The 3 P’s That Drive 10× EBITDA

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Transcript:

And hello, everyone. This is Art Wiederman, and I am happy to have as my guest today on, this recording, Chip Fichner, who is the cofounder of Large Practice Sales, which is the largest company that takes dental practices, to market with DSOs and larger groups. Chip, how are doing today?

I’m doing great. How are you, Art?

I’m good. This world of yours just keeps changing and changing, and we’re gonna talk about that, today. I wanna start the discussion, you and I were talking a little earlier, about the fact that there are three key doctor and practice attributes that tend to drive the values to in some or many you have to me some or many cases, over a ten time EBITDA return. That EBITDA, as you said, was kind of the, you know, the the key to get you into the meeting, and then we gotta dig further. So talk about some of those attributes.

You know, it’s, practices in my world are valued as a multiple of EBITDA. In the traditional sale to a DSO or to another doctor, practices are often valued as a fraction of their prior twelve months or prior thirty six month average collection.

And in in my world, a practice is gonna have at least a half a million dollars of EBITDA or operating profit.

And sort of a low value is to get seven times EBITDA, but some practices that, we have helped over the years have been able to get double digit EBITDAs. And so we were sort of going through our track record over the last nine years to try and figure out what exactly were the key elements of a doctor and a practice that always achieved the highest values.

And so we identified three key traits that I’m gonna call the three p’s. And those three p’s are a doctor that has a personality, a passion for dentistry, and a plan for growth.

And I love that.

I love that. When you can elucidate all of those three elements in your on the phone meetings with one of the six or eight prospective bidders that we will bring to become your invisible DSO partner, as we call it, you have the opportunity to get an out of the ballpark value. So doctors with a personality, we’ll cover on that real quickly. Doctors that are friendly, outgoing, and know a little bit about sales.

In sales, It’s about listening. So the great doctors, part of their personality traits is they wanna learn about that bitter sitting across the table from them. They wanna ask questions. They wanna understand their personal life and what their hobbies are.

And so that’s part of sales one zero one. Right? And so doctors who have that personality trait and are friendly, outgoing doctors who understand sales one zero one always will achieve a higher value.

Number two is a passion for dentistry. You know, great doctors are passionate about dentistry. They’re passionate about their team members. They’re passionate about the clinical outcomes for their patients, and that comes through.

That comes through on a phone call. It certainly comes through when we bring the three final bidders on three consecutive nights to do a practice tour and dinner afterwards. But doctors that are passionate about dentistry and are curious and eager to learn, those doctors achieve higher values. And last and maybe most importantly is today, a practice that’s shrinking is not a practice we can help today.

So a growing practice is required to get into the stadium no matter what your EBITDA is. But if you have a plan for how you’re going to grow, and that plan does not need to be, yeah, I’m thinking about expanding my office. It needs to be a more detailed plan. And we coach all our clients about what is their plan for growth.

Have they identified three competitors that are thinking about retiring that they could buy and fold into their practice? Are they thinking about adding a de novo office? Or do they have a way to open their practice up another two days a week so they can see more patients out of their existing facility? But the doctors who can describe in detail their plan for growth, not just next year, but over the next five years, are the doctors that achieve the highest values because all of the invisible DSOs are eager for growth.

And the reason they structure their transactions the way they do where they’ll come in and buy fifty one to eighty percent of a practice for cash up front. But the doctor retains ownership and continues to lead the practice with full autonomy. And what the invisible DSOs are eager to hear is a doctor that has a plan for growth, not just next year, but over the next five years. And so the doctors who have those three p’s, end up getting the highest values.

Know, Chip, it’s it’s interesting. I I’ve been selling individual dental practices. I don’t for twenty years, I don’t I don’t step into your world because you do what you do, and you go to the experts like yourself for for this particular specialty and niche. And in selling individual practices, a lot of times, I’ll find that a buyer will buy on emotion.

I wanna be in this location. I wanna have this view. I like this city. The thing about in your world is going these buyers are the super advanced class.

They are looking for particular things like these three p’s. And doctors, if if you don’t have your act together, you know, your valuation isn’t gonna be as good, or you may not even get offers. Who knows? Right?

Yeah. It it’s true. I mean, in our world, they’re gonna get offers because they’ve they’ve come in with a half a million dollars of EBITDA. Yeah.

If they have the half a million We wouldn’t have taken them if if we thought they would get zero offers because we only get paid when a deal closes, and we invest a lot of time and money in this process.

So but it’s interesting. So I’ll give you a good example of a early forties doctor, three offices in Nashville last year. We got him eleven times EBITDA. And it wasn’t that big an EBITDA. It was less than two million dollars. But this doctor was effervescent, and he was active in organized dentistry in Tennessee.

And therefore, the Invisible DSO knew that this guy could help them grow their platform by introducing them to other great doctors like him that I won’t say worshiped him, but certainly respected him because he had that personality.

And so personality is really important. And and speaking of organized dentistry, if you are actively involved in organized dentistry, we sold the president of the Florida Dental Association a couple of years ago. He’s now on the board of the ADA, and we’ve we’ve done transactions for multiple doctors who are in leadership positions in organized dentistry. That helps as well. It’s part of the personality test.

Yeah. Well, yeah, you gotta be able to put two sentences together. That’s in in pretty much any business, especially this one. Chip, let let’s let’s shift gears here.

I and I understand that in any invisible DSO partnership, a doctor retains ownership. We’ve talked about that over over the broadcast that we’ve done. Talk to the audience about how they exit the ownership, exit the partnership. How do we get the doctor out if they wanna be done?

Great question. First, let me give you a quick commercial. I’m doing a webinar on the three p’s in early December. I would give you the date, but I don’t have it in front of me.

But if you go to our website, large practice sales, you can sign up for one of my famous fifty nine minute webinars that always go to sixty five. But we’re gonna talk specifically about those three elements and and and how it can help you improve your practice today. And when you’re ready for a partnership, it’ll help you achieve the highest value. So large practice sales dot com.

You can register for that webinar.

So back to equity. So in these transactions, the doctor is generally gonna have the option to retain ownership in one of three structures. Number one, they can retain ownership directly at the practice level. And when you do that, you’re getting paid a percentage of your practice profits tied to your percentage ownership in the practice.

So let’s say you do a transaction where you sell fifty one percent of the practice value for cash and you keep forty nine percent ownership directly in the practice, you’re gonna receive forty nine percent of the practice’s profits, typically paid to you either monthly or quarterly. So that’s structure number one. Structure number two is instead of retaining direct ownership in your practice, you become an owner in the parent invisible DSO. And at that point, you’re betting on the success of the entire group, not just the success of your practice.

And when you do that, you’re no longer getting cash flow payments monthly or quarterly from your practice because you’re making a bet on the success of the group. And the group is reinvesting their cash flow in adding additional practices and growth resources for all of their practices. And the benefit of taking parent company equity is you potentially have the upside for gains in the value of that equity. Certainly, you’ll have upside for gains in the value of practice level equity, but they won’t be as high because the trade off is you’re getting cash flow, whereas in the parent company, you’re not. The third option and probably the most popular structure option today is a combination of both, where the doctor keeps some practice level equity, usually because they want some additional income on top of getting paid for doing dentistry, and they take some parent company equity so that they have the upside potential of the parent company’s hopefully explosive growth in value.

So the the question is, how do you exit that equity? And the answer is it’s negotiable. So in some transactions, the doctor can say, look. I have a five year window, and at the end of five years, I’m moving to Hawaii, so I know I’m out at the end of five years. Great, doctor. We can structure a transaction where you have a known exit of your equity at the end of five years, and the value of that equity will be prenegotiated. And it’s typically a a valuation tied to the performance of the practice in that fifth year prior to the doctor’s departure.

And you can do that the same thing with the parent company equity where you can have a known exit. Most of these transactions are done where the invisible DSO says to the doctor, you’re gonna be able to exit when all of the other doctors are able to exit through what they call a recapitalization. Recapitalization is where the current investor end investors, which include doctors because most people don’t realize that in many cases, the invisible DSOs are majority owned by doctors, by the partner doctors throughout the group. And so it’s not just some big private equity firm. It is doctors are part owners along with the investors.

And so the the oftentimes exit option is you get to exit when everybody gets to exit. And sometimes that’s great, and sometimes it’s not because many of the groups out there will never be able to recapitalize. So it’s important that you choose wisely in who your partner is, understand where they are in their capital cycle, and understand their history of completing qualified recapitalizations.

So you can have a known defined exit, or you can wait for the happiness of a recapitalization at a huge number. Now the the the risk to that, though, Art, is if we go back to first quarter of twenty twenty, there were ten invisible DSOs attempting to recapitalize. And given what happened on March seventeenth called COVID, none of those deals happened that year. And several of them did happen in twenty one, twenty two, but you’ve gotta fully understand who your partner is and, most importantly, who the investor is because they’re the ones who’s going to dictate your ability to depart and monetize your retained piece of equity if you did not do a fixed structure upfront.

But you have the option to do both.

Here’s the advantage, folks, of working with someone like Chip and his team is that, you know, it’s not like, you know, when you when you sell an individual practice and you’re a seller, generally, we cash out a hundred percent. You get your money, many times before the team even meets the doctor. Okay? So you’re done.

You got your money. In this structure, you have choices. And if you are gonna leave some of that value of your practice on the table for down the road, for hopefully a recap, Chip, no. I mean, it’s not like there’s thousands of players that he’s dealing with.

You’re dealing with a limited number of players that you know have a pretty decent shot at getting this done. Right?

Yeah. Absolutely. So today, there are over a thousand DSOs and invisible DSOs out there. Right. And we consider about a hundred of them qualified to bid on our clients. The other nine hundred are on what we call the blacklist. And the blacklist are groups that we won’t deal with for a variety of reasons.

We’re gonna talk about that in a minute. Let let’s talk about values in twenty twenty six. I mean, we’re recording this late in twenty twenty five. What are the risks that we have coming up in twenty twenty six to practice values?

You know, it’s interesting. A lot of doctors are under the perception that twenty five and twenty four were tough years due to high interest rates. The reality is that the quality bidders are very well capitalized and very lightly leveraged.

And so interest rates did not have an impact in twenty four or twenty five on practice values. However, the investors or the invisible DSOs have been far more selective as to who they want to partner with.

So to give you an example, last quarter, quarter ending September thirty, we completed a hundred and forty million dollars of invisible DSO partnerships. And of that, over fifty million were done at new record values, meaning values we had never achieved as a multiple of EBITDA for practices of their type, and and several of those were specialists.

So if you have the right practice and you’re the right doctor with the three p’s and you’re growing, and that’s the key metric to value is growth. Again, if you’re shrinking, there’s no value possible for you in my world. So my theory is that in twenty twenty six, we are finally going to get to that much advertised recession that we have in theory been avoiding over the last five years.

And if a recession comes and if you have a decline in practice collections, your practice becomes functionally unsellable in my world. Certainly, you can still go sell to a doctor, and you can probably sell at a low value to a traditional command and control DSO that’s gonna tell you what to do and how to do it.

But doctors are at risk of declining practices because we’ve got a stretched consumer out there. We’ve got a record number of repossessions so far in twenty twenty five of people’s cars, and that’s kind of the last thing you wanna get repossessed. But we are at a record level of that. The consumer’s under a lot of pressure. The Michigan consumer sentiment index that came out last week was dealing with an almost new low. So there’s a lot of issues going on in our k shaped economy that doctors need to be aware of. And so my my big fear to twenty six is that declining practices become unsellable, which is a problem.

It won’t go on forever, but if if you wanna get out in twenty six or you’re thinking late in twenty six, you’re what you’re saying, Chip, is maybe we need to talk now.

Well, you know, my theory is everybody should have a conversation with me just so you can understand a baseline of where are you today from a value perspective.

And it’s no obligation. It’s no cost. It’s confidential, and everybody learns something in that process. And it gives you an opportunity to understand what the value is. And it may not be right for you today, but we signed seventy seven million dollars of new clients last month. And of that, half of them, I have been talking to for at least three years.

Well, they’ll do it when they’re ready. And that’s that’s how it works. It’s just with patients in the dental chair. They’re ready for dentistry when they’re ready, not when you’re ready.

Exactly. Talk about which practices qualify for an invisible DSO partnership. What what types of practices are gonna qualify? We we chatted on it, but let’s let’s nail that down.

You know, one of the key issues to value today is age. If you’re a single doctor practice and you have a six in front of your age and you’re not an oral surgeon, you’re probably not going to get a high value. And in fact, I’m probably not going to take you as a client unless you have an eye on a great associate.

And what’s driven that is the number of younger doctors that are now eager for these partnerships. Yes. And so if if I’m an invisible DSO and I’m interested in a long term partnership, I’m much more eager to pay a higher value for a doctor who’s thirty eight or forty or forty five than I am for a doctor who’s sixty. And I’m sixty five, so I get to pick on old people.

But that’s a challenge. You don’t wanna be trying to do one of these deals with a even a two doctor practice where both the doctors are over sixty. Very tough. So it pays to start early.

And if you are over sixty, but you have multiple young associates, not an issue.

But it’s age is becoming an issue. Next issue is obviously growth.

The faster you’re growing, the more valuable you are. One of the one of the things that’s interesting that’s not impacting value right now is geography.

Certainly, the most valuable states today are Florida, Tennessee, Texas, but we’ve done ten times EBITDA deals in Michigan, which is not considered a fast growth state. It’s about the quality of the practice less so than the geography.

People have teeth in Michigan just like they do in Florida, Tennessee, or Texas. I mean, it’s it’s all about cash flow.

This whole valuation business is about is about cash flow. Now we were chatting a little earlier, Chip, about, you know, some of these invisible DSOs, and you said there’s a thousand DSOs, invisible DSOs out there, and you’ve got about a hundred on your radar that you’ll do business with. I I wanna make the point before I ask you this question, doctors, is if you haven’t gotten the call from a DSO or somebody that, you know, sign a letter of intent. Just sign the letter of intent.

We’re gonna give you gazillions of dollars. Don’t sign the letter of intent till you talk to Chip Fitzner and his team. Because once you sign that letter of intent, you know, they sound real good. Nobody’s gonna say to you, Chip, well, we’re we’re really by the way, sign the the letter of intent, but we’re on Chip’s, blacklisted, on his blacklist.

So let let’s talk about what puts a an invisible DSO on your blacklist that you just won’t take any of your valued clients to them.

You know, there’s a long list of items, but the the number one thing is to look at the practices that they’ve partnered with historically. Are they partnering with quality doctors in quality geographies that are relatively young with growing practices. So you can you can take a quick look at an at an an invisible DSO and look at the quality of the practices they’ve partnered with. The successful ones will only partner with great practices. That’s number one.

Number two is you gotta look at the source of their money. There are many of the invisible DSOs that were started by doctors out there today that are financed by bank debt. And bank debt is a limited resource, and you can’t build a big invisible DSO based on bank debt. Certainly, can start out early, but it’s not a long term solution to being able to create a high value invisible DSO.

Ultimately, they need to have some sort of institutional financial backing. And keep in mind, that’s not necessarily private equity. Doctors are of the opinion for some reason that all of the consolidation is driven by private equity, and that is just not true. BlackRock, for instance, the world’s largest asset manager with thirteen and a half trillion dollars under management today, has invested in four and a half four invisible DSOs just in the last three years.

The sovereign wealth funds are in the invisible DSO business to the tune of billions of dollars. So it’s not just private equity, but understanding who the money is is very important to the long term success of the invisible DSO. And, therefore, many of that group on the nine hundred long blacklist are those which you do not have the proper financing to create success.

And I have seen some of them, and I see their balance sheets. We’ve had a we we’ve been asked to evaluate a couple of them, and I just look at this and I go, how are they gonna pay this debt off? What if there is a recession? And, you know, whereas we, you know, we that’s the, again, the advantage of working with you, Chip, is that, you know, you look at a practice, and in in five minutes, you can say, okay.

This practice is good for, invisible DSOs one through six. And you know where to take them, and you can have the conversations with them and say, hey, guys. You know, this this is one you should look at. And they respect you because they know that you’re not gonna bring them garbage practices.

Right?

Yeah. And and, you know, that’s an interesting point. We did a symposium in Dallas this summer. We had forty three CEOs that were off our list of qualified invisible DSOs. They came to Dallas since we spent two days together. And, of course, we are providing a fun time and lots of food and beverages, and we asked them in return one favor. We said, we want you to go home and look at all the practices that you’ve partnered with over the last eight years and tell us how did our clients perform relative to the doctors that you partnered with directly and relative to the doctors that you partnered with that were brought to you by the little advisers?

And they did. We got reports back from thirty nine of the forty three, which I was shocked by.

Impressive. Yeah.

And they said, you know what? You’re right, Chip. Your practices have outperformed the other practices by pretty significant margins.

And so our track record based on our client selection process, meaning we’re only taking larger quality clients, has paid off for our future clients because now those invisible DSOs, the forty three that we’ve partnered great practices with, can stretch a little when it comes to value. They can go, well, we know based on LPS’ track record of bringing us successful doctors that have been proven over a year, two years, five years, eight years, we’re able to get higher values for our clients to some degree because of our reputation and our track record.

And that’s why having a story as a practice that once you decide that this is the route you want to go, and that’s we’ve talked in prior, recordings about, you know, what what is, you know, what is the right thing for each doctor to do, and each doctor practice owner is is different. But once you decide that this is what you wanna do, then those three p’s really come into play.

And They do.

You know, you’re it’s nice that you’ve been doing this for so long that you pretty much know that if you take practice x y z in Abilene, Texas I pulled that name out of my, you know, what.

And at the moment. There you go. Well Datacenters.

Lucky lucky guess. Right? You take that practice, and you move that practice into, you know, your invisible DSO number six is the best fit, you got a ninety plus percent chance that, you know, there’s gonna be success, and that and that’s why. But but, again, doctors, be be careful about doctor started DSOs where they just every doctor that they can get their hands on, they pull a practice here, practice there.

It’s this this place and that place, and some are in metropolitan areas, and some are in rural areas. And and they don’t have the same accounting. They don’t have the same, management. They don’t have the same I mean, it’s it’s not gonna work.

Right. True. So so that that’s what we have to look at. Let’s touch on, for doctors that are listening.

What things should a seller be looking at as to determine you know, you let’s say you you they they sign up with you and you say, you know, Art, I would like to introduce you and you’re one or three or five or how many have ever practices you’re taking to market? I would like to introduce you to these six, invisible DSOs. Chip, let’s get into some of the weeds here as far as what how do we know that an invisible DSO is the right fit for the seller? What should that seller be asking?

What should be they be looking at to say, yeah. This is this is the right fit for me?

You know, interestingly, the the number one concern of our client doctors is losing autonomy.

In that, what we promise, the invisible DSOs that we bring as bidders, and, typically, we’ll have six or more qualified bidders for one of our clients. But the invisible DSOs that we bring are those which want their doctors, not just allow their doctors, but they want their doctors to retain full autonomy.

Many of these groups talk about autonomy, and what they’re talking about is clinical autonomy, where the invisible DSO is gonna take over the management of the office and the doctor just does the dentistry. We don’t deal with those groups. We are interested in doctors who wanna continue to be the leader of their practice and doctors who wanna continue to have the decision making ability to decide who to hire, who to fire, how to set their schedule, what products to use, what payers to take, etcetera.

And so one of the key parts of our process for helping the doctor understand whether this is the right fit for them is not only we’re gonna make sure that the doctor meets with the senior executives of the Invisible DSO, But once we get down to the three finalists, we’re gonna put our clients on the phone with other doctors that have partnered with the groups Yes. That are the three finalists. And they’re gonna have a doc to doc call with multiple doctors from each Invisible DSO to hear their story. Hey.

How’d it go? You joined them five years ago. Did they do what they said they would do? What changed?

What didn’t change? Are you glad you did it? And so that helps the doctor understand, frankly, the invisible DSO’s culture. And do they get to retain full autonomy as promised?

And so that part of the process is critical to choosing a partner. This is your life’s work, and probably, you’re gonna spend the balance of your career with them. So making this selection properly is life changing. It’s important.

Oh, I absolutely agree. The the the other thing I like to talk about when you partner with an invisible DSO is, you know and the doctors need to realize that they’re going to you know, that they’re getting paid what they’re earning in their practice. They’re gonna take a pay cut. That’s just normal in in your world.

But I’ve talked to doctors who partnered with some of the folks that that that you work with. And because of the fact that these invisible DSOs have amazing economy of scale as far as being able to get deals on dental supplies and lab and equipment and all these things. More importantly, the increase in the, the insurance reimbursements that these groups can get in many cases mitigates that. And I’ve got some doctors saying, listen.

Not only did I get a bunch of money from my practice, not only did I get equity in, as I like to call it, the mothership, but I’m making as much, if not more money now than I was when I owned my own shop. I mean, do you hear you hear that sometimes too.

Right? Yeah. Absolutely. You know, that that’s that’s been one of the big changes post COVID is, you know, they’ve always been paying twenty five to thirty percent less for supplies, and they’re paying ten percent less for team benefits because of their size.

But what’s really changed is as the invisible DSOs have gotten bigger, they’ve been able to negotiate with the payers. And they have been able to negotiate significant reimbursement increases depending on the doctor and how well they’ve done it themselves.

But we we did a deal recently where the Invisible DSO was getting reimbursed at a rate twenty percent higher than the doctor was getting reimbursed.

Oh, that that’s huge.

This is a four million dollar practice that was about a hundred percent insurance, so it was an eight hundred thousand dollars. Right to the bottom line.

You’re talking to a CPA. It get all tingly when you talk eight hundred thousand dollars, and that’s all profit It drops the bottom line. And if the doctor owns you know, maybe they own forty nine percent of the practice. They’re still a partner. Maybe they own twenty five percent of the practice, and they’ve got the rest of the equity in the mothership. I mean, it just the the the amount of profit that they can make, that they can make more money, and it just depends on and that that’s, again, the thing that you know because you know these partners that you’re bringing your doctors to. You know them inside out and what they’re gonna do, and because you’ve talked to them.

Yeah. And and as you know, and when when we get down to the three finalists, we we coach the doctors. We coach them on the three p’s. Hey, doctor. Let’s not talk about your drag racing habit because that’ll make them nervous.

They don’t wanna hear that.

No. They don’t wanna hear your your parasailing habit.

But let’s ask the question. Okay. I’m getting reimbursed at this rate on these nine codes. What are you getting reimbursed at?

So doctors in the process are gonna be able to ask very specific questions to determine what that particular invisible DSO’s value is to them from a bottom line. And you’ll ask that same question about insurance benefits cost for your team members. You’ll ask that question about supplies. You’ll ask it about technology.

And that’s another thing that’s driving, I think, a lot of doctors is the acceleration of technology, whether it’s AI and diagnostics or whatever. That’s coming, and it’s coming fast.

And and It’s here.

It’s here.

It it’s here. But it’s not here for eighty percent of the independent dentists in the country.

That’s true. But in the next five years, I mean, some of the stuff that this AI does I was talking to one, you know, listening to a podcast from one group that they literally they have their AI bots get on the phone and talk to the insurance companies about getting paid. I mean, you know and and and the insurance companies like talking to the bots instead of a real person because they don’t have to fight with the bots. You know?

So it’s it it is very real. And if it’s used in yeah. And these these big groups are probably on the cutting edge of the AI and case They are. Presentation and diagnosis.

And, I mean, it’s it’s it’s I I’ve seen some of this stuff in action. Is pretty cool. So any any final advice to our listeners here, Chip, as far as what, you know, what they should be looking for, questions they should ask, and then I want you to give out your contact and talk about that that that webinar you’re gonna be doing here on the three p’s.

Yeah. My my pitch to doctors at the end of every one of my webinars is let’s have a conversation. If you’ve got at least a million and a half in collections, if you’re a specialist, and you’ve got at least a million eight in your GP, let’s have a conversation. Let’s spend twenty minutes on the phone, and and my guarantee is you’ll learn something. We can talk about the practices that I know in your region that have partnered with Invisible DSOs, or we can talk about how you may be able to improve your margins.

But let’s have a conversation. That’s that’s what I do all day is talk to doctors, and I learn something from every doctor I talk to, and and I hope every doctor learns something from me. And they can they can set up that call by going to large practice sales dot com, And, my team will get you set up, and we’ll have a twenty minute call. And I do it seven days a week, so you’ll never be able to say, we couldn’t find a convenient time. We can always find a convenient time.

Exactly. And then on the website, they’ll be able to find the information about the webinar on the three p’s? Yes, sir. In December. Right?

Yes, sir.

Alright. Chip Fisher, cofounder and head of large practice sales.

You’re you you just have amazing knowledge in this area and helping to guide doctors through this very, very difficult maybe the most difficult decision that they’re gonna make in their lives as to whether to do this and who to do it with. Thank you so much for your time. Really, really appreciate it. And, again, this is Art Wiederman for, you know, on behalf of Chip Fitzer and large practice sales.

Okay.

Thank you, Art.