Dental Practice Valuations Explained

00:00
This is Dental All-Stars, where we bring you the best in dentistry on marketing, management and training.

00:12
Welcome to Dental All-Stars. I’m Eric Vickery, president of coaching at All-Star Dental Academy. And I’m very excited to interview our guest today, Brandon Moncrief. He has over 20 years of dental industry experience as a banker, a broker, a sell-side advisor. His firm, McLaren and Associates, specializes in providing practice, valuation, sell-side advisory, and brokerage services to large practice owners looking to monetize their business.

00:42
in private buyer sale or DSO affiliation. That is a mouthful, my friend.

00:51
How are you? I’m good. I’m good. Good to see you. Thanks for having me. Yeah. Glad to have you on and excited to dive in. I get a ton of questions. I feel like every day I’ve got a client asking me, Hey, what’s going to happen when it’s time for me to sell my practice? And so I will assume the role and be the middleman here and just pass some questions on to you and, just see where this takes us. We’ll do, we’ll do, hopefully create just a ton of value for people who are thinking about this, this process.

01:20
And so why don’t just give us an update on the practice transition, just the landscape, the overall view of things and what you guys are seeing on your end. start there. So the marketplace is essentially bifurcated into two different landscapes. You’ve got the private buyer world, you know, traditional practice sales, what we call doctor to doctor practice transitions. And then you’ve got the DSO and private equity landscape. Uh, that’s really, uh, caught fire and, and.

01:50
Um, emerged over the past, let’s say five to seven years, been around for a while, but a tremendous amount of consolidation over the last five to seven years. So let’s kind of break that conversation into two pieces. Um, talking about the doctor to doctor traditional practice sale arena, you know, that market has not changed remarkably over the past 10 to 20 years. Um, we still see a strong level of demand from, you know, young doctors that are looking to go out and.

02:19
and start or buy their first office, despite the fact that they’re coming out of school with more student loan debt than ever, despite the fact that interest rates are elevated compared to where they were a few years ago, you still see a lot of entrepreneurial doctors that are pursuing practice ownership. I think a lot of that is surrounding the fact that a lot of people chose to go to dental school rather than go to law school or medical school or what have you. So you’ve got more graduates.

02:47
Um, and there’s definitely been a shift towards the female demographic and dentistry. And some of them are not pursuing practice ownership or waiting longer, uh, to pursue practice ownership until maybe after they start a family. Uh, but despite those trends, you know, still seeing solid, uh, demand from private buyers and practices continue to trade for anywhere from let’s say 70 to a hundred percent of annual revenue.

03:14
Or two to two and a half times net cashflow before doctor compensation. that, that market has been very resilient, uh, over the past 20 years, irregardless of really the trends from a macro economic perspective or from a demographic perspective. Okay. And I want to sort of repeat, make sure everyone’s hearing and I’m hearing clearly. So if I’m a private practice owner and I’m wanting to sell to a private practice owner, one-to-one sale.

03:45
It’s about, let’s I million dollar practice just for round numbers. It’s about 75 cents on the dollar for collections. I would sell my practice around $750,000 and approximately. Ballpark. Depending on the profitability and depending on several other qualitative factors as well as geography, the practice is gonna trade for 70 to 100 % of revenue, right? There’s some markets, especially like rural or tertiary markets where you have limited demand, practice is gonna trade on the lower end.

04:14
or if it’s especially practice. uh Outside of PEDO or though, which trade for premiums, it might trade on the lower end. know, comparative to all things equal that same practice being located in, you know, Austin or Phoenix or uh Raleigh, North Carolina or somewhere like that where you have, you know, tremendous amount of demand. Why do you think, it’s like you’re reading my mind. I have here, why is it so hard to get buyers into smaller cities? Do you like, you know,

04:44
these practices from my perspective crush it. mean, they are like, feels like no competition. The new patient flow is amazing. They’re fee for, well not fee for, they’re at a network, maybe fee for service, but they’re not an in-network practice. They’re doing quality dentistry. Patients are plenty. Why is this such a hard, it feels to me from my perspective, it feels like it’s such a hard sell to get dentists to move to that area or want to be there.

05:12
They all want to be in Louisville. They all want to be, like you said, Phoenix. They want to be in bigger cities where it feels to me like the competition is higher. have to pay your employees higher, your rent is higher, and there’s a lot more in-network competition. So do you have any perspective on that? Because it baffles me as a business coach from that perspective, I don’t understand it. Do you have any experience with why this is?

05:39
I mean, definitely hit the nail on the head in regards to the fact that in rural markets and tertiary markets, you’ve got lower overhead, higher profitability, less competition, much more favorable environment to be a proud owner. However, the young generation is focused on lifestyle and whether it’s the dentist or their spouse, you know, they want to live within 60 miles of a major metro area because.

06:03
They want access to what those areas have, right? Great restaurants, lifestyle places to spend money and have fun. So it’s getting harder and harder to get the younger generation to consider going out to those tertiary markets. Unless maybe they’ve lived in the city for awhile and they started a family and they realized that they don’t want to be in the city to raise a family or they grew up, you know, in a more rural environment. And that’s what they know. That’s what they love. And they want to go back there from the coaches.

06:33
perspective feels like, yeah, I want to live there with a lifestyle. And then you go there and you have your practice, you can’t afford the lifestyle, but you’re there because it’s such a competitive market. And then we get clients going, Hey, how do I, how do I grow? How do I get better? And it just is for me, such a no brainer, but what do I know? 28 years in dentistry. I don’t know anything. So you’re right though. There’s a draw. There’s a peripheral draw. That’s the only thing I can put my finger on to think, okay, why would they choose this? So I totally hear what you’re saying.

07:01
A couple other things to unpack about the private buyer marketplace, because there have been a couple of things that have changed. that is, you know, smaller, more antiquated practices have become nearly impossible to sell. So we’ve been around for 35 years and we will not take a practice to market today if it has revenue of less than 700,000. Or if it’s extremely antiquated from an equipment and technology and build out perspective.

07:30
because buyers have certain expectations, both from an aesthetic perspective and a technology perspective, but also from an income perspective. If they’re coming out of school with more student loan debt than ever, and they’ve got high lifestyle expectations, they need to make more money than the previous generation just to pay their bills. So they have to buy larger practices that have significantly higher net cash flow.

07:57
Then a smaller practice would throw off. So for that reason, smaller practices, antiquated practices have become increasingly difficult to sell. And then on the high end of the marketplace, once you cross about, let’s say $2 million in revenue, you kind of outkick your coverage from the perspective of selling to a private buyer because most of them either don’t have the cashflow backing, like the ability to buy a practice from a financial perspective or

08:27
the confidence or the skillset to take on a practice of that caliber. So that’s when you move into looking harder at the DSO option as compared to the private buyer sale. Totally. So I want to repeat that. If I have a practice and I’m selling, I’m 65 plus and I decided I was slowing down a bit. I was just kind of cruising into retirement, figure out, my practice. And somehow I’ve let it get below $700,000 a year in collections.

08:54
You’re not even listing that practice. That’s not even worth your time. Cause nobody’s going to buy that practice is what I’m hearing. It’s going to be an uphill bow for sure. And it’s going to take a lot more work, honestly, to sell a practice that’s smaller than it is to sell a more elite practice where, you know, buyers are falling all over themselves to buy a practice of that caliber. You know, on a daily basis, we’re talking to, you know, anywhere from two to five new buyers that call our office and we’re vetting them, trying to figure out who they are, if they’re qualified, what they’re looking for and almost across the board.

09:23
From a private buyer perspective, they’re looking for a practice within 60 miles of a major metro area, five plus operatories, annual revenue of 750,000 or higher, and an updated facility. That’s 90 % of the buyers we talk to, that’s what they’re looking for. Yeah. I’ll basically just open a scratch practice if I don’t have that. I could go do that myself. Exactly. Okay. Got it. Okay. And then we’ll get into the over 2 million in DSO.

09:52
Do you think, I have a question you made me think of another thought here with, I love this conversation. Are there more dentists wanting to buy practices that are for sale or are there more practices for sale than there are buyers? great question. ah So for a long time, it was a seller’s market and in certain geographies, it’s still a seller’s market. Again, anywhere where buyers, where dentists want to live, there’s typically more buyers in the marketplace than there are

10:21
Sellers of class a assets, right? So when you talk about the major metro areas that are growing rapidly, you know, it’s still a seller’s market. But as you start to move, uh, I would say north in the colder climates, or you start to move into, you know, more rural or tertiary markets, it’s the opposite. It’s more of a buyer’s market. Right? So if we’re talking a lot about like Buffalo, New York, for instance, right. Um, especially in the winter, not a lot of buyers.

10:51
In that marketplace compared to, you know, a Dallas, Texas, or, you know, Irvine, California, or somewhere like that. Um, so geography plays a big role in that, um, in markets where people want to be, it’s definitely still a seller’s market and typically a multiple offer situation. When you take a high caliber practice to market. If I were a buyer, young dentist, I came to your.

11:19
practice and I said, Hey, I want to live in the best market possible. want, I can live anywhere. I practice anywhere. You tell me to go Brandon, you just tell me where to go. And there’s a practice for sale that you have listed. Where am I going? Oh, that’s an awesome question and a hard one to answer. Right? Yeah, I bet. I definitely think looking at these smaller markets, um, you know, maybe not extremely rural, but what I would consider

11:45
You know, a second or third tier city where you don’t have as much competition. You have lower overhead. That’s where I would focus my attention. Although again, the vast majority of them are going to want to be in a major Metro that sounds sexy and has all the amenities that the dentist or their spouse is looking for. I think it’s more about finding the right practice, right? Than it is necessarily going to a particular geography and then making sure that your patient

12:15
And you do everything you can to find the right practice. Talk to every broker in that area. You know, do some grassroots marketing for yourself, whether you send out, you know, letters to all the practice owners in that area or go to all the dental industry events. Um, I mean, it’s going to take concerted effort to, find the right practice, but you need to be patient because you typically only do it once. You got to buy the right one, or you could make a tremendous mistake and derail your career.

12:45
We might share a brain sometimes, I’m not sure, because literally that’s how I would answer that question and say, look, you’ve got to look for a space that isn’t so competitive. Maybe it’s warmer, maybe it’s colder, whatever you want, and then not be so tied to what you’ve always grown up in. If you want to have an easier go at running a very successful business, it feels like the coaching clients we have that struggle the most are in bigger cities, more competitive markets. They’re fighting with…

13:14
PPO rates and they’re trying to figure out how do I get out of network with that instead? And the ones that have just an easier go at transitioning to a practice they really can envision are in that description you just provided. So I could not agree more. All right. So now we’ve been holding at bay the DSO side of this. So how do we compare? I’m your client. I’m a dentist. I don’t know if we want to use round numbers, 1 million or 1.5, whatever you want to use. I’ve got a practice.

13:44
that collects $1 million a year. How do you evaluate my practice if I’m selling to Dr. Smith versus if I’m selling to DSO? Yeah. So at a million dollars a year in revenue, I would say 90 % of the time, the DSO sale is not going to be compelling, right? From an economic perspective, because what we’re really looking at first is economically, is there a gap between the private buyer valuation and the DSO valuation?

14:13
So let’s talk about a practice with top line revenue of 2 million. Cause that’s where the comments get more congalling. let’s see. Just a real quick to interrupt. Sorry to interrupt you. So if you’re listening to this and you’re not collecting $2 million and you’ve been thinking, Oh, maybe DSO, maybe not. Maybe that’s not even on the table then. Correct? Right. I’d say, you know, a million dollars in revenue, 90 % chance. It makes sense to go the private buyer route. One point $5 million in revenue. Now we’re maybe 50 50.

14:41
And then once we take up to 2 million plus, now it starts to tip the scale towards the DSO route compared to the private buyer route. And one is just economics alone, right? So $2 million, uh, top line rev practice with let’s say $500,000 in EBITDA. So 25 % EBITDA margin, very healthy EBITDA margin, but definitely achievable if you’re in the right market and running a practice and in the right way and working with your team.

15:10
to make sure you’re optimizing it. um In the private buyer world, if you can find a buyer, on a good day that practice is gonna trade for 1.5 to 1.6 million from a valuation perspective. In the DSO world, that practice trades rather than a percentage of revenue, we’re looking at a multiple of EBITDA. So $500,000 in EBITDA times a 7X multiple, that’s a three and a half million dollar valuation, right? Trading for twice or more.

15:38
what it’s worth in the private buyer space. So for that reason alone, large practice owners tend to gravitate towards a DSO sale. Now that said, it comes with more nuance, right? There’s more strings attached in a DSO deal. From a private buyer perspective, you’re normally getting 100 % cash at close, minimal post-closing commitment. You know, it’s pretty quick and clean. From a DSO perspective, you’re talking, you know, 50 to 70 % cash at close and a three to five year.

16:07
You know, post sale commitment. Um, the deal is going to be a combination of cash and equity. That equity could have good upside, but it also has risk, right? So a lot to unpack there. There’s, there’s a big difference between going the private buyer route and the DSO route. And I think you need to quantify both, right? So a lot of times when somebody has a $2 million. Top line of that practice, we get to know them. We get to understand their why and what their goals are and what their runway to exit looks like.

16:35
And then we’ll do evaluation from both perspectives and quantify, Hey, here’s what it’s worth. If sold to a private buyer, here are the nuances involved in that type of transaction versus here’s what it’s worth. If sold to a DSO and here are all the strings attached. If you go that direction and then let’s pick a path and execute at a high level, you never really want to entertain both of those options simultaneously because they were remarkably different. No.

17:03
So let’s go back to the numbers because you’re like the genius professor in the front of the classroom and you’re throwing numbers out there and I’m seeing if I can grab them. And so $2 million practice, 25 % profit, I’ll use profitable EBITDA, 25 % means every year about $500,000 in your pocket, not including dentist owners payout, like whatever they’re making. Correct. If I’m selling that to a DSL, you use the term 7X. So you’re multiplying that.

17:33
profit times seven to say, the value of a $2 million practice will sell for 3.5 million. However, you’re not getting all that right now because you’re not running away. We’re keeping you. We’re buying you and your goodwill. So you’re going to stay doctor. You’re going to stay. We’re going to give you 1.75 right now. Okay. then maybe a little higher, maybe a little, maybe two, something like that. So we’re there. Okay. You’re to get 2 million right now. Okay. Cause it needs to match.

18:02
what you would have gotten if you had sold it to someone else. Got to be sexy there, right? Exactly. And when we’re qualifying, like, you know, how big does the Delta need to be between private buyers price and DSO price? Typically, the cash at close on the DSO deal has to be equal to or greater than the private buyer sale to make it compelling. That’s right. Give me something now, because I don’t want just the hope and dreams of what you’re going to allure me to, you know, and

18:30
I’m worried about a bait and switch and all those things start playing a role in it. Okay. So whether I sold the private or DSO closing, DSO is going to give me the same or a little bit more. So 2.25. Okay. oh And now I’ve got 1.25 sitting out there that in my mind as a seller’s owed to me and I’ve got a five year agreement to get the rest of that money. And they split that money over five years as kind of a bonus payout, as long as the strings attached are met. could be oh formatted and structured in

19:00
a lot of different ways. What you just described is an earn out where you would receive that money over five years on annual installments based on you fulfilling your post-closing employment agreement and the practice performing same or better as it was at the time the sale occurred. What we more frequently see is equity, whether that’s retained equity in your own office, what we refer to as joint venture equity or holding company equity, equity in the DSO’s parent company.

19:29
or a combination of both, you know, sometimes you’ll see, um, you know, 60 % cash at close and the remaining 40%, you know, 30 % of its equity and 10 % of it’s on an earn out. mean, there are so many variations on deal structure and that’s why it’s so important. If you’re going to take your practice to the DSO market, you need to have a sell side advisory and need to create as much optionality and competition as possible to find the right partner for you and the right deal structure for you.

19:57
And then obviously leverage that competition to increase the valuation. Got it. All right. Now I think I got it. And while I’m on the five year plan, I’m also getting paid as an associate, basically 30 % of what I’m a net production, what I’m producing as a dentist in that practice. That’s correct. Uh, you would be paid, you know, if you’re a general dentist, probably somewhere in the range of 28 to 32 % of your individual collections, you’re paid as you would pay an associate.

20:25
And if you have some retained equity at the practice level, joint venture equity, you would also get a pro rata amount of the ongoing EBITDA uh of the practice because you’re partnered with that DSO in your practice. They own some equity, you own some equity. there’s a phrase that goes, started around out there that I need you to define recap.

20:47
Can you help us understand that? Yep. So private equity is gold. The reason they invest in any business, but the reason they invest in building a DSO is to buy low and sell high and use economies of scale to increase profitability and use debt to juice return and generate a return on invested capital at a recap event. What a recap event means is the private equity sponsor or family office, the institutional investor.

21:18
Uh, that backs that DSO is selling the company to a new investor who will then keep typically the DSO intact, the management team, the culture, the infrastructure, and then basically repeat the cycle and grow the business over the course of the next four to six years and then look to sell it again. And again, buy low, sell high. So buy practices at six to seven times EBITDA and through

21:46
Leveraging economies of scale and increasing profitability as well as leveraging debt and then selling the business for 12 to 14 times EBITDA. I had a recap four or five years later, the goal is to generate, let’s say a three X return on invested capital. Um, and a lot of people say, well, if they’re buying at seven times EBITDA and selling at 14 times EBITDA, how are they generating a three to four X return or even higher on invested capital? And it’s through the use.

22:16
uh Debt so I think it’s always interesting to kind of unpack like how it is PE making money in our space So let’s relate it to the housing market So let’s say that you buy a house for four hundred thousand dollars and five years later you sell it for eight hundred thousand dollars It appreciates over time simple math Invested four hundred thousand took eight hundred thousand dollars out you doubled your money That’s assuming that you paid a hundred percent cash for that house

22:42
But let’s say that you put a hundred thousand down and borrow 300,000. And then five years later, you sell that house for $800,000 and generate a $400,000 gain. Well, what was your initial investment? It was only a hundred thousand dollars, right? Cause that’s the cash you put in. That’s a four X return on invested capital over a five year window. That’s how private equity makes money in our space through buying low and selling high. And then the use of leverage that you leveraging it.

23:09
Yeah. Leveraging someone else. So even though it’s private equity, they’re just using their credit score to get some bank funding, let’s say to put that money in. I’m not rich guy putting all my cash in. I’m just putting a 20 % down and then leveraging for a time. So I want to make sure I understand something really. If I’m in the DSO, I’m a dentist in the DSO and I’m owner of equity. I’ve got 43 % equity in this company.

23:33
Anytime they’re saying a recap event, what they’re saying is someone behind the scenes, behind the DSO that has money is now selling it to someone else basically is what they’re saying. And when we sell all of it, we all get a percentage of that payout. That’s correct. The doctors, the investors, and typically the management team of the DSO will have the ability to liquidate their equity in part or in full, likely in part, likely not in full, especially in today’s environment and hopefully a handsome return, right? If they were successful.

24:03
somewhere between a two to five X return on invested capital and a four to six year window. Um, that’s the goal of private equity. They’re not making a ton of money along the way. They’re making the bulk of their return after recapitalization event. Uh, and if a recap doesn’t happen or if the return is not what they projected, you know, they’re losing a tremendous amount of, uh, of capitalized result. And therefore there is the risk in.

24:32
Hey, I’m taking 2.25 right now and that, that, that rest of that money, there’s some sort of string attached there to whether I get all of the 3.5 or am I guaranteed the 3.5 as long as I, in my little world, my practice continue growing? Or is it, is it, is it contingent upon the recap of it? All depends on how the deal struck. And in an earn out, the, your ability to get your money is contingent upon the performance of your practice.

25:00
In an equity situation, it’s contingent upon the performance of the recap, unless we’ve negotiated some type of put option, where if a recap doesn’t occur, you have the right at some point in time to litigate your equity at a modest return or at least what it was worked to start. However, put options in this world are challenging to negotiate. Wow. It starts to get complicated and doesn’t surprise me when a, you know, I think age plays a big role in this too. If I’m a dentist.

25:30
don’t know, 58 plus. don’t, I don’t know if I’m feeling like understanding all that and long-term and waiting for a recap event versus if I’m 40, 45, 50, and I know this is happening, I feel like I’m willing to take on that risk for a bigger opportunity of a payout if I’m selling. Does it matter to you or am I making something up here? So.

25:53
It can work that way. can actually work the opposite way, right? Because if I’m 45, I happen to be 45, and I’m planning a practice for another 15 or 20 years, by monetizing my business, I’m giving up that and that EBITDA, right? And I might be giving it up prematurely, and if I lose all of that EBITDA, my partner Danwell better be successful on that recap, or it made no sense for me to sell. Whereas if I’m closer to the tail end of my career, and maybe I only have a five-year runway,

26:23
If I’m taking, you know, four times EBITDA off the table and cash at close, then I’m probably not as sensitive as to what happened at that recap because my runway was limited comparative to that younger doctor. I think the point here is there’s a lot to unpack, right? uh There’s so much to consider in regards to if and when you should go down the DSO path. And then every DSO is different.

26:52
They all have different financial sponsors. all have different deal structures, a lot of different stage of their recap cycle. Um, they all look at valuation through a different lens. It is absolutely bonkers to me that so many dentists try to navigate this process on their own. Uh, they don’t realize how good their deal could have been, or they don’t realize necessarily what they were agreeing to, or maybe they sold prematurely or to the wrong DSO. There’s so many, you know,

27:20
rabbit holes that you can fall in. And that’s where we come into play to just like, Hey, objectively, let’s talk about who you are, what you have, what it’s worked, what your goals are, and then what’s available in the marketplace. And if, and when this even makes sense. I think you’re 100 % correct. Please don’t try to do this on your own. This is not a for sale by owner, sell your house situation and we need help. think

27:47
from a dentist perspective, they start looking at that percentage, that fee and say, okay, how do I justify that with finding my buyer? Well, it’s not just finding the buyer, it’s making sure you don’t get screwed in this deal, in this process. You have someone that’s looking out, you said sell side, you’re looking for someone who’s on the sell side, you’re helping dentists sell their practices. Okay, I have another question for you, because it popped in my mind. I’m thinking about buying and I feel like, man, maybe I have to sell the DSO because,

28:14
feels like everyone’s selling the DSO now. And I feel like I have to do that. Otherwise I’m not going to sell my practice. I’ll be here forever. What percentage of practices out there are under the DSO umbrella versus still private?

28:28
That’s the million dollar question, right? Nobody has, even the ADA doesn’t have good statistics on how much of the marketplace has been consolidated by DSOs. And it’s also difficult to define, right? Are you defining, you know, how many storefronts are owned by DSOs? How much dental revenue is controlled by DSOs? How many doctors work under DSOs as opposed to uh in private practice, right? There’s a lot of different ways that you can define consolidation.

28:58
But my best guess is of the practices that DSOs would want to own. Now, what do I mean by that? What I mean by that is 50 % of the practices across the country do less than a million dollars a year in revenue. Those are not practices that DSOs want to own because they’re chasing EBITDA, they’re chasing profitability. And if you don’t have the EBITDA, your practice is worthless in the DSO space. So of the practices that DSOs would want to own, I think they currently own about

29:27
25 % of them, uh maybe up to 30%. But again, geography matters, right? If we’re talking about a state like Arizona or a state like Texas, we’re probably in the sixth or seventh inning of the game. There’s been a tremendous amount of consolidation in those states. Whereas if you’re talking about the West Coast or New England, they’re in the second inning uh of the game. So it does vary state to state.

29:57
as far as what the DSO consolidation metrics look like. Okay. That makes total sense. Would you say that there are, there’s a, there’s a lot of dentists then choosing to affiliate the DSO and, and are you expecting it to continue? it a state by state answer or how, how is this trending on why doctors are choosing the DSO direction? I think there’s several reasons and I do expect it to continue as to why doctors are choosing to go down.

30:25
The DSO path. Um, I mean, post COVID from a management perspective, you know, it, burden’s got exponentially higher, uh, combined with the inflationary pressure on overhead. Yeah. So a lot of people are looking at, Hey, I want somebody to help me manage the business from an administrative and operational perspective. I’m a little burned out from that perspective. And I want access to economies of scale to push against some of the inflationary pressure that private practice is facing.

30:55
And what I mean by that is, know, DSOs can negotiate with vendors and buy supplies and equipment and negotiate with labs and marketing firms and benefits uh companies. And they can acquire, you know, those services um for 30, 40 % discount, comparative to a private practice owner, simply due to their size. They’re also able to leverage their size to negotiate better reimbursement rates with vendors.

31:24
So for access to economies of scale and help from an operational perspective, know, a lot of people have chosen to go the DSO route because that’s what DSOs are good at doing. Also just the economic, you know, consideration alone. We talked about once your practice crosses about $2 million in top line revenue and $400,000 $500,000 in EBITDA, the private buyer pool starts to shrink rapidly and valuation actually starts to decline. Whereas in the DSO world, it has the opposite impact.

31:54
Demand starts to ramp up and valuations start to ramp up considerably. Um, we also have a lot of clients that have a lot of their net worth tied up in their business and they want to diversify their wealth, take some chips off the table, invest that cash and other asset classes outside of their practice, and then, uh, continue on, you know, as an owner in their business or diversified by having equity in the DSO’s parent company and owning a little piece of all the practices, you know, under that umbrella. So.

32:24
You know, comes down to economics. comes down to support infrastructure. Uh, economies of scale. comes down to de-risking. Um, and then, you know, some people don’t want to miss out on a window of opportunity, right? At some points we will hit a tipping point from a consolidation standpoint where demand starts to come down from a private equity and DSO perspective and valuations start to cool off.

32:49
You know, I think we’re probably still five to seven years away from hitting that tipping point, but you know, you need to be mindful of the fact that if you’ve got this large multi-doc, multi-million dollar revenue practice, it’s likely going to get harder and harder to monetize that from a private buyer perspective. And you don’t want to miss, you know, if we are in a bubble or in a window where private equity currently loves the space and valuations are strong as a result. Okay.

33:19
So we’re going to go over time because this is so good. We’re way over time, which I love. So I have clients that tell me, they say this, I just don’t, because you mentioned burnout. go, I just don’t want to lead anymore. I’m so tired of finding new team members and I don’t want to have to lead them. I think I’m just going to sell to a DSO so I can just do dentistry. And I laugh and I chuckle, not like to embarrass them or make them feel bad. But I, cause I hear this over and over and over again so that I know I’m explaining this right to my clients.

33:48
and help them understand, well, probably not what you’re thinking it’s going to be. How do you tell, how do you gently uh point that out to them? That’s not, that’s not how it happens. What do you say? I love this point and I appreciate you bringing it up. If the number one reason that you’re looking at pursue a DSO affiliation is because of burnout or you want help from an administrative and operational perspective, you need to be very careful about

34:18
who you partner with because very few DSOs are super hands on from an operational perspective day to day, right? Um, our clients are always concerned about autonomy. You know, how is a DSO going to interrupt my autonomy? And typically if you partner with the right DSO, they’re not going to interrupt your clinical autonomy at all. They are going to interrupt your operational autonomy to some degree, but it’s going to vary dependent upon which DSO you partner with. But if you’re looking for support,

34:48
Just understand that all DSOs are going to provide some level of administrative support, right? They’re going to take over payroll payables. They’re going to take over recruiting. They’re going to take over legal accounting compliance. But as far as you continue to be the leader in your business and, kind of like put out fires on a daily basis, especially as it pertains to your staff, it is virtually impossible for a DSO to take that off your plate. Now.

35:16
You might sleep a little better and not feel as much pressure if you’ve got some money in the bank and now you’ve got a partner to lean on, but it’s not like you’re going to just go from being an owner to clocking in and out as an associate. That is not the shift. Um, so it’s kind of funny when our doctors are concerned about the loss of autonomy. Um, I actually have to educate them that look, the majority of DSOs are going be relatively hands off. You’re going to have as much autonomy as you want, as long as things are going well.

35:44
Right. Where you start to lose your autonomy is if the numbers start to fall off the clip that your DSO partner has to assert themselves. Uh, but it’s actually the opposite of a lot of times their fear in regards to the fact that look, a lot of DSOs are like, Hey, just call me if you need me. I I’m not gonna, you know, mess with you on a daily basis. So the other question I get right after that from my client says, Hey, this DSO reach out to me. What do know about them? Are they any good? And I’m guessing.

36:14
that this is where you come into play this. We’re not asking if there anybody on the bus here or anything like that, but I’m, I’m assuming that you guys know the ins and outs of most of these DSO groups. And then if you were representing, we were co-represented client, I’m coaching them. You’re supporting them and their practice transition. You’d be able to say, well, this is what this DSO can do. It cannot do. This is one to stay away from. This is one to be involved with. Would that be fair? Yeah, I get the same question. Hey, I’ve been offered from a DSO. What do you think? And I’m, my first question is, is this the only DSO you talk to?

36:44
Like what is your, why, what are your goals? How is your practice engineered? I can’t really comment uh on one offer in a vacuum. Uh, and by the way, that’s the goal of the DSO is that you’re not at the table. I’m not at the table. They do a deal in the dark and you don’t create optionality and shop the deal to other potential suitors. Um, all of them are, are, are different in, in a lot of different ways. So it’s.

37:10
critical that you create the optionality necessary to find the right partner and then to create leverage to negotiate the deal structure you’re looking for and the valuation you’re looking for. So you can’t just talk to one and just understand that just because your friends sold to a particular DSO doesn’t mean that they’re going to be the right partner for you, depending upon what you’re looking for and how your practice is engineered. That’s a great answer.

37:40
All right. So I’m now the dentist. I’m thinking about where I’m at 1 million, 1.5, 2 million. I’m trying to figure out, Hey, I know I’ve got to sell at some point. I know that’s the end result of this. What are the steps that you guys like, Hey, these are things you have to do in preparation for that. So first plan ahead, right? You want to make sure that you plan, um, ideally five years out, right? Especially if you’ve got a larger practice, DSO is going to require a three to five year post-sale commitment.

38:09
If you wait until you’re ready to retire or a year or two away from retirement, that option is going to be off the table. So plan ahead, get educated early and often. often encourage anybody who’s within 10 years of monetizing their business to have us do a deep dive, have us do evaluation, quantify what your EBITDA is today, and then talk about what levers you can pull along with your coach and coordinate and collaborate in that manner to reverse what engineer, whatever outcome you ultimately want to achieve.

38:39
You want to make sure that you keep your foot on the gas, right? You want to sell when the practice is healthy, sell at a peak. Don’t sell at uh a valley. Um, you want to make sure your profitability and your benchmarks are where they need to be that you’re even a margin is where it needs to be. Um, and we need to talk about, you know, what drives demand and value private buyer versus DSO. And we want to check as many of those boxes as we can in advance of a sale so that we can get.

39:06
A good outcome. There’s a few other things that we see like being very aggressive in what you’re writing off through your business. You want to make your financials as transparent as possible. Look, as the owner of a business, I know the name of the game is to show the IRS that your overhead is as high as possible and save money on taxes. But in the couple of years in advance of a sale, you should be more conservative in that regard to make your financials more transparent. We see a lot of practices not reporting cash collections.

39:35
Which is pure EBITDA. So, hey, I’m not the IRS. You can do whatever you want to do, but as we approach, you know, a sale, make sure that you’re reporting all of your income. Um, and then, you know, when we talk about key man risk, you know, ideally there would be multiple doctors working in your practice and the practice would not be, you know, dependent on one single provider. Um, so all of those things are things that you need to be thinking about.

40:01
not just from a sale perspective, but it’s just smart business to be constantly evaluating those KPIs and those metrics and enhancing them as much as you can. But you really need to lean in and get serious about all of those things. Beginning, I’d say at least three to five years in advance of monetizing the practice. At least, at least. I love it. You said keep your foot on the gas. So many of the clients that you run into, just one coaching session, all of a sudden, yeah, I’ve decided I’m gonna sell.

40:31
It’s like, okay, so in two years we’ll have completed that task. I mean, that’s the mindset that I’m telling clients you have to be in because they’ll talk to, you know, guy down the street broker or shine rep or whatever it is. Oh yeah, you’ll sell your practice in six to seven months. What do you guys say to clients when they reach out to potential people who want to work with you? Like what’s the timeline that it’s going to take for me to find a buyer? Is that geographical again?

41:00
How does that work? if you’re in 60 miles of a major Metro area and you know, I would consider your practice a class a asset. You’re checking a lot of the boxes we talked about, you know, earlier, I would say within six months, you’re likely going to have money in the bank and be done, whether it’s a private buyer deal or a DSO deal. But when the story gets longer and the less boxes you check, uh, and you know, the more rural your practice is, you’re probably going to have to.

41:29
plans significantly ahead. could take a year or two to sell your practice if you’re in a smaller town. um And then you’re going to also need to work with somebody that can get you maximum exposure, right? Because you’re probably going to have to cast a wider net and work a lot harder to sell a practice like that. Then, you know, a practice in a major Metro with 1.5 million in revenue and, you know, seven ops that that’s healthy and going to have a line out the door, you know, from buyers looking to to make an offer.

41:59
Um, so lot of it is dependent upon the practice. A lot of it is dependent on, the geography. Um, but yeah, just thinking, taking a cookie cutter approach and a one size fits all approach to this conversation is extremely dangerous. Um, that’s why it’s important to talk with, uh, build a team of great advisors. And like I said before, get educated early and often, you know, not only do you want to plan early, but then along the way you need to check in.

42:28
Right. Every six months, every year, you know, Hey, here, look at my numbers. You know, what does the market look like? What are, what’s my value today and what are my options? Because those may evolve over time. I love that. Okay. So people have, you’ve listened this long, you know, 40 plus minutes into this. means you love this. It means you want to talk to Brandon. You want to talk to his team. So how do people reach out to McLaren and associates? How do they get ahold of you? Yeah. I would encourage you to check out our website is dentaltransitions.com.

42:57
It’s got a lot of articles and conversations, podcasts, webinars, just like this. Um, you can text me and schedule a discovery call. Um, all I do all day long is talk to large practice owners and have these types of conversations. So I give out my cell phone number. Um, it’s five one two six six zero eight five zero five. If you want to shoot me a text, we can schedule a discovery call. That’s a 30 minute, you know,

43:23
Casual confidential conversation just to get to know each other and see if it makes sense to do a deep dive to do a valuation and then email Brandon beer a NN o n at dentaltransitions.com You can find me it any of those ways and yeah, I would love to to start a conversation and take it from there Brandon at dentaltransitions.com. got it. Perfect. All right, so

43:50
Thank you guys so much for listening out there. If you want to grow your practice, because you know at some point you’re going to want to work with Brandon as team, then that’s where All-Star comes into play. So if you want to learn more about how we can help support your practice and help you know the ins and outs of all of this and be improving your cashflow, improving your revenue, improving your collections, then just reach out to us. Heather at All-Star Dental Academy. Just email her. She’d love to sit down and do a discovery call with you as well.

44:17
and just talk and see how can we potentially support you. And again, thank you so much, Brandon, for joining us. We really appreciate your time. Thank you. Appreciate it. For those of you listening, continue to listen, like, share. Share this podcast with someone you know who would love to hear this sort of conversation. We’d really appreciate it. And until next time, go out there and be an All-Star.

44:45
We hope you enjoyed this episode of Dental All-Stars. Visit us online at AllStarDentalAcademy.com.