Will Transitioning to a DSO Make You More Money? – Episode 123

It could be the #1 question on dentist’s minds: “How will the growth of DSOs affect my practice?” In this Dentist Money™ interview from the Dental Success Summit, Reese Harper, CFP® welcomes attorney Brian Colao, Director of Dykema’s Dental Service Organizations Industry Group. Brian represents several DSO venture capitalists and shares his view on the DSO business model compared to solo, multi-location, and group practices. He explains when it makes sense to transition to a DSO, how ownership structure differs from traditional practices, and the implications of selling to a DSO buyer versus a private practitioner.

Podcast Transcript:

Reese Harper: Welcome to the Dentist Money™ Show, where we help dentists make smart financial decisions. I’m your host Reese Harper, and I am on site at the Dental Success Summit, here with someone that I have just met that is actually one of the foremost experts on a lot of factors that affect entrepreneurial dentists: illegal fee splitting, the regulation of corporate dentistry, lab regulations, advertising regulations, patient finance regulations, billing regulations, HIPAA, and lots of different things relating to dentistry. Within his law firm, he had kind of become the expert in a lot of these topics, and so I was really excited to get Brian Colao on the show today. Brian, thank you so much for joining me.
Brian Calao: Thank you so much for having me! Really good to be here.

Reese Harper: Yeah. Now Brian, I think we are going to jump in. You are kind of an expert on a topic that, for a lot of dentists, is important, which is this idea of, “should I be a DSO, or should I be in solo practice? Do I like the idea of kind of having my own mini, less formal DSO, where I am just a multi-practice owner, or do I really step up and try to institutionalize my business a little more? So, tell me a little bit about, for those who are less familiar with the evolution of DSOs, what it actually means, because it is a buzzword that everyone will throw around, but there are a lot of dentists who don’t really understand the difference between a multi-practice, privately-held business, and a DSO.

Brian Calao: Now, I agree, there is a lot of confusion in the marketplace, and a lot of so-called experts say a lot of things, and some of it is not true; some of it is confusing. But I have sort of devoted my career to this, so I am going to try to clarify things as best I can. The single biggest question facing the dentist right now in the solo or the group practice is “how do I handle the evolution of dentistry?” It has evolved from solo practices to group practices, and now to DSOs; a massive consolidation of the marketplace is occurring, and how do I fit into this new world, or this new structure? That is the biggest biggest question. So let’s start with, what is a DSO? A DSO— the abbreviation is dental service organization, and sometimes it is dental support organization, sometimes it is dental practice management company, sometimes it is a management company, sometimes it is an MSO— what it is is a management company that provides non-clinical administrative support services to contractually-affiliated dental practices. Why? Well, because it allows for participation of non-dentists to invest, because under the applicable laws, generally— ironically except here in Arizona where we are, where non-dentists can own a dental practice— in most places, you have to be a licensed dentist to own a dental practice, but through a DSO, it allows non-dentists to participate in making an investment in the dental space. It also allows for proper succession planning. If a licensed dentist were to become disabled or unexpectedly pass away, usually, they have to fire sale their practice, but if they are a DSO, they can continue to preserve the value of their organization into the future. And also, with the new tax code that we have out, the jury is still out, as they say, on the code, but it looks like there is going to be some favorable treatment opportunities for folks that restructure as a DSO.

Reese Harper: So, if I am a dentist who ones two practices, and I am thinking about owning three, is there really a place for me to set up a management company to be able to make my operations more efficient, or is that below the scale of where it should be?

Brian Calao: No actually, you are a prime candidate; as you just described it, you are a prime candidate. What I tell folks— I was just talking to a dentist from Maryland a few minutes ago, and he said, “who shouldn’t do this?” It was a good question; a very fair question. If you have one office, and you are always going to have one office, and you are never going to expand, you don’t need to do this. You probably are going to need to sell out to a DSO someday, but you don’t need to do this, you know? If you have three offices, and you are 70, and you are getting ready to exit, you don’t need to do this. But if you have two or three offices, and you know, you are in your 30s, or 40s, or even early 50s, and you want to expand further, and you have a decade or more to continue to practice, this is sort of how you have to restructure now! I mean, you have to be thinking this way, because the old model is not going to be financially viable anymore. I mean, I know your show focuses on how to be more profitable, or that is one of the things that it focuses on. You are going to really struggle to run a profitable operation if you are continuing on, you know, and not restructured as a DSO, and you have two or three offices.

Reese Harper: So let’s talk about that a little bit. What is the advantage financially for me to restructure as a DSO?

Brian Calao: Well, by centralizing your non-clinical administrative support functions, you achieve economies of scale. So suddenly, you get volume-based discounts. I’m talking to you now, and I’m just looking at our friends at Henry Schein; I’m just looking at their booth; it happens to be in front of me. It comes to mind, if you go to Henry Schein on behalf of a DSO that has a number of affiliated practices, you are going to get better pricing than if you are a solo practitioner, or if you are getting separate pricing through three separate offices; that is just a fact. So, you are going to lower the overhead. You are also going to likely increase your reimbursement rates by negotiating with private payers on a volume-based manner instead of on behalf of a solo office. So, the opportunity, of course, is to increase the money coming in by increasing your reimbursement rates, and lower the money coming out by achieving volume-based discounts. And there is more to it than that, but those are some obvious things right there.

Reese Harper: So, why do I need to set up a DSO for someone to— what if I have four practices, but I am not a DSO? Does that really affect things? Does Henry Schein look at me differently? Do I need to do that? I mean, help me understand why— because it seems like you are speaking to more than just reimbursement negotiations and supply renegotiations.

Brian Calao: If you really are a DSO, you are going to get better prices than if you are what I would call an imposter DSO. Like, you say, “oh, we’ve got four offices, and one of our offices is sort of providing some centralized services, but they are just doing it out of that office… we don’t really have a DSO,” you are not going to get as good of a deal. It’s just a fact. Henry Schein is not stupid; they are a really good friend of ours; I like the folks at Henry Schein; I spend a lot of late evenings at these conferences chatting with these folks, and I am just going to tell you, they can tell the difference between an imposter DSO and a real DSO, and a real DSO is going to get a better rate.

Reese Harper: I know your firm gets into a lot of areas of law, and there is a difference between strategy and then corporate setup. When I am going to establish this for the first time, for those who have never seen this process, what kind of entity do you guys usually recommend we set up that runs these administrative functions, and then, does that just have ownership at 100% of the other organizations? How is this typically done if I am starting down this path, and I want to bring investors on, maybe at that DSO level, but I am not really doing it at the individual practice level? I mean, can you give me some context into how that entity structure really looks?

Brian Calao: Sure! These are really good questions you are asking. Remember, the DSO cannot own dental practices, so it is typically going to be an entity that will allow ownership of non-dentists. So, it can’t be a PC or a PA, it is typically an LLC. And because it can’t own dental practices, all it can do is contractually affiliate. What that means is assign management agreements and other similar agreements with the actual dental offices. So, you are going to have usually a PC, or sometimes a PLLC, sometimes a PA, that is 100% dentist owned, because except for here in Arizona, that is generally the way it has to be done, and then you are going to create an LLC up above that, and that LLC is going to sign up what I call a DSO business agreement. It could be a management agreement, a license agreement, equipment use agreements, things like that, with the clinical entities. So, you have a non-clinical entity that will support non-dentist owners, and then you will have clinical entities that have to be 100% owned by dentists, and then you will have contracts between them. The term is contractual affiliation. If you hear that, what that basically means is that the DSO non-clinical entity has signed up management and related agreements with the practice entities; that is what contractually affiliated means.

Reese Harper: So do I have to have more than one entity, or can I just have one entity that has these contractual agreements with all of my clinical operations?

Brian Calao: I mean, the structure varies, depending on what state you are in, and what your setup is, but yes. If our target audience here are smaller group practices, not giant organizations with hundreds of offices, you can generally have a single DSO entity, and it can often be structured with a single set of management agreements. Sometimes, if you take Medicaid, and you have separated out your entities, and you have a number of different— like, you have five offices, but five separate PCs because you take Medicaid, then sometimes, it is more complicated than that. But very often, we can do a single DSO and a single set of agreements with a single clinical entity.

Reese Harper: Well, if I am going to exit— let’s say I am building up a multi-practice operation, and I am going to exit to another private buyer versus exiting to a DSO. In your experience, do you see different valuations at the smaller end of the scale, like a three, four, five, maybe up to ten-practice operation that is selling in the private market compared to selling to a DSO?

Brian Calao: Well, again, really good questions. The issue with this is EBITDA, okay? I tell people not to get bewitched or caught up in how many locations you have, but get caught up in EBITDA. An example that I have sometimes when I speak at these conferences is you can have a $2,000,000 practice that— and this is a simplification of course, but it is a good illustration— costs $1,800,000 to operate, so what is your EBITDA? 200,000. You can have a $1,000,000 office that costs 600,000 to operate: what is your EBITDA? 400,000. So, which is more profitable? The smaller office, you know? The guy who is bragging at the bar with his $2,000,000 practice… the small guy needs to be buying him drinks, because his larger operation, from a revenue standpoint, is not as profitable. So, what I am saying to you is I have seen three locations clean the clock of ten locations, so you have to get focused on EBITDA more than have many locations you have, and I have seen three locations have $3,000,000 or $4,000,000 of EBITDA, and ten locations have one million in EBITDA, and they actually do a lot better. But, just in terms of a general rule, now that we are talking about EBITDA: doing a deal with a DSO will usually get you five to seven times EBITDA. It’s like bonds. There is no right or wrong answer; it depends on your situation and what works best for you in all of these things. A private equity deal versus a DSO deal, they work well for certain people. But it’s like, bonds work better, for certain people, than risky stocks, or intermediate stocks. So, if you do a DSO deal, you are going to get five to seven times. It is a safe investment; there is minimal additional obligations asked of you afterwards. Usually, you have to be a good corporate citizen, you know, you want to make a smooth transition… they will hold back some of your money, they will release the rest at the end, and you can probably exit after two years. If you do a private equity deal, you might get double digits! I often see 10-14 times EBITDA, but, the big but, the fate of the organization depends on you going forward. You are going to have to roll over up to 40%! So, if you are getting hypothetically $10,000,000, you are going to have to roll over four million of that into the enterprise, and a lot of what happens will depend of a second equity event, and the second equity event will depend on how good of an operator you are, and your continued involvement for five years or more, so… yeah.

Reese Harper: Yeah, let’s back up just a little bit–

Brian Calao: Let’s talk about three terms that I think will do it: holdback, earn-out, and rollover. Those are three things that, if you are listening to this, and you don’t know anything about this, these are three terms you will want to know. EBITDA too, but we already covered that one. So—

Reese Harper: Let’s just say, EBITDA is whatever you make on the location after you pay yourself a normal wage.

Brian Calao: Yeah, it basically means, you have taken all accounting judgments out of it, and after payment of all appropriate expenses, that is kind of what is left over. But the other terms that we should talk about… a holdback just means you did a deal with a DSO— and I will keep it simple: they did a $5,000,000, they paid you. They are going to give you three million up front, and they are going to hold back $2,000,000, and they are only doing it to make sure you are a good corporate citizen, and you follow all your obligations, and at the end of hypothetically two years, they are going to give you your money. It is not dependent on the future economic performance; they are just saying, “hey. We have bought your organization. Please don’t steal from us; don’t open up a competing office; don’t divert business, and help us transition those patients to our organization. And if you do those things, we will release your two million at the end.” And that is what a holdback is called. A holdback can also be held back, for, “by the way, if you lied to us in any of your documents, and it turns out the OIG is investigating you for fraud, or there’s lawsuits that you didn’t disclose and we’ve gotta settle those, we might take some of your money to do that,” but that is what a holdback is. And earn-out is something that says, “you are going to stay with us for a couple of years, and if certain financial thresholds are earned, you are going to get a percent or formula that you are going to get paid, so it gives you skin in the game post closing. So, if the organization continues to perform post closing, you can get premiums and bonuses and things like that; that is what an earn-out is.

Reese Harper: In most cases, with an earn-out, you will see some kind of upfront compensation in an earn-out, or do you most often see the compensation entirely in an earn-out?

Brian Calao: No, no no. An earn-out is just a supplemental form of compensation. They will say something like, “hypothetically, we are going to pay you six times EBITDA on $1,000,000 EBITDA.” So, will make $6,000,000, and they will say, “we’re gonna give you four million up front, and we might hold back two million,” or they might say, “we’re gonna give you four million up front, and there is going to be a floor of two million, but if certain benchmarks are made in this two years, you could earn up to three million or four million,” and that is what an earn-out is.

Reese Harper: Yeah. Let’s hit a rollover now so people understand that.

Brian Calao: A rollover, now this is when you start dealing with private equity groups, and this is where they really want you to have skin in the game, because the goal is for you to exit together with them. With a DSO, we are assimilating your practice, and then you are going to exit it a couple of years if you want to, and our name is still going to be on your door (laughs), and we are still continuing on. With a private equity group, we are investing today, and we all exit later at a higher multiple, and to make sure you are on board with us, and all of our interests are aligned, we are going to require, usually very common, a 40% rollover. It can be anything from 20%-49%, but 40 seems to be the most common. So, if I have just given you $10,000,000, I am only going to give you six million, and four million gets reinvested, and you are going to get shares in the new organization, the new DSO that we are going to create, and when we sell out and do a second equity event, usually in three to five years, those shares are hopefully going to have a lot of value. But what I have tried to tell the audience that we are speaking to is that it really depends on your performance. If everything goes as planned, and you are a great operator, and the plan was that we bought your six offices, and we are making this investment, and we are going to grow it to 15 or 20 and sell it, and you do that, and it all turns out, then yeah, you can make an absolute killing, and life-changing money. I have clients who are hiring special attorneys. I can’t do it; I don’t have the expertise. Generation-skipping trusts for grandkids, and unborn people…. But that is if it goes perfectly. Sometimes, I have seen it on the other side. If you are not the entrepreneurial person— and I am not judging— if you are not, then do a DSO deal. If you are not that type of entrepreneurial person, and you get in bed on a private equity deal, and you don’t want to hang around for five more years, or you are not as good an operation because there is one set of skills that takes you to five or six offices and another set of skills that takes you to 15 or 20, and if you don’t possess that… I have seen folks fired from their own organization! Imagine this: you founded the organization; you took it to five or six offices; you did a private equity deal; the plan was for you to stay for five years, but you just weren’t good at it, and you got fired from your own organization a couple years in and they brought somebody else in… they won’t take your shares away. You can still realize some benefit in a second-equity event, but you may not be in a leadership position going forward.
Reese Harper: Yeah. And that is not uncommon. So, I think what is important for people to understand from this last part of the conversation is that there are some qualitative and quantitative changes that might fall on your plate depending on how well you can negotiate, how profitable you are, how well you are running your practice, and what kind of leverage you have, but a lot of these things are based on the specific DSO you are selling to, or the specific private equity firm that is interested in obtaining your equity, and you have a lot of flexibility around that transaction. Sometimes, I feel like people don’t realize that there is quite a bit of wiggle room in the deal they can structure.

Brian Calao: There is a wide variation on private equity deals. On DSO deals, there is less flexibility, but there is more certainty; you know what you are getting. What can affect the multiple— you haven’t asked me this yet, but while we are on this— people say, “what decides a seven multiple versus a five? What’s a 14, and what’s a ten?” Well, the things that can influence that are one, what does your payer mix look like? Are you heavy Medicaid, where everybody knows what the regulatory risks, the reimbursement challenges there… you are going to get a lower multiple; it is almost impossible to do a double-digit multiple if you are heavy Medicaid. If you are no Medicaid, or de minimis Medicaid, that is a really big factor. What does your infrastructure look like? Have you invested heavily in infrastructure so you are not using dusty boxes up in your attic, but you actually have proprietary software, and all of your practices are integrated? Meaning, are you operating, like, five silos, or are all your five practices on uniform software packages and uniform business systems?

Reese Harper: Can they actually be managed, like, from a central location, as opposed to showing up at each location and diagnosing, right?

Brian Calao: Yeah, do you have a central location that has to drive to all five locations, or can you actually manage them from the centralized location? You know… are they scalable? Perhaps the most successful DSO transaction that I am aware of was DECA Dental, Ideal Dental in the Dallas–Fort Worth area. This is pretty public knowledge; I have heard the owners speak. I mean, they got like an 18+ multiple, but one of the keys— and I admire that organization so much— one of the keys was that it was scalable. They build it in such a way that when the private equity group came in, they said, “yeah! We can scale this up pretty easily. They all look alike; they all follow the same form… you know, maybe a little bit of variation, but by and large, they all follow the same blueprint, and it is easy for us. We could see this thing going from 20-50 in a couple years, because the blueprint is right there in front of us.” Do you have some type of blueprint like that?

Reese Harper: Yeah. What about team? I would imagine it has somewhat to do with it? How do you see team— like, if you have a really competent team this is executing well at an executive level, do you see that affecting valuation, or in most cases, do those people get replaced in the transaction?

Brian Calao: No. You know, that is a misnomer, and I am glad you asked that question, because sometimes, private equity groups get a bad rap. You know, people will say, “ohh, they are just going to fire everybody.” Now, why would they do that, okay? Well, let’s answer it: why would they do that? Yeah, if you staff is completely incompetent, and harming the business, and you can’t turn a profit… yeah, okay, they might fire your staff. But let’s assume you have a successful staff, and you staff is profitable, and very much contributed to the success of the business… that would be really poor business, bordering on suicide, for them to walk in and say, “we have a really successful team, but we are just going to fire them all because we are the new owner.” I mean, nobody wants to do that. Now, what they might do is commercialize the business. They might say, “if you don’t have a really professional CFO, maybe we are going to install a CFO, or we will help you recruit one. And it doesn’t necessarily mean the CFO is going to get fired, but maybe we will re-assign the duties or do something else.” but it is very rare for the new owner to come in and just completely clean house. When you see something like that, most people would understand. You walked in, and oh my god, it wasn’t turning a profit, the folks were not competent, they just couldn’t handle their job responsibilities… but it is almost never that I have ever seen it where the business is profitable, the team is successful, and the new owner just cleans house just because they wanted to do that.

Reese Harper: I think it is good to clarify that, because I think there is some fear, sometimes, in I think, “what will happen to my organization? My team? The legacy I have built? The people who are depending on me?”

Brian Calao: Yeah, and as you know, clinical employees are like gold in this marketplace. The demand for dental services is beginning to far outstrip the supply of very competent practitioners, and I am not just talking associates. I am talking about them, but I am talking about hygienists, registered dental assistants, other folk, good practice office managers… so, it would really be almost unheard of and short-sighted if you had really talented folks for the new owner just to start firing these people.

Reese Harper: So, really quick— and this is math that is kind of hard to do off the cuff, but you are an attorney, so you can do math and write really well—

Brian Calao: Well I went to law school so I wouldn’t have to do math, but I will still do the best that I can for you here.

Reese Harper: (laughs) so, a normal dental practice— like, Dr. Mark Costes this morning at this event was kind of walking through what his target levels of profitability were on a single location. So, he has an example where he is showing a phase one as kind of someone who is—

Brian Calao: What did he say? Because I flew in late.

Reese Harper: Yeah, so phase one, he talked about a 10% target profitability where you are struggling to figure out your systems, then you maybe move to 15, maybe get to 20, and 20%-25% would be pushing a really profitable envelope in terms of true EBITDA profit, like a percentage of collections. That was kind of the discussion this morning, and in my experience, that has been fairly typical, the range going anywhere from 10% to— we’ll call it 30%. But it would be really rare to see a 30% of gross revenues in profit, and it would be more common to see 10, 12, 15, 18, and maybe 20 pushing the high side of profitability off of one location. Now, if that is the case… what most dentists think of— are those ranges familiar to you, first of all?

Brian Calao: Yeah, you know, they are. I mean, I have seen as high as 40 before for some super profitable operations, but I would agree. That is why— you know, you come to a wonderful conference like Dental Success Summit, where we are at, and you see all these great consultants and folks here, and the reason that they are able to fly all around the country and they have a following and an audience is because a lot of dentists are doing 10%, and there is a lot of margin for improvement there, but I do agree. In general, you do see a lot of 10% and 20%; I think you can improve that, and you can do a lot better than that, but you see a lot of that.

Reese Harper: Okay. So let’s just say, in theory, we talked about how DSOs can improve profitability; we have established that. And there is a lot of leverage that comes when you consolidate some fixed costs across more locations. But most people, when they hear a five to seven multiple, a nine to eleven multiple, a 15-20 multiple, like you were mentioning, this kind of unique, one-off case, the 18-multiple DSO exit, what they think of is the correlate that with what they are normally valuing their practice at, which is a percentage of collections, so one location’s collections, you know, a GP is going to get 60%-70% of that. And I think the thing that I am trying to help people see, and I want to get your feedback on to make sure we are doing our math correctly, if one location is doing 20% of profit, that leaves me 200 grand of EBITDA revenue. If I get a five multiple of that, that is a million-dollar sale on one location, right?

Brian Calao: It can be. If your EBITDA is 200,000 and you get a five multiple, that is right.

Reese Harper: In a million-dollar collections practice, that would be one times my collections; it would be 100% of my collections. A lot of dentists think about it in those terms. They say, “what percentage of my collections am I going to be able to get when I sell it?” So, five times EBITDA would be the same as one times collections, right?

Brian Calao: It can be, in the example that you have given. I have to tell folks, you have to get off this, because you are vulnerable, and I will tell you why: because the folks with all the money— the DSOs and the private equity groups— they are utilising EBITDA. I promise you they are. Sometimes, they will convert their model back to percent of revenue, like the universal translator in Star Trek or something, they are going to go back, but at the end of the day, they are calculating EBITDA. So, it’s okay! You guys went to dental school, you don’t need to know this. All you need is a good accountant, and sit down with your good accountant, and get your EBITDA— now, if your accountant doesn’t know what EBITDA is, then fire that accountant and get another one, but all you need is a competent accountant, and you can walk in there and say, “look. I went to dental school, I don’t know anything about this. I know what my percent of revenue is, but can you help me calculate my EBITDA?” And in a very simple exercise, an accountant will help you do that, and that will empower you, because there are all sorts of differences of opinion sometimes on formulas for calculating EBITDA, and you really need to speak that language, and understand, and have a good idea of what your EBITDA is before you start discussions for any type of equity event, whether it is a DSO, or private equity deal, or any other deal.

Reese Harper: Yeah. Well, I guess the question I was leading to is, in this example, where we are talking about evaluation of a $1,000,000 practice, it could range anywhere from five to seven EBITDA—

Brian Calao: Five to seven multiple, yeah.

Reese Harper: Five to seven multiple of EBITDA, and that is approximately somewhere between 100% of collections to 140%. It is 1.4 million, or as low as 600,000 if you are selling it not in a five to seven EBITDA, but I am talking about a normal dentist selling it to another dentist. At this conference here, there will be a lot of people here who say, “I am only going to pay 60% of collections,” or “I’m paying 70% of collections.” So you can see the massive difference between valuation if you are selling a single location to someone else: that $1,000,000 in collections could bring you 600 or 700,000 in an exit, or it could bring you as much as maybe 1.4 million in a DSO exit.

Brian Calao: Yeah, so here is the thing on that: a big part of the reason why the entire industry is evolving towards DSOs is because the non-dentists have all the money, okay? You can walk up— there is always somebody where there is not a big audience out here today, but if there is an audience, somebody will shout out, or make an obnoxious comment about that, but like it or not, it is kind of like Walmart is taking over the mom and pop stores. I mean, you don’t have to like it— I don’t make anybody like it— but you are really doing yourself a disservice if you don’t understand, and you need to understand what is going on in the market, and the non-dentists have all the money. If you are trying to sell your office right now, and you want to just open it up to a dentist population in your area, then yeah, you are going to get the valuation you are talking about. If you open it up to, “no, I am going to like non-dentists participate…” basically, if I am here— if I am in Dallas, where I live— I am either going to let licensed Texas dentists in my area— which, I don’t know, there might be, at any given time, ten or fifteen in a whole universe that are interested in my practice in that particular time. Or the world, okay? That can be hundreds of folks, and the world has more money than the ten or fifteen dentists, and that is why you are seeing oversized multiples. They wouldn’t pay these multiples if it wasn’t a step up. In other words, what they are saying is, the reason that they are paying these multiples is the DSOs and the private equity groups want to make this attractive. They are used to going out in the marketplace and bidding against other folks, and they are saying, “yeah, go ahead and sell to that dentist if you much, at, like, three times, but we are going to pay five to seven over here.” And you are foolish if you don’t take a look at it, at least.

Reese Harper: Well, and I think it is interesting to think about, though, that will come a point in time where the private dentists population is willing to pay more money so that they can acquire single location practices as well? Because there is a big spread between those two tolerances to pay, right? The institutional money versus the private citizen, like you are talking about. Is there a point in time where these things kind of get a little bit closer, or do you see the dynamic just not going there?

Brian Calao: On the whole, they just can’t afford it. Now, somebody is going to— you know, we don’t take calls here, but I was going to say call— somebody is going to email, or make a comment when they listen that they can afford to do it, and they outbid DSOs all the time, and yeah, there are unique cases that do that. But on the whole, generally talking about the industries as a whole, the licensed dentists cannot outbid; they cannot do it. If they are able to suddenly raise their prices, the DSOs will raise them even more. They just can’t do that on balance on the whole.

Reese Harper: So, the obvious question for some people is, “what if I don’t wanna go down that route? How many dentists are going to be in the marketplace that—” I guess, before we jump there, what percentage of the marketplace would you say right now is dentists practicing with some sort of contractual affiliation with a non-clinical entity? That is what we will say.

Brian Calao: Yeah, this is why it is so explosive right now. When I give my presentation, it is around 10%-11% market saturation, so you have 89%– you have an enormous amount of runway. All the solo dentists out there, you are still the overwhelming majority. It is not going to be that way in the next ten years, but right now, you are still the majority out there. So because there is so much runway, the activity is so explosive right now in the space.

Reese Harper: Where do you see geographically most of the activity happening? Is it in the major metro centers? Your Boston, New York, Dallas, Seattle, California, or is it really just a demographically, agnostic kind of growth?

Brian Calao: I am trying to think of a good example. It is like, “beauty is in the eye of the beholder”; it is one of things like, “there is something for everybody.” There are investors and DSOs that I know that focus on a rural market; they will not touch a major metropolitan area, and they have made a killing opening up dental centers where they don’t only treat that particular— I’m not even going to call it a city— town, but they treat the 20 towns surrounding it, and they are the best options is 20-30 miles, and they make a killing on that. There are DSOs that you couldn’t pay to go there; they are only in the metropolitan cities. Then, there are DSOs that are expanding aggressively into Alaska, into Hawaii. Others just look like—

Reese Harper: They have a flavor, and it is based on what kind of market they want to serve, who the owners are, their tolerance for risk—

Brian Calao: That’s right. Some are like, you know, the NFL draft— I’m a big NFL fan— best available player. Some DSOs are, “we are looking for the best available opportunity.”

Reese Harper: So are you a 49ers fan?

Brian Calao: (laughs) no, I am a New York Giants fan, because that is where I grew up.

Reese Harper: No way, so you are not a Cowboys fan? (laughs)

Brian Calao: I am not a Cowboys fan.

Reese Harper: You have a nice stadium! You probably at least go there one in a while.

Brian Calao: Yeah… we are considering, for our DSO conference, you know, dykemadso.com, that we have in July, getting Roger Staubach to speak. I don’t know if it is going to happen, so I am not representing that he’s going, but we are at least in discussion that maybe he may speak there. But I am a New York Giants fan.

Reese Harper: Well, I think have covered a ton of ground today. I wish we could go for a few more hours, but people won’t be able to handle it. You and I will make it a regular habit of getting together once a year and kind of hashing through the evolution of this market. I think I would just like to ask you if there are any last thoughts that you would like to leave with everybody.

Brian Calao: Yeah, I do have one, because you touched on it just a second ago. There are options if you don’t want to do a DSO yet, and some of the options that we are seeing right now are, for example, the California Dental Association is opening up a volume-based discount program that they are going to offer so that you can get some of the benefits of being a DSO without being a DSO. I have also seen folks string— I call it “duct taping” is my term— string groups of practices together to get volume-based discounts, and provide centralized management so they can maintain their autonomy without selling out to a commercialized DSO or private equity group. We’ll see, only time will tell if those models will be successful, but right now, there are some models like that where some folks can see if they are right with them, if they want an besides going the traditional DSO route.

Reese Harper: One last question that I am going to have Justin layer into this. What about the specialists in the marketplace versus the GPs? How do you see the DSO market penetrating the specialty community versus the GP community?

Brian Calao: It is all over! I mean, we are doing a lot of oral surgery deals right now, there is a DSO out buying oral surgery groups… I was involved, very fortunate, at the beginning of one of the first specialty DSOs, ClearChoice Dental Implants. I also do some work with another generation company called ReNew 1-day dentures; these are specialist-type DSOs that are doing very very well in the marketplace; there have always been some orthodontic DSOs, and there still are, so yeah! I mean—

Reese Harper: Do you think there is a specialist or a specialty that is the most resistant to the consolidation, or do you feel like it is just personality specific?

Brian Calao: It is personality specific… I would have told you years ago that some of the oral surgeons were going to be resistant to it, but actually, this oral surgery rollup has worked out great; it has been terrific. You know, the orthodontist— because those who have followed the industry know they were in litigation 20 years ago with Orthodontic Centers of America, the first DSO that sort of had a failed model because of all the litigation— so the orthodontists, I think, have probably been the most resistant of any specialty, but they are coming around, and they have to be, because the market is changing.

Reese Harper: Well Brian, thanks so much, man. I really appreciate you sharing those thoughts. You are a good contact; we will leave contact information in the show notes for you to be able to get ahold of Brian and ask any questions to him about the firm’s work that they do, or his opinions of the industry. I really appreciate you coming on, and we look forward to having you again soon, man.

Brian Calao: Thanks so much. I really really appreciate it.

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