I received a significant amount of feedback from my previous email, “FAQ’s on Dental Consolidation.” Since many doctors had their own questions that they wanted answers, I figured I would share those questions in a “FAQ’s Part 2” email. If you have any questions that I have not touched in regard to consolidating your dental practice, please let me know. So here are a few questions from your peers:
-How much autonomy will I really have if I partner my practice with a DSO?
If I was asked this question 10 years ago, the answer would be zero. However, the reputable DSO’s have learned their lesson and realized that giving doctors full autonomy on the clinical side has improved the patient experience and increased the value of their practices. What a shocker. Now, if you are looking for full autonomy on the operational side, that will probably be a challenge as most DSO’s will have some sort of involvement. DSO’s come in all shapes and sizes and the services they offer their doctors are vastly different so it’s really about what exactly you are looking for your partner to take over and what you want to remain in control of. But there is an option for every doctor based on needs and wants.
-My time horizon to retirement is in 6 years. Why should I do something like this now?
Before COVID, the commitment for a doctor when joining a DSO was 3 years (typically 5 years for specialists). Post COVID, most Groups are now looking for a commitment of 5 years. It’s absolutely possible to get a 3 year commitment, but your pool of potential partners will be less. The “great resignation” in dentistry, along with a massive increase in the amount of DSOs in the space has led to a fierce competition to attract talent and keep talent. Like most private practices, staff retention is the achilles heel of DSOs as well. So if you want to capitalize on the current impressive valuations and your timeline to retirement is around 5 years, you better start weighing your options now versus waiting and being stuck. Enterprise valuations, favorable current tax rates, and the ability to have equity at either the practice level or holdco level for an extended period of time should give you a little motivation to entertain this idea.
-What is my practice worth in the current environment?
I stated in my previous email factors that drive the valuation of your business, but the main factor is your adjusted EBITDA (Earnings BEFORE Interest, Taxes, Depreciation, and Amortization BUT AFTER Doctor’s Compensation). A healthy, median average EBITDA is going to be 20-25% of Net Revenues/Collections. We are seeing at least one whole turn on EBITDA multiples compared to say 3 years ago. Here are 2 examples, (you are welcome to send me your last 12 months in Collections and I can carve a projected value for you):
Practice 1: TTM of Collections: $2M Adjusted EBITDA: $500K Enterprise Value of Business: $3.5M (500k x 6.5 multiple)
Practice 2: TTM of Collections: $4M Adjusted EBITDA: $1M Enterprise Value of Business: $8M (1M X 8 multiple)
-Will I be forced to use certain brands of products or vendors that I don’t want to use?
This should be discussed obviously before any partnership comes to fruition, but most groups will have a contract in place with your current vendor/product supplier anyways so you won’t need to make a change in this regard. Again, groups don’t want to make a lot of changes because doctors and staff don’t like changes. In most cases, this is a nonconcern.
-Aren’t advisors just brokers? What do they actually do to warrant their commission?
NO! I can’t stress enough the value that a reputable advisory team brings to the table. DSO’s want to buy you for the least amount possible, a sell-side advisory firm wants that DSO to buy you at the highest price possible. If you don’t have representation, the buyer will control your EBITDA figure and yes, you guessed it, they want your EBITDA to be as low as possible. They will control the terms of the deal with the idea that you have no idea what your options are..and in most cases they are correct. A seasoned advisory firm will conduct your EBITDA and defend it, create a competitive marketplace to drive up the valuation, take the time and energy to introduce you to every potential partner and allow YOU to make the decision on who you partner. They will walk you through the terms of the deal and know all the red flags that you won’t be aware of when approaching this by yourself. Their commission is irrelevant because they will get an offer that you can’t get on your own which will surpass what you owe them anyways. You only get one shot at selling your practice and you owe it to yourself to make sure you do it the right way. Big advocate of a few groups out there, but proceed with caution because a lot of them don’t do it the right way or for the right reasons for that matter.
-I’m young with a lot of gas left in the tank, I’m entrepreneurial in spirit and currently have 3 practices and want to continue to grow. What does a DSO bring to the table for someone like me?
The market has seen a significant shift with more younger docs that fit this narrative utilizing a silent partner. A reason for this is they want to utilize a DSO’s superior back end office support which allows the doctor to focus more on acquisitions and managing the practices. Another reason is they want to utilize the available capital that a Private Equity backed DSO will bring to the table that they can use to purchase more practices. Traditional lending vehicles will typically cap a doctor out around $3-$4M in available cash, but that’s not the case with PE.
Several DSO’s will give the option of a subordinate (SUB) dso. This will allow the doctor to focus on business development/management while receiving the option of investing a % into the practices being bought with significant financial upside. When the PE firm eventually sells the portfolio, the doctor will receive the same exit multiple (11x, 12x, 13x) on their percentage of ownership. This should be a highly profitable event for the doctor.
-How many potential partners will have interest in me?
This depends on a few factors and is case-by-case. What type of dentist you are and where you are located will come into play? Payor mix will be a factor as well. Some specialty doctors can have up to 16 potential sets of eyes looking at their practice. Remote areas of the country will see less opportunity, but most docs should expect to have around 6 potential buyers at minimum.
-If I was to start this process, how long does the process take from beginning to end?
You should expect 6-7 months for your deal to get to the finish line.
As stated before, I do not work for an advisory team or a DSO. A conversation between the two of us should be the first step for you if you are beginning to entertain this option for your business. With prior experience in dental M&A, I can provide a lot of valuable resources and priceless advice for you which will save you a lot of time and headaches in the future. Thanks for reading!
