Understanding Invisible DSOs – Episode #627

On this episode of the Dentist Money Show, Chip Fichtner from Large Practice Sales joins Matt to discuss the complexities of large dental practices and explain what an invisible DSO is. He highlights the importance of selecting the right DSO partner and how to avoid common pitfalls in these transactions. Whether you’re a dentist considering a partnership or just looking to understand how these organizations work, tune in to hear some valuable insights of the current market landscape, the factors that can help maximize practice value, and the future dynamics of DSOs.

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Podcast Transcript

Intro: Hello, everybody. Welcome back to another episode of the Dentist Money Show brought to you by Dentist Advisors. We have another great show for you today. Another interview. Second time we’ve interviewed Chip Fichtner with Large Practice Sales. We talk all things Invisible DSOs. Chip breaks down what is Invisible DSO. The DSO landscape, what he’s seeing as far as valuations and the challenges that dentists are facing currently in the DSO landscape. one of the most intriguing parts we talk about is the funding of DSOs and how it’s not all just private equity. And, Chip breaks that down and talks to all the different funding sources and capital structures of DSOs. Super interesting conversation with Chip Fichtner with large practice sales. As always, we hope you get something out of this and we hope you enjoy the show.

Matt Mulcock: Welcome back everybody. Thank you as always for listening. Excited to have a special guest here, Chip Fi with Large Practice Sales. Chip, I want to start off with a very difficult question. Very difficult. So prepare. Um, if somebody, if you’re talking to someone, you’re, you’re on the street somewhere and they say, what do you do, Chip? What would you tell them?

Chip Fichtner: I tell them that I help larger dental practices monetize all or part of their life’s work.

Matt Mulcock: Killer answer. You’ve been asked that before, haven’t you?

Chip Fichtner: I have.

Matt Mulcock: Yeah, okay. So let’s break that down. So I want to, I want to understand when you say, first of all, I love that answer monetize their life’s work. That’s, that’s amazing. when you say larger, dental practice, maybe let’s start there. how do you think about segmenting the dental practice and what would you consider a large dental practice?

Chip Fichtner: You know, in our world, what, what the practices that achieve the highest values in any type of structure across dentistry are those which are going to have at least a half a million dollars of operating profit or EBITDA after paying the doctor. And that will often occur in a specialty practice that has at least a million and a half dollars in collections. And it will often occur in a GP practice that’s going to have 1. 8 million in collections.

Matt Mulcock: Got it. So you’re looking, you’re looking specifically though at the EBITDA part of it to consider it large versus not. Okay.

Chip Fichtner: Correct. We are the, you know, unfortunately, in our world, values have nothing to do with collections or the number of offices that you have, or the number of doctors that you have. It’s a, it’s a pretty simple formula. It’s all based on your operating profit. I mean, it’s, it’s interesting. Last year, the biggest deal we did was 62.5 million for a single office GP practice. Think about that. One office,

Matt Mulcock: 62 million for one office. How many ops did it have?

Chip Fichtner: Uh, not that many, 10 very high end cosmetic practice year before, uh, the most valuable deal we did was again, a single office GP practice. And we got them about 43 million.

Matt Mulcock: Whoa. Okay. So these are not, these are not small numbers we’re dealing with.

Chip Fichtner: Yeah, but of course I, I bring out the unicorn size deals, but our average deal is about 10 million and our deals last year range from, 3 million to 62. We

Matt Mulcock: Got it. Got it. Okay. yeah. So I love this. I love this thought here of, you went right to EBITDA right to profit. This, this goes right along with what we tell people all the time, which is you got to know the numbers, right? And it’s funny that you’re saying this because we see this all the time in dentistry where dentists seem to always know their collections number, their top line number. They very rarely know any number beyond that, their profit margin. Is that, is that what you’re, is that what you see too when you’re engaging with doctors?

Chip Fichtner: I urge every doctor that if your accountant is not getting you your PNL statements in a clear and understandable fashion within 15 days of the end of the month, you’re driving blind. Because if you’re not looking at your numbers on a very current basis, you’re not looking at what’s going on in your practice and you can’t make effective changes quickly. When I talk to doctors, I go, I don’t look at my numbers except annually. I’m going, man, you’re not managing your practice the way you could or should be the value you’re creating for you and your family is why you’re doing this.

Matt Mulcock: Yeah, such a good point, Chip. And this I think right here is what you’re highlighting. If nothing else has taken away from this, it’s I think this point you’re making right here. And we’ve talked before, right? We talked last year, and this was something we discussed as well as there’s a huge difference in a dentist, owning or owning their high paying job versus owning and running a business. I think what you’re highlighting here is, Step number one is the difference between those two people is the business owner knows their numbers.

Chip Fichtner: Yep.

Matt Mulcock: There anything else you would think of when you talk about valuations or knowing your numbers or things that dentists should be thinking about? Whether or not they’re exiting right now, just things that they should be thinking about.

Chip Fichtner: Yeah, absolutely. I mean, we’ve had some challenging years over the last five years, including COVID and rapidly increasing costs and not increasing reimbursement rates and not raising your fee for service schedules fast enough So it’s been a challenging time Recruiting certainly has not been easy either. So Doctors need to understand their numbers because it’s in essence the GPS roadmap to the future And if you don’t understand your past numbers, you’re going to have trouble improving your future numbers and given what’s potentially coming around the corner, that’s going to be important to practice values and having a key understanding of what is EBITDA and how it’s calculated and is important to the ultimate value that you’re creating for you and your family. Um, you know, I’ll, I’ll give you a rough example. If you’ve got a two and a half million dollars in collections GP practice, um, it should be making at least 20 percent operating margin after paying the doctor for what he does, he or she does every day. So it should have a 500, 000 EBITDA. Now if that practice has a 10% EBITDA or $250,000 ebitda, that practice is gonna qualify for a sale with a hundred percent sale to A DSO or a sale to a another dentist. And the value of that two and a half million dollars practice is gonna be about 1.75 million on their $250,000 in ebitda. Now, if the doctor pays attention to his numbers and his costs, that same practice with 2. 5 million in collections could and should have at least a 500, 000 EBITDA. And in my world, the invisible DSO partnership world, that doctor’s practice is going to have a value of roughly double. The value of that practice is going to be 3. 5 million instead of 1, 750, 000. So, the doctors who focus on their numbers are creating multi million dollar value increases. And, keep in mind, I didn’t use a different collections numbers. That was two practices, both with the same collections numbers. It’s just a matter of how you run it. And we’ve seen practices that’ll have 30 percent margins, but 20 percent is really should be considered the baseline for any GP practice, across the country..

Matt Mulcock: I was just going to ask that. So 20 percent to you, if I’m, if I’m a dentist out there listening and, and whether or not they’re tracking their numbers, let’s say they feel inspired after this, hopefully, and like, you know what, I’m going to go start tracking this. and they start tracking their profit margin or EBITDA. You’re saying a baseline should be 20%. do you make a distinction chip, as far as how that correlates with the top line number, meaning it’s scale. Like you mentioned the 2. 5 million dollars. Is that different from like a million dollar practice or a 1. 2 million dollar practice?

Chip Fichtner: It is, and that’s why we look at practices, to consider them as becoming our clients. Those which are doing at least a million eight in collections and up. Once you get down, the average GP in the US last year did 840, 000 in collections. Now that average GP does not have a business, he or she has a job, because ultimately after you pay the doctor. 30 or 35 percent of collections for what they do every day. And after you pay the overhead, a practice that small is generally not generating any operating profit.

Matt Mulcock: Just know what it is. Yeah. Yeah, that would totally make sense when we do this. We work with dentists all the time, hundreds of them all over the country. And a lot of times when we talk about business issues that they have, they have a growth issue. They have a, they have a revenue or an income issue that they’re just not, they’re not focusing on the things that they should be doing to grow that thing. Um, and actually turn it into a business. Um, I want to come back to something you said, And the kind of the essence of what you do, you, and there’s two things. I want to put a pin in something ominous. You said, uh, I want to mention, uh, and you left me on the edge of my seat here when you’re saying something about what’s coming around the corner. Maybe ominous isn’t the right word, but you got me, you got me interested in what’s coming around the corner. I want to come back to that. but first you mentioned a visible DSO. We talked last year, you were on the show, but for those of you, for those of that weren’t on or listening, Can you just kind of back up and talk about the distinction here? Cause I think the DSO space is, it’s getting confusing with all the different kinds of models and things that are coming out, just maybe back up and help us understand invisible DSO and how does it differ from all the other models that are out there? What does it mean?

Chip Fichtner: Great question. So, today, there are functionally, in our world anyways, two different types of, We’ll call them group practice organizations. They are the DSOs, which you might think of in, in your neighborhood as Pacific Dental Services or ASPEN. Okay. These are groups, which typically will own a hundred percent of their practice offices. Heartland is another example. And the doctors are functionally employees for the practice and they are, uh, managed, uh, to a playbook. the good DSOs, will not tell their doctors what to do clinically. However, from an operational standpoint, they will dictate pretty much everything, who to hire, who to fire, who, what payers to take and what procedures to perform and, and how to do it, not except clinically, right? So an invisible DSO, becomes a doctor’s silent partner. By buying anywhere between 51 and 80 percent of a practice. Keep in mind, I didn’t say 80. In all of the invisible DSO transactions that we’ve done, billions of dollars in the last eight years, every time the doctor remains as an owner. Now that ownership may reside at the practice level, the parent level, or a combination of both, but in all invisible DSO transactions, they’re going to become the doctor’s silent partner by buying 51 to 80 percent, and the doctor is going to continue as an owner for years or decades. And the reason for that is the Invisible DSO’s basic business philosophy is that an owner doctor will run a better practice than a doctor who’s just an employee. They have skin in the game and they’re going to make owner like decisions that benefit, functionally, both parties. Both the Invisible DSO partner and the doctor partner.

So, the invisible DSOs are the fastest growing type of DSOs out there, much faster than the branded groups. And the invisible DSOs, uh, are interested in doctor partners who have a three to five year time frame. And in the last billion dollars of transactions we’ve completed in the last 24 months, uh, over 150 million of that were for doctors in their thirties. Now that’s been a big change since COVID and part of it, I think, is because the doctors are now realizing that an invisible DSO partnership is not selling out. It’s not a short term exit strategy. It’s not selling to corporate. The invisible DSO partnerships truly are partnerships. The invisible DSOs want to invest in great practices where they believe that their resources can help those practices grow bigger, better, faster, more profitably. And through their resources, they can make life easier for the doctor by reducing some of the administrative minutiae burden. So the invisible DSOs, while they’re not going to tell you who to hire, who to fire, when to be open, what brand to operate under products to use, what labs to use, what payers to take, they are not going to do any of that. However, they will come in and take over banking, accounting, payroll, benefits, benefits administration, compliance, credentialing, tax, legal, IT support, and most importantly, vendor and payer negotiations. One of the big reasons that the younger doctors are migrating to the Invisible DSOs, even at, you know, in their 30s and 40s, is because they see what’s coming.

So the Invisible DSOs are paying 30 percent less for supplies. They’re paying 50 percent less for implants. They’re paying 10 percent less for team benefits that are better, which are important for recruiting. And most importantly today, they are getting reimbursed from insurance payers. at higher rates than independent dentists. So all of the independent dentists in the country have experienced margin compression in the last five years. Their costs have gone up, their reimbursement rates have stayed static, and so they’ve had margin compression. Well, with an invisible DSO partner, you instantly are going to get better margins, and that’s important, uh, for the doctors, it’s important for the doctor’s wallet, and it’s important for the team members. You know, one of the great things about the invisible DSOs is, although team members initial reaction, To, uh, our client partnering with an invisible DSO is, Oh no, he’s selling out to the man where they’re going to tell us what to do. Half of us are going to get fired. Our benefits are going to go to heck and our work schedules are going to change. That doesn’t happen. The invisible DSOs do not touch any of that. This is the doctor’s team, the doctor’s getting to make those decisions. The doctor has full autonomy. If you choose the right invisible DSO. But you know for doctors It’s it’s very helpful to understand what an invisible dso is whether It’s something you’re going to consider today or whether something you’re going to consider next year or five years from now or 10 years from now because The reality is the invisible dsos have been around for 35 years. They are not new They have well over 10, 000 partner practices across the U. S. And interestingly, you have them in your town. You just don’t know it. Because when they partner with a doctor in, in a community, they’re not putting out an announcement. Hey, Dr. Jones is now a part of Acme DSO. And they’re not changing his brand.

And it’s invisible to the patients. but that doctor down the street from you that joined an invisible DSO is now paying less and getting reimbursed more, has recruiting resources, and has new patient development resources that you don’t have. They are very tough competitors, and they are hidden. So, sorry for the long answer, but there’s a big difference between the two,

Matt Mulcock: Yeah. I totally get what you’re saying and, and I think there’s a couple parts of this, right? There’s the, what you’re describing and, and what we’ve, we’ve heard many times, from DSO pitches to clients and or just dentists we’ve, we’ve worked with over the, over the years. But I want to address the other side of this and get your thoughts, chip, because what if, imagine you got the dentists out there that are saying, I did this, I did this chip, I sold to an invisible DSOI was promised all these things from an administrative. Relief and and help and margins and supplies and everything you described and I didn’t see any of it Um, i’ve heard this. I can’t even tell you how many times

Chip Fichtner: I’m sure.

Matt Mulcock: That that say this like All the pitches are the same right and so i’m curious from your perspective seeing the transactions that you see If a dentist is going this route and there’s a We could probably talk for hours of the reasons why or why not to do it. But let’s say a dentist has decided they want to go this route. How does one decipher between all these different groups? What are the things they should be thinking about looking at? Because again, I think the dentist out there is saying all these pitches are the same. They all use the same vernacular. They’re all using the same language. They’re all saying the same services, but a lot of them are left holding the bag with less profit. And then they’ve given up their profit and they still have the same administrative burden. What are your thoughts on that?

Chip Fichtner: It’s very true, and sadly, it’s, in 9 times out of 10, you will find that those doctors, when they did a transaction, either did it themselves, or used an inexperienced advisor. We have 35 full time people and all we do is dental. If you look at the other advisors out there, they’re doing dental and med spa and vet and cardiology and Optometry and whatever, we just do dental and part of the key value that an experienced professional advisor brings to this process is they’re not going to let the low quality invisible DSOs even talk to you. They’re not going to waste their time or your time.

So the key today is to choose the right partner. And when you choose the right partner, the outcomes can be spectacular. I’ll give you a good example. The largest invisible DSO in the U S just completed their third recapitalization. A recapitalization is where an investor in an invisible DSO monetizes their gains of building that invisible DSO by selling to a larger investor. So last year, the biggest invisible DSO completed their third recapitalization in seven years. And fortunately, when that group was small, we We partnered one of our clients seven years ago, a 38-year-old doctor, and in his example, um, he kept $2 million in equity in that invisible DSO. So he, he had ownership in the parent company, and that group grew from its initial value at that time, meaning the value of the group was $330 million. And 38 months later, after my client partnered with them, his 2 million that he kept was now worth six. So he kept it and waited another 42 months, so a total of seven years, and they recapitalized for the third time at a value of over 3. 8 billion. So my client’s 2 million in equity, all of a sudden, over seven years, had become worth over 20 million.

Matt Mulcock: Wow.

Chip Fichtner: In that invisible DSO, as they grew from 51 to 780 practice partners today, fortunately, we had dozens of our other clients over the seven year period of time that partnered with that same invisible DSO and saw similar types of gains. So, doctors that we partnered with them three years ago saw the value of their equity increase by 300%. Now the challenge of that group is at 780 practices, it’s tough to move the needle, so those types of returns are probably not possible with that particular invisible DSL. But the good news is there are dozens of others that are smaller, that are well managed, that have the right capital behind them. And those types of equity upside opportunities are available to doctors, whether they’re young or old. Now, age is important. Today, a doctor with a six in front of his age, if he’s a single practitioner, it’s tough because he’s competing with the guys who are 30 and 40. And if you’re an invisible DSO, you want a long term partnership so you’re going to pay more for a doctor who’s 40 than you’re going to pay for one who’s 60.

So that’s why I urge every doctor who’s of any age to at least learn about this. It may not be something you want to do today, but it’s something you should understand now the, the challenge with the invisible DSL partnership route, because it’s not for everybody is it’s not a short term exit. A doctor who calls me up and said, uh, I want to leave in a year. I can’t help. The invisible DSOs have no interest in partnering with doctors who have a one year time horizon. So for that doctor, a doc to doc transaction or a sale to a traditional DSO is their only option. Whereas if you’re a doctor that has three, five, or decades of future, you’re going to get a much, much higher value in an invisible DSO partnership than you are through any other mechanism.

Matt Mulcock: Totally makes sense. there’s so much there, Chip, so much good, valuable information. I love what you said about learning about this. That to me is so critical for, for dentists out there is just, you know, don’t stick your head in the sand. Absolutely. Learn. As much as you possibly can about the landscape here, you know, the landscape of DSOs and what’s happening in dentistry. I want to come back to something you mentioned about the blacklist. And first of all, that story about the visible DSO that, you know, the, the, the numbers that they saw over the last seven years, incredible. But you mentioned something interesting that you said, there is this blacklist and they’re on the blacklist because of things that you see, I, I’m guessing transactions that you’ve seen go wrong. Is that, is that fair to say? Like, what are the things that you’re seeing that would put them, are there examples?

Chip Fichtner: No. Fortunately, knock on wood, we have not yet partnered a client with a failed invisible DSO. I’m sure that day will come, but at the moment we’ve been pretty, pretty astute at choosing the winners and the losers. Um, and that, and that just comes from industry knowledge. We live this every day. And so you would pay to use a specialist, uh to help you navigate those waters because It can mean a multi million dollar difference in value to have multiple qualified bidders to consider But more importantly it’s choosing who you’re going to spend the balance of your career with So you need to choose wisely, you know, it’s, it’s like getting married, you, you really only want to do it once if you can help it, and, there are a lot of invisible DSOs out there that will fail, so let’s, let’s talk about some elements of why a, a group ends up on the blacklist, because they can come off the blacklist too.

But lately more have been going on than have been coming off. But, you know, the first thing you really want to look at is how is the Invisible DSO financed? The money behind the Invisible DSO ultimately is the decision maker. It’s not the management. It’s the money. And so when we look at an invisible DSO and there’s lots of new ones created every year There were probably 50 created last year and some of those will succeed and some of those will fail But the first thing you look at is who’s the money behind it, unfortunately Because invisible DSOs have been around for 35 years. There are lots of investors who’ve done this time and time again There are groups, investors that have started, built and monetized dozens of invisible DSOs over and over again. And, you know, there’s one of my favorites, um, which I think is on their ninth invisible DSO, and they’ve already returned three and a half billion dollars to their doctors and investors on the other eight invisible DSOs they’ve done over the last 10 years.

So the first thing we look at as to whether, an invisible DSO should be on the blacklist or not is Who’s the money and what is the money? So there’s hundreds of those invisible dsos that are doctor led and doctor operated and that’s great problem Is they’re bank financed and bank financed invisible dsos That do not have access to bigger capital That’s not, not, constrained, by banks, uh, banks are certainly nice guys and we’re excited to borrow money from them and because dentists are low credit risk, they can borrow lots of money at relatively low rates. But the challenge is you can’t build a big, successful, invisible DSO with bank financing. Now, you can start there, but ultimately, you want to have a successful, sophisticated capital source, uh, if you want to grow, and, and growing is what’s critical to value. so, that knocks hundreds of them out, is when they have.

Limited capital to finance growth. The next thing you look at is, uh, certainly their track record in their management, you know, and one of the key tells to go on the blacklist is when we find an invisible DSO that has partnered with a doctor that we declined to represent, that tells us that they’re not exactly choosing the high quality partners. And if they’re not choosing high quality partners, the ultimate future of that invisible DSO is certainly in question. You know, so when, when we see an invisible DSO where we’ve talked to the doctor and said, no, we don’t, we don’t think we can help you and they end up with a, with an invisible DSO. Um, that doesn’t necessarily speak well for the invisible DSO.

Does that mean we’re perfect at? client selection. No, but it’s a real sign. so you can look at that. And the other thing you can look at is management turnover. So there’s a, one of the biggest invisible DSOs in the country has over 400 offices. They’ve been around for over 30 years. And between 16 and 19, we partnered probably 250 million of our clients with this particular group. And they had had the same CEO and the same chairman for it. 20 some odd years. They were very consistent, very safe, and they completed a recapitalization, which means our clients had the opportunity to sell the equity that they retained as a part of a deal, and many of them did, and many of them made great multiples on that capital, and the new investor who invested a billion dollars in this invisible DSO, then went about eliminating the entire management suite.

So CEO gone, CFO gone, CMO gone, CRO gone, everybody. And they replaced the management team. And at that point, they went on the blacklist because we didn’t want to risk partnering our clients with a group where we didn’t know what the management was going to do. And so we just put them on the blacklist, put them on pause. So we fortunately could see the potential risks there. So, you know, choosing wisely is the key and making sure you structure a transaction that’s mutually beneficial for everybody.

But there are little elements in these structures that have a lot of gotchas. And if you don’t know what to look for, it can be painful. you know, the, down to the minutiae of the lease terms, we, we see doctors who do these deals themselves, who own their, their buildings, um, enter into leases with their new invisible DSO partner that functionally render their buildings unsellable. Whereas if you structure it correctly and you own your real estate, when you partner with an invisible DSO, the value of your real estate increases significantly because you now have a triple A credit tenant in the building that you’re operating in. And so how you structure these transactions and looking at all of the minute details another place where Where we see doctors do it yourself. They screw up is on the tax allocation tax allocation is really important In these deals because it’s a difference between paying 20 federal long term capital gains tax rates or paying 37 percent, uh, ordinary income. painful transactions are usually doctors who were not properly represented or did it by themselves, which is a mistake.

Matt Mulcock: Yeah. And we’ve, we’ve seen horror stories like that as well. Totally agree. I do want to come back to, this is so interesting, this blacklist. and then I want to jump, you’ve, you mentioned valuations. I want to get to that as well, but we talk about the blacklist and you gave a great example there of, you know, the, the recap, whether it be the second or the third, We’ve seen this as well, and I love the analogy you used around marriage, like this is a, if you’re partnering with Invisible DSO, it’s the same thing as partnering with another dentist in your business. It is a marriage, right? But one thing I think is an interesting distinction, and I want to get your thoughts on this. And one challenge we’ve seen is when you partner with a DSO, or I want to hear like your, your thoughts on this, this thinking and tell me if I’m thinking about this incorrectly. That when you’re thinking about it in the analogy of a marriage, the dentist has to think about Not just the first marriage, but possibly the second or third marriage of which they don’t have control and where, where we’ve seen some issues pop up outside of the administrative stuff we talked about earlier. What do you say to people who say there’s a concern around not like the first deal and, and the administrative support and the money and the, the partnership that all is great with this first group, but what happens when they do a recap and there’s that second marriage? and that other group comes in and they overhaul their management team or their CEO, or they completely change the administrative support they’re getting or just overhaul everything.

What are your thoughts on that, Chip?

Chip Fichtner: My thoughts are it goes back to the original contract that you negotiated when you did the initial transaction. And so when you do these right, you can put in protections that can keep that from happening to you. Now, if you don’t think about it, it can happen to you. But the reality is, when you set up your contract with your initial transaction, you can protect yourself from a lot of that. Not all of it, but a lot of it. And ultimately, A good doctor is the most important protection from unwanted changes because when these groups pay millions of dollars for a practice or invest millions of dollars by buying 51 to 80 percent of a practice, the only thing ultimately that they’re really getting is the doctor and his team.

Now certainly there may be beautiful lobby furniture and high tech equipment in the back, but ultimately, Less than 7 percent of the value in these transactions is tied to the goodwill of the doctor and his team. And so doctors, while they think they’re not in control, the reality is they’re the golden geese that lay the golden eggs. And the good invisible DSOs know that if they piss off that doctor, He’s got millions of dollars in his pockets and he can just quit, which is allowed. So the good invisible DSOs go out of their way to live up to their promises. And in a recap of a good invisible DSO, the management is typically signing long term contracts because the new investor in the recap is buying the management. Otherwise, you’re, you’re either buying the management or you’re buying the doctors. So the new investors in, in the good invisible DSOs are locking down that successful management. Certainly, they’ll let some of the 60 year old guys retire, but the majority of the management in a good invisible DSO that recapitalizes is going to be there next year and five years from now.

Now, there’s plenty of bad ones that recap, and they do change the management. But, if you’re careful enough, you’re going to avoid those. If you know what to look for, and you know to look at the blacklist and figure out where they are.

Matt Mulcock: Yeah. you mentioned the ownership structure of 51 to 80 percent kind of being that window. Have you seen, or have you, do you have much experience with these groups that are now popping up that are actually going below 50%? They’re actually allowing their doctors to own more of that. And did you have thoughts on those groups that have popped up recently?

Chip Fichtner: Yeah, and if you really look under the covers, they don’t have any money. The groups that are offering less than 51 percent in cash, generally are doing that because they don’t have any money. generally speaking, the invisible DSOs want the doctors to have skin in the game, but they want to own at least 51%, um, because they can consolidate from a financial perspective. And if you own less than 51 percent you can’t, or less than 50 percent you can’t, but yeah, so we see again, there were probably 50 invisible DSOs started last year and probably 30 of them have no money. But the challenge is they don’t have the capital to go expand and therefore create increased value for their practices. They certainly can’t buy any of our clients. so you got to look carefully because there are in any booming business, no matter what it is, whether it’s AI or whatever, there are going to be some charlatans out there. There are going to be some scam artists that are going to be eager to take your practice and not give you enough for it. You have to be very careful in your selection process.

Matt Mulcock: Yeah. What are you seeing coming back to this idea of valuations? You mentioned it. What are you seeing from a valuations perspective? You mentioned earlier, COVID and what has changed over the last five years, just seeing cost of capital, um, that changes the leverage mechanisms these DSOs can use and PE. And what are you seeing right now, Chip, when it comes to valuations?

Chip Fichtner: You know, it’s interesting. The first topic about valuations is dispelling the myth that doctors have that all of these groups are backed by private equity. They are not. Private equity certainly has been a leader in consolidation of dental practices for the last 35 years. But as they have been successful, it has attracted lots of other capital sources. As an example, last year, over 8 billion was invested in financing and capital into the invisible DSOs in the U. S. With the P. E. backed invisible DSOs, and there’s nothing wrong with them, decisions come very slowly because they’re dealing with other people’s money. The family offices are dealing with their money. So the private equity backed invisible DSOs have to go get permission, and they go through committees and layers. Getting a decision in a transaction with a private equity backed invisible DSO is generally slower than a family office backed invisible DSO. As it pertains to values, fortunately all of that capital that was invested last year enabled us to create new record values for many of our clients last year, so, today we see values of practices ranging from seven times ibida up to, call it, ten times ibida. And, um, it’s all about the growth rate and the age of the doctor today. If you have a flat practice, you’re looking at seven times EBITDA. If you have a growing practice, you may exceed 10 times EBITDA. And if you’re 40, uh, you’re going to get a higher value than if you’re 60.

Matt Mulcock: And what are you seeing, Chip, on those values? Um, first of all, those are way higher than what we’ve heard of or, you know, that’s out there. Um, I’m curious from your perspective what you’re seeing. What, how is that broken down for a doc when it comes to cash in pocket at the time of transaction versus rolling equity?

Chip Fichtner: Good question. So the answer is that the. The cash versus equity component shifted a little bit in 24 to more equity, less cash. But in the last 120 days, we’ve seen offers that have ranged from 51 percent cash to 80 percent cash. Whereas in 22, we did one transaction for Older large doctor that was actually at 95 percent cash, but the the groups are typically 51 to 80 percent in cash. And ultimately what I tell my clients is you don’t know what split you want until you meet. Your perspective partners, because there will be cases when you are become a very strong believer in the upside of their equity. So you may have gone into it saying, gee, I want 75 percent in cash. And by the time you find the right partner, I’ve had lots of doctors come back to me and go, no, no, no, no, no. I want 25 percent in cash, 75 percent in equity, because I believe the upside of this, this group. So you don’t know what you want until you see what your options are.

Matt Mulcock: Got it. And what are things doctors out there right now that are saying, I want to learn about this more. I’m considering it, or I just want to know what, what I should be thinking and focusing on to increase the valuation of my practice. We mentioned the numbers, obviously increasing profit margins. There’s a lot that goes into that. What other factors are you seeing chip, that goes into, you said age, but are there, what other things are they looking at?

Chip Fichtner: You know, ultimately the highest values that we achieve for our clients are based on the doctor’s personality, their passion

Matt Mulcock: Was just going to ask that. Yeah.

Chip Fichtner: And their plan for growth. So we coach our doctors in their personality elements. We want them to emphasize. We coach our doctors to actually create with us a written growth plan, not just a, Hey, I’d really like to open another office, you know, five miles down the road. You’ve got to have a growth plan. Because that’s what the invisible DSOs want, is they want to partner with doctors that are passionate about dentistry, love what they do every day from a clinical perspective, maybe not from an administrative perspective. But the personality and the doctor’s passion and their plan for growth are All critical pieces to getting maximum value today. And it makes a huge difference. You know, having the basic EBITDA numbers to get into the stadium is important, but the way you win the game is you convince an invisible DSO that you’re going to grow and you’re going to be a superstar. And so that’s part of the value we add to our clients is coaching them on the elements of themselves and their practice to talk about and, that’s important.

Matt Mulcock: Wow. So a lot of nuance to this, uh, I’m curious, Chip, what you see on the horizon for 2025 when it comes to valuations and just DSOs and this landscape in general, what are the, what are the challenges you’re seeing?

Chip Fichtner: You know, the biggest challenge that a doctor has today is the value of their practice. If they’re growing today, it’s high. If they have a decline in revenues, for whatever reason, the doctor gets hurt, three of his hygienists quit, whatever. If you have declining revenues, I cannot do a deal for you. So, all of a sudden, today, you could have a practice worth 5 million, and three months from now, if your revenues decline, you’ve got a practice that I can’t give away. Until you return to growth. And so you are one heartbeat away from that practice value going down because if you have become disabled or whatever happens, the value of your practice could drop precipitously and the impact on your net worth and your family can be significant. . So today a doctor can diversify their investment portfolio. They can use that cash for things other than treasury bills. So having a diversified portfolio and I am not a financial advisor, uh, is probably something doctors should understand, especially given the high values for practices today.

Matt Mulcock: Got it. So the biggest thing that you mentioned a factor there being growth of revenue, showing consistent growth of revenue. What do you say to the doctor that Killer business owner knows the numbers, has a good handle on their practice. Um, they’re not even share side that often. They’re, they’re just, they’re literally running their practice like a CEO and them saying, cause I’ve heard this many times, them saying, I’m basically running my own business and know how to do this. And I have the same. Like same risk of a recession as, or they have the same risk of a recession as I do, or the macroeconomic issues would impact us all. Um, what do you say to the dentist that says like, why would I give that up? Why would I give up my profits? Cause that’s the trade off, right? Like the diversification you’re achieving from selling a piece of your practice. What you’re giving up though is your future profit. That’s what they’re buying. So what do you say to that dentist? It’s like, why would I do this? I’ve got a good handle on my business. Like. I guess I’ll present this to me. It’s interesting. I think it creates a bit of a paradox somewhat of the most valuable docs that are running their business the right way. And they’re doing exactly what you’re saying that would get the highest valuation are often the ones personality wise and ability wise, skill set wise that they would be like, well, why would I do this? I’ve already got a good handle on this. What do you say to those doctors?

Chip Fichtner: You know, what I say to them is, is number one, you still potentially have risk issues associated with things that you can’t predict. and yes, you’re both going to be affected by the same macroeconomic issues. However, 100 percent of your net worth, let’s say, is tied up in your practice. And if we have a decline in collections over a two year period of time, your ability to monetize that is not there anymore. Okay. Number two, if you choose wisely, that piece of equity that you retained can become dramatically more valuable than the hundred percent of your practice today. And so that’s part of why some of the younger doctors are doing this is because they say hey I’ve got a 10 or 20 year horizon And I could see the value of my equity create generational wealth for my family, which I couldn’t do by growing my practice .

Matt Mulcock: Yeah.

Chip Fichtner: When I, when I hear a doctor says, Hey, I can, you know, they’re, they’re offering me eight times EBITDA, which is functionally meaning they’re buying my profits for the next eight years. And that is exactly what it is. They’re buying your profits that you would make over the next eight years. A couple of differences though. There’s a lot of tax ramifications to that now a lot of doctors say well I run all kinds of personal expenses through my practice And therefore i’m able to shelter a lot of that ordinary income Well I can tell you if you just Google dentist tax evasions and look at the number of cases that have been brought against dentists in the last six months, it has been shockingly increased and they are getting indicted for things that Most doctors consider normal every day, you know, kids on the payroll, the girlfriend’s apartments on the expenses, the car payments. I mean, you run through the list of tax optimization strategies that dental CPAs, um, seem to urge their doctors to do. That’s ultimately very high risk. Um, in a world of doge,

Matt Mulcock: Yeah, I totally agree with that. chip to wrap this up. Appreciate the time. This has been so insightful. where does this go from here? You know, as far as the, the overall landscape of DSOs, you mentioned all the different kinds of capital sources that are in what, you know, there’s a lot of talk around like quote unquote full consolidation, at some point. What does this look like in the future?

Chip Fichtner: We’re not even close to full consolidation and we will not be certainly in my lifetime. And here’s why. If you have the average GP practice in the U. S. doing 840, 000, it’s a job, not a business. It’s not going to sell. Okay? It will sell doctor to doctor. So we will have a very long time before dental gets to where MDs are. MDs are 77 percent consolidated. Dental is, depending on who you listen to, call it 20 for easy math. We’ve got a long way to go in dental consolidation, and it will never get to quote full consolidation. However, you know, there are times to buy and there are times to sell, and the idea is to buy low and sell high. And I can say with great conviction that, uh, we are in times of high. It’s probably time for a doctor to understand the potential value of their practice, which they can find out by going to largepracticesales. com. And at largepracticesales. com, you can set up a meeting with me. Uh, I, I love to talk to doctors and I’ll talk to anybody, whether you’re interested in the concept or not, I want you to learn because ultimately, if you have a big enough practice, you’re either going to join an invisible DSO or you’re going to compete with many. And so you should at least understand this concept, I urge every doctor to at least become educated on this opportunity because it’s in your community today and you should understand it

Matt Mulcock: Yeah, I think that’s a great way to leave it. Chip. Is this idea of education, educate yourself as much as you possibly can understand the The landscape, knowledge is certainly power in this situation because to your point, it’s happening. Money’s coming in. You, like you said, they’re out there. It’s, it’s, it’s best to, to be as educated as you possibly can on this. So large practice sales. com, is where, you can get in contact with you, and your group and understand and understand more. Okay. Awesome. chip, any final words, any, any final piece of advice as we wrap up here?

Chip Fichtner: Nope. I appreciate everybody’s time and it’s a good time to understand this option, whether it’s for you or not, who knows.

Matt Mulcock: Awesome. Well, Chip, thank you for being here. Everyone. Thanks. Thanks for listening. again, that’s large practice sales. com. And then of course, if you want to get ahold of, uh, of us or get more information, dentistsadvisors. com. We’d love to talk to you as well. So Chip, thanks for being here, everyone. Thanks for listening till next time. Bye bye.

Chip Fichtner: Thank you, Matt.

Keywords: EBITDA, invisible DSO, dental partnerships, practice valuation, profit margin, dental industry trends, DSO models, Invisible DSO, partnerships, practice value, market dynamics

Practice Transitions