiederman. I wanna thank you for listening, and I would strongly encourage all of you, if you’re having a conversation with your spouse or your adviser or with yourself about maybe I should be doing this, Chip would be an excellent resource to call. Alright. Very good. Have a great day, Chip. Thanks for your time.
Thank you, Art. I appreciate it. And doctors have a wonderful week.
Okay. Bye bye.
