DSO Dynamics: The Trends You Need to Understand – Episode #494

Due to shifting market conditions, the DSO landscape is changing with private equity firms adjusting to new circumstances—but DSOs are still looking for the right practices that have a strong EBITDA and potential for growth. On this episode of the Dentist Money Show, Ryan and Brannon Moncrief, Principal and CEO of McLerran & Associates, look into the current trends of DSOs and dentistry.

 

Show Notes
McLerran & Associates

 

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Podcast Transcript

Ryan Isaac:
We’ll just, you’ll just get going here. But, uh, thanks for joining me today, man. I really, I really appreciate it. You’re it’s like pre spring break for you. You’re about to leave. So thanks for jumping on here, man. I appreciate that. Yeah. Uh, give, uh, the audience if they don’t know who you are, you’re a long time, you’re a long time friend now of the show, but, uh, and personal friend, but how about, um, give us a little intro. Who are you and what do you do?

Brannon Moncrief:
Absolutely. Thanks for having me. I’m Brandon Moncrief, principal CEO of McLaren and Associates. So I’ve been around the dental world now for 23 years. That’s kind of hard to, I know, and I’m only 27, so it’s wild.

Ryan Isaac:
You’re pretty great. 27 year old. I didn’t, I mean, it’s not nice to say, but, uh, well.

Brannon Moncrief:
But I do, yeah, I know, the gray and the beard. So for the first decade of my career, I was a dental lender lending money to dentists all across the country to buy, start and expand practices. And for the past 13 years, I’ve owned McLaren and Associates. And we are a sell side advisory firm. We specialize in helping large practice owners that are considering going down the DSO private equity path. So the sandbox I play in all day long is working with practice owners revenue of let’s say 1.5 million all the way up to 20, 30, 40 million that are considering monetizing their business in one form or fashion, whether that be a DSO affiliation or partnering with a private equity firm and continuing to scale their company. We also have a division of our business that does more traditional practice sales, you know, private practice sales, doctor to doctor transitions.

Ryan Isaac:
Yeah, so man, we’re recording this in the, what are we in March now? We’re in March, 2024, time’s flying. Can you, I feel like most of our audience is gonna be fairly familiar and pretty plugged in to content you’ve done with us before. DSO is a thing that’s on just so many people’s minds, but can you maybe give us a high level overview of what the landscape is like right now?

You know, everyone’s got different conjecture on when the peak was, when it will end, what it will top out at, you know, are multiple still good? Is it still worth it? Um, we’ve seen more transactions start to play out. It’s, it’s getting a little older, which is funny to say, cause I feel like it just came out of nowhere like five years ago, but now you’re starting to see work back periods ending some of their, um, you know, the, the first rollups or recaps happening and, or not happening. And can you just get what’s like the state of the union? Let’s do that state of the DSO Union of 2024. What are we looking at?

Brannon Moncrief:
Yeah, absolutely. The environments obviously changed pretty significantly over the past 18 months as a result of the macro environment changing, right? I mean, private equity, both in the DSO space, as well as many other industries that they’ve been rolling up, was operating with ideal macro economic conditions for about a decade, like super, super low interest rates, capital markets were wide open, a lot of access to cheap leverage cheap bank debt. And most of these investments are heavily fueled by leverage. But about 18 months ago, it’s been almost two years now, interest rates started to escalate rapidly and the capital markets tightened significantly as a result of the regional banking crisis, many of which fund these alternative private equity investments. And what was looking like a recession on the horizon, that still has yet to play out and hopefully won’t given that we’re in an election cycle now. But private equity is operating under a new set of circumstances. Interest rates have doubled, capital markets are very tight, so access to leverage is inhibited to some degree. And as you touched on, this concept in the DSO space has not been proven out long term.

I think, you know, Heartland and a few other DSOs have hit multiple recaps. Many other DSOs have hit one and some are headed towards their first. But due to this change in macroeconomic conditions, there have not been many recaps over the past 18 months. There’s been over 15 DSOs that have been to market and attempted to recap and not done so for one reason or another, mostly because they couldn’t fetch the multiples they were looking for so that they could give their investors the type of arbitrage they had promised. So what we’re dealing with right now is multifaceted in the sense that I think we’re kind of operating in a new norm, right? Interest rates are actually at kind of more in line with historically where they’re supposed to be. But private equity has not yet readjusted their expectations on the returns that they were looking for at recap.

I think you’re gonna see a recalibration of those expectations over the next six to 12 months, as well as I think you’re gonna see the capital markets open back up over the next six to 12 months. And as a result, we’re expecting multiple recaps in Q4 of 2024 and Q1 of 2025. So we’re expecting market conditions to improve, but for the time being, the market’s been a little tight. Some BSOs are on the sidelines. They’re either over levered. They’re carrying too much debt. They’ve tripped their bank covenants and don’t have access to fresh capital or they’re over their skis operationally. They grew too quickly post COVID and they’re not well prepared to actually integrate and operate the practices that they acquired. So they’re having to catch their breath and allow their infrastructure to catch up to their growth. So for one reason or another,

About a third of the DSOs in the marketplace that were buying practices coming out of COVID are currently on pause. Now, how has that impacted valuations? It’s actually had very little impact on valuations for like class A quality assets as a result of the fact that we’ve got a lot of young, entrepreneurial emerging DSOs that have recently taken on private equity capital and debt and still have plenty of money in the piggy bank to spend. So they’ve kind of stepped up, filled the void that some of the legacy DSOs have left in the marketplace by being on the sidelines for one reason or another. And as a result, valuations have held pretty steady over the past 12, 18 months. And sell-side activity has been at an all-time high for a couple of reasons. I think a lot of people want to de-risk and take some chips off the table. They know now’s a good time to do that. They want some help from an operational and infrastructural standpoint. And then a lot of doctors have become wise to the fact that private equity and DSOs are opportunistic. If you don’t have somebody like me at the table, if you don’t create optionality, create a competitive environment for your practice, to say it bluntly, you’re going to get screwed. I mean, you’re going to leave millions on the table and you’re potentially going to sell prematurely or to the wrong DSO.

Ryan Isaac:
Man, you said so many things. I want to ask some questions about number one would be, we talked about recalibrating expectations. Is that, how will that work for people who maybe sold, joined one over the last few years and they’re not meeting those expectations, maybe recap one was far below expectations. Can they, like, what does that look like to go back and realign expectations with doctors who already sold and already partners with them.

Brannon Moncrief:
Well, I think doctors have to understand that as a result of COVID, a lot of buyers being on pause during COVID. And as a result of the change in macroeconomic conditions, recap cycles are probably going to be a little bit longer, right? They may have promised a few years that may turn into five years. And returns may not be quite as robust because there’s not as many buyers on the backside. Institutional capital doesn’t have access to as much leverage and it’s more costly. So multiples might be muted, returns might be muted to some degree. So, you know, a lot of the promises that were being made of five to seven X returns on invested capital might end up being, you know, three or four X return on invested capital and a slightly longer window look still phenomenal return, right?

Ryan Isaac:
I was going to say, 300, 400% return in a few years. Like, yeah. On seven figures? Yeah, yeah.

Brannon Moncrief:
Yeah, I mean, where else can you get money? Yeah, where else can you put money and get that kind of return? But a lot of private equity firms in the DSO space and otherwise were generating five to seven X returns on invested capital when they were operating with ideal macroeconomic conditions. Also just looking at some of these offers that DSOs put in front of sellers where they map out over 20 years, you’re going to get a 50X return on capital and your $2 million practice is going to be worth $60 million over the next 20 years. I mean, we’re starting to see that. I mean, a lot of that was BS, right? Kind of pie in the sky. And that’s why when we’re mapping out the economic implications of a potential sale, we look at a five-year window, one modest recap at a, let’s say, 3X return on capital so that you can make a decision based on much more realistic projections than what some of these DSOs put out in their LOIs.

Ryan Isaac:
Yeah, the realistic expectations. Yeah, I think that’s gonna smack some people who are counting on it otherwise. A lot of the questions we get, from listeners and clients, and now especially that we’re a few years into this, are is it obvious to you, you were kind of saying this a little early, is it obvious to you who makes a good candidate? Like you can listen to someone’s story and decipher. And even educate someone who thinks they’re good candidate might not be, or vice versa. I mean, you want to talk a little bit about those who make good candidates for this or maybe characteristics of those who might tend to regret a sale.

Brannon Moncrief:
It’s a great question. Look, it’s a combination of what DSOs are looking for and then what our clients are looking for, right? What’s your why? What’s your goals? I mean, as far as what DSOs are looking for, that’s relatively straightforward. They’re, yeah, I mean, they’re chasing EBITDA, you know, at the end of the day. Not only EBITDA today, but a strong likelihood that EBITDA is going to be sustainable long-term or potentially increase in the future. So…

Ryan Isaac:
Money. Yeah.

Brannon Moncrief:
We’re talking about practices with revenue ballpark, 1.5 million and greater. Ideally six plus operatories and two plus providers to bifurcate the key man risk and provide potential for future growth. Growth potential is obviously a huge talking point. If a DSO is going to pay top of market for the practice seven, eight, eight and a half times EBITDA, they want to buy down their multiple through organic growth post affiliation so that by the time they get to a recap, their multiple was more like a six or a six and a half X if EBITDA has organically grown in the interim. The younger the doctor, typically the more demand you’re gonna have from DSOs, that’s become a huge talking point recently. So your runway to exit, it plays a large role. Now that doesn’t mean if you’re closer to the tail end of your career that you’re not going to be a viable DSO candidate, but you’re going to need to have a vested interest in the business for, I would say, five years in order to get peak demand and peak valuation. That doesn’t mean you work in Chairside full-time for five years. It just means that you’ve got some sort of ongoing role in the business. Specialties of all type, there are specialty-specific DSOs, general DSOs, and multi-specialty DSOs. So whatever type of dentistry you’re doing, there’s gonna be demand for that type of practice in the marketplace. So that’s really what DSOs are looking for. That’s all right. Yeah. Absolutely.

Ryan Isaac:
Can I pause there really fast and just interject a question? On the maybe non-financial, non-logistical side, are there personality characteristics that tend to be more favorable for a yes or no on these decisions?

Brannon Moncrief:
Yeah, it surprises our clients, but we say this with every client when we do our go-to-market kickoff call and we’re talking about what to expect over the next six months as we go to market and create that competitive environment and start interviewing buyers. We always tell them, let us worry about the economics. Let us handle the negotiation, all the posturing, all that stuff. That’s how we earn our keep. You focus on fit and being the most charismatic version of yourself. You don’t have to posture at all. Basically, check your ego, get to know the people, focus on fit because this is a partnership. You’re going to be with them long term post-closing. So, do they seem like people that you can get along with? Because they’re also evaluating, are you somebody they feel like they could get along with? Not only in good times, but also when you have to have challenging conversations. So, DSOs are paying close attention to fit, culture, personality, the more they like you, I mean, if they fall in love with you, it will move the needle on the valuation as much as a turn of EBITDA.

Ryan Isaac:
Okay, yeah, thanks for that. You were about to say then maybe on the other side of things, like ideal scenario.

Brannon Moncrief:
Yeah, so what are our clients looking for? You know, there’s multiple reasons that people look to go down this path. For many, it’s economics. I mean, I don’t think I’ve ever met a client that the economics didn’t matter. Normally when people say, it’s not really about the money, it’s very much about the money. Yeah. Yeah, absolutely. I mean, the money matters to everybody to some extent. So looking at what’s your runway to exit,

Ryan Isaac:
It’s about the money, man. Yeah, it’s like, yeah, it’s about the money. It’s okay. It’s okay. It’s okay to be about the money. Yeah.

Brannon Moncrief:
How much do you need to retire? What’s your annual burn rate, right? What do you need to make on an annual basis? How is that going to look pre-affiliation compared to post-affiliation? And then ensuring if you’re gonna go down this path, you understand all the economic implications, cash at close, annual income, as well as, when is the next recap expected to occur? What’s the projected return? Are the expectations and projections reasonable, how likely are they to happen? And then what are the levers that are gonna impact your return at recap? How much equity can you liquidate? And if you’re gonna roll equity, how does that function in the next recap cycle? So taking into account all of those economic implications, and then also thinking about what other elements of your why are there? Are you looking for administrative and operational support? Are you trying to take a step back and you want a DSO to lean in and help you operate the business, if so, you better make sure you partner with a DSO that actually has infrastructure and operates the assets they acquire because many are very hands-off. You know, it’s kind of funny, a lot of our clients are really worried about autonomy and really worried about Big Brother partnering with a big corporate entity and they’re gonna micromanage the business. In actuality, you should probably be more worried about the opposite that they’re going to be too hands off, that they don’t have the operational fortitude to actually help you run the business and alleviate some of that management burden. So that’s kind of a funny misnomer that we get into when we start talking about DSOs. The DSOs that we work with partner with good clinicians, great businesses, and try not to screw them up. They kind of, they’ll leverage economies of scale behind the veil to help make the business run more efficiently financially, but a lot of them don’t get super involved on the day to day. So if you are looking to take a step back, offload that administrative burden, you need to make sure you talk to a lot of DSOs and find somebody that can actually offer that.

Ryan Isaac:
Yeah, I don’t know if I just heard it this way or if you said this earlier, but it’s along these same lines, which is some people end up a little surprised that the DSOs are just a, it’s private equity is just here to make some money. And they get a little bit surprised that they’re not more involved maybe, or they’re not as helpful as they thought, like administratively running the business, the culture, training, leadership, that kind of stuff. Maybe that’s kind of what you’re talking about here, that there are so many different flavors of DSOs, and it’s not as simple as like, I’ll just go out by myself and cut a deal and find someone for top dollar and then be mad that they’re not taking more burden off my plate when, you know, that wasn’t the DSOs. That wasn’t their thing. Um, it’s, it’s sounding like maybe you want to talk about this, that there’s just a lot of different ones out there that do different things. Maybe they’ll pay a little bit less, but they’ll be way more involved or the other way around.

Brannon Moncrief:
Yeah, and I think the important thing to look at is that it’s not purely an economic decision. Fit matters, deal structure matters, your why matters, and if you met one DSO, you met one DSO. They’re all different, right? They all have a different level of infrastructure. They all have a different financial sponsor that are different iteration in their recap cycle. They all have different financial goals, a different culture, a different management style. They all own different assets. They’re all good at different things and probably have some blind spots. So yeah, making sure you create optionality to really find the one or the few that are the best fit for your particular why is important. Well, we’ve talked about some of our docs that wanna take a step back and really want some help operationally. We have other young entrepreneurial docs that are at three, four, five locations. They’re at an inflection point in their business where they either have to build their own infrastructure and invest time, money, energy to continue scaling the business, which erodes EBITDA. They’ve got to grow significantly in order to absorb those costs in order to take the practice to the next level and make it more valuable than it sits today. Or they can affiliate with a DSO and then use their infrastructure and their capital to continue scaling the business.

A lot of our clients actually use the DSO affiliation or private equity partnership as a way to lean into their business and continue to scale it. But what I’ll say when it comes to fit, the younger you are, the longer your runway to exiting your particular business, the more important fit is, right? If I’m 65 years old and I know I’m going to retire chair side in three years, fit’s still important but I’m probably going to focus a little bit more on economics than I am on fit. Well, vice versa. You know, if you’re a 42 year old doctor that plans on being in your business for 10 or more years, fit is critically important. What your life is going to look like post affiliation, you’re gonna be more sensitive to it if you’re planning on being there long term.

Ryan Isaac:
Yeah, that’s the group. I would love to hear if you have thoughts about that. Just from an advisor standpoint, that’s the group that I find has the hardest time accepting or just like committing to these things is the younger crowd. Late thirties, early forties, even when we, as their advisor can say, man, mathematically with this amount of money, you’re kind of, you’re mathematically retired, like this is you’re independently wealthy with this amount of money and still having them really, really struggle with the decision and if you want to talk to that at all, but I just, I think that’s the crowd that because of the runway, because of how much time is left and there’s just that leaves so many questions on the table. Like, well, what have I just kept it? You know, or like, and then I’ll find a lot of people I’m sure you do that sell. And then they’re like, I just want to jump back in and do my own thing again, as soon as my work back period is done and I get recapped and I’m out of here.

Um, do you want to talk about that at all? Just that younger crowd? I think that that’s to me, my experience, that’s the crowd that struggles the most with the decision-making totally makes sense. Yeah.

Brannon Moncrief:
Which makes sense, right? I mean, the younger you are, the more runway you have to actually in the business, the more sensitive the subject and potentially the less compelling it is, you know, economically, if you’re at a point where you’re like, hey, I’m cool. I don’t need to sell. I’m not worried about de-risking. I’m not, I don’t need administrative support. Most of the time when we have those conversations, it’s like, well, then then what’s the why, right? I don’t, is it just FOMO, your buddy sold, whatever? There’s got to be some compelling factor outside of the economics. Typically, if you’re under the age of 45, unless, well, yeah, outside of the economics, a lot of them are, Hey, I’m going to eventually move back, you know, to wherever I grew up to take care of my parents or some, some type of major life change, whether it’s switching careers or a relocation or they’re just overwhelmed with the management of the business. They want to de-risk. They want to take some chips off the table, and they want to get some help. If it’s purely, purely economic, though, and your runways longer than, let’s say, seven years, and you don’t have another element of the why, yeah, sometimes it’s hard to make sense of why you would go down this path. And we’re unique in the perspective that we give people just objective guidance, right?

My job is to educate dentists regarding their options. And then at that point, it’s choose your own adventure. And not doing anything, not selling the business, holding onto it, is always, I would say option number one. Right? And then we can quantify what is door B, door C, door D look like, right? What are the other options available to you? And then allow them to make that decision and we’ll go execute, whatever it is.

Ryan Isaac:
I think that’s really helpful. I’m glad you went there. I wanted to ask, I think some people hesitate to reach out to you or someone like you because they don’t know at what point they should be at before they’re ready to talk to somebody. Do you wanna talk about that a little bit? Who’s a good candidate to reach out to you in their situation?

Brannon Moncrief:
I would say anyone who’s thinking about monetizing their business in the next five years. We’re very low pressure. We take a soft sell approach. We take more of an educational approach. We’re blessed to be super, super busy. We’ve got a great reputation because of the fact that we’ve taken that approach. Probably the approach that many of your listeners have taken to building their own practice. Don’t try to diagnose everything in the patient’s mouth and knock out all the treatment that day when they walk in build trust, educate the patient about their needs, and then eventually you know that’s like an annuity for you. That work will eventually come to fruition. That’s the same approach we take with our business. So if you’re thinking about monetizing your business in the next five years, you need to get educated about what drives value, what drives marketability today so that you can make enhancements to make your business more profitable along the way, more valuable, more marketable when it’s time.

And then also probably more than anything, avoid mistakes. We see so many people by the time they get to us and they’re ready to go to market, I’m like, I wish you wouldn’t have done that startup. You’ve got this great business that does $4 million a year with a million in EBITDA. And now you’ve got a practice down the street doing $350,000 that we’ve got to figure out how to solve for. Or just the different decisions people make in their practices that could erode confidence from buyers and could erode the economics when they’re ready to go to market. So yeah, I love to start conversations early, do an EBIT analysis, do evaluation. If now’s not the right time to take the practice to market, let’s talk about your goals and then try to reverse engineer the outcome that you’re looking for.

Ryan Isaac:
Yeah, I love that. I want to second what you were just saying. We get feedback from people who work with you, clients of ours, listeners of ours. And I’ll just second that your approach of it, a very educational approach, if it’s not right, it’s not right. You don’t have the incentive to make someone make it a gigantic life decision that is not right for them. So I’ll second that has been the experience like, um, that people have had working with you. And I appreciate that a lot, man. I wish there were more people in the industry who work with dentists in all capacities, who are more educational and less salesy. So I appreciate that.

Brannon Moncrief:
Yeah, no, I appreciate that, man. I feel like a lot of people in our position are just trying to get from a conversation to a commission, you know, as fast as they can. And the reality is, I mean, I’m 43. I’m going to be here. I want to be here a long time. And in order to do so, I got to take good care of people. And like you said, I mean, this is the biggest decision you’re going to make in your professional life. Yeah. You only get to do it once you got to do it right. And it’s got to be, it’s got to make sense. It’s got to be the right time. And our job is just to help doctors clarify, you know, that decision making process and lead them down the right path.

Ryan Isaac:
Yeah, little case study question here for you. Uh, very anonymous, of course, but, uh, I’ve heard this a few times, but recently, uh, situation where people have multiple practices and they’re starting to feel spread a little bit thin and, uh, feeling like, Hey, let’s get rid of two, but I want to personally keep one for myself. I just want to like scale back, make that one, you know, big and efficient and profitable, but these other two, is that a, is that a scenario where they’re a candidate for a DSO offer to like let go of a car, their DSOs that’ll take a couple off, off someone’s hands and not one, or they always want a package deal or how does that normally work?

Brannon Moncrief:
It’s pretty rare. So most DSOs want you to be all in or they’re all out. Now, if you do have a weaker practice, you’re looking to offload, the DSO might say, hey, go ahead and sell that one to a private buyer or hang on to it. And we’ll talk about buying it later when it’s more mature. But they’re always going to want to buy the main practice, the one that has the majority of EBITDA. Yeah, I mean, it’s a partnership, right? Now, maybe if you’re in a market where a DSO has substantial density and you wanna offload a couple of practices, they may take them off your hands, but it’s gonna look probably more like a private buyer deal. So the economics aren’t gonna be overwhelmingly favorable compared to selling them to private buyers. So if you wanna divest part of your business, most likely, just sell it, sell the practices individually to private buyers, clean deal, cash it closed, you know, no post-closing really restrictions on you. That’s probably the route that I would look to go. But I think that brings up kind of the misnomer that more locations means higher value. And that’s couldn’t be further from the truth, right? More locations come with more overhead, more staff, more occupancy costs. I would much rather have a $5 million top line revenue business with 1.5 million EBITDA with one location than a $5 million top line revenue business with three locations with only a million EVTA. The first one’s going to sell for significantly more than the second one, hands down every time.

Ryan Isaac:
Another common question I get a little bit of case study situation is, um, a bigger practice or multiple locations where there are associates involved and, uh, who might be, if the practice continued would be like a good long-term partner. Is there, is there a way for the owner dentist who really values some of these associates as partners, as future partners, potential partners that also might be exploring a DSO option. Is there like a best practice so that these associates lack of a better phrase just get screwed in the deal by the doctor selling and then they don’t have partnership opportunities? How should a doctor explore that with associates that are there? They do value and they want them to share and be around in some of this stuff. Is there a way to navigate that?

Brannon Moncrief:
And this is one of the hardest conversations that we have on a daily basis. You know, a lot of times large multi-doctor practice owners have had conversations with their associates about eventually selling them equity or selling them the business. And then they grow this business to a point where it’s worth exponentially more in the DSO space than it is in the private space. And it no longer really economically makes sense to entertain a private buyer deal or selling off chunks of the practice to associates. So most DSOs understand that framework and have created some type of on-ramp to equity for associates. We’ve also seen some of our clients give associates some type of significant six figure plus retention bonus if they’re willing to sign a contract and stay on with the DSO for some period of time, post affiliation, not in the perpetuity, but to agree to sign a new contract, stay on for a year, maybe two years in exchange for a six-figure bonus once they fulfill that employment obligation. We’ve seen some of our clients give associates equity at sale, but I think it brings up a good point. I mean, if you are a multi-doc practice and you’ve got non-equity producers that are important to the business, the DSO is going to be sensitive to them staying on post-affiliation.

It’s hard to recruit and retain quality associates in today’s environment. So key man risk is a big deal. It’s great to bifurcate production among multiple providers, right? Rather than having it all be concentrated in the owner. That’s got its own risk from a DSO perspective. But you’re going to have to figure out a way to make sure that your associates are going to stay on in order for your deal not to fall apart. And if you’ve got a dang or a carrot to do so, then there’s multiple mechanisms that you can use to do it.

Ryan Isaac:
I’m just, we don’t have to talk about it. You’ve probably seen some horror stories with associates bailing or the team, the owner and the associates building up to this big point and then the owner kind of sells from under them a little bit. I mean, I’ve seen that. I’m sure you’ve seen that too. I’m sure that can get ugly. Key man risk, that’s a good phrase. I like that you put it that way. Maybe a topic for another day. Is there anything in this year 2024 like you would really want people to know coming into this environment considering it thinking about it You know red flags must do’s, you know, what do you want people to know right now?

Brannon Moncrief:
I think it’s still a good time to be a seller. I think that’s important to understand, but at the same time, diligence should be at an all time high. So DSOs are gonna do a lot of diligence on you, right? Outside of a blood sample, they’re gonna want every single piece of information about your practice in order to make a decision as to whether they wanna partner with you and what they wanna pay. We believe diligence should be a two-way street, and especially right now with multiple DSOs being over levered or over their skis operationally. And, you know, for lack of a better word, in some sort of trouble, you need to make sure that you’re doing diligence on the buyer, asking all the right questions, vetting the buyers to make sure that they’re going to be a good partner. They’re well positioned to help you accomplish your why, and they’re well positioned to be sustainable and successful financially long-term. It’s a big part of what we do is vet buyers on a daily basis and keep track of who’s hot and who’s not at the moment and who we believe is positioned to be successful long term and who is not. There’s over 500 DSOs operating across the country now. We only work with about 70 regularly and the subset of DSOs that we would put in front of our clients will depend on our clients’ why and the unique characteristics of their practice, geography being one of the big ones. So diligence is more important than ever, you know, making sure that you’re vetting the virus at the table and not making a mistake. But yeah, it’s still a good environment to be a seller. You just wanna be a lot more pragmatic in your approach if you’re gonna go down that path.

Ryan Isaac:
Yeah, you bring up a topic, man, that’s very specific. It’s something I had on my mind, which is you’ve probably more than I have seen some DSOs go under, not make it. I’ve seen a handful that were on the smaller side, for sure. And then maybe a couple that are currently really, really scarily struggling that are very large scale operations. Do you, I mean, speaking of diligence, there’s not really a way for the average dentist to find this stuff out, right? I mean, I wouldn’t imagine that the average dentist looking at a term sheet is gonna know if their financials are sound or if they’re even gonna be there in 12 months. You know, like, is that, how do you, is it a matter of just hiring the right person? You just gotta have someone who actually is involved and knows, that’s what I would think, but.

Brannon Moncrief:
Yeah, I mean, you’ve got to have somebody like us that interacts with all of these DSOs on a daily basis. Like it’s really easy for me to talk to five different DSOs and very quickly rank them as far as who is going to be successful long-term based on who their financial sponsor is, who their management team is. No.

Ryan Isaac:
This isn’t like a public database, like a doctor can’t just like look it up on like some spreadsheet that’s public on the internet and be like, which one’s solvent, which one’s not? You just gotta be plugged in like full time like you are. Yeah, I’m sure.

Brannon Moncrief:
We spend an inordinate amount of time talking to buyers and constantly talking within our company about each buyer and who we believe is best positioned to be successful long-term. And there’s a lot of data points that you have to use to really put together a picture of who a buyer is and why or why you don’t think they’ll be successful.

Ryan Isaac:
Yeah, and I mean, not only, man, the buyer, the operational team, what they say their niches, are they highest value, are they operational, are they growth partners, and then who are their equity backers or debt backers? I mean, it’s like, how do you even know all that stuff? Unless you, unless it’s full time, it’s your job. Yeah. Oh yeah.

Brannon Moncrief:
Well, and their deal structure, right? Like, is their deal structure mindful of, you know, the goals of their doctors, as well as how does that deal structure function after a recap? Does everybody have the ability to just cash out and walk away and the business literally falls apart post recap? So evaluating all those things. Yeah, I mean, that’s a, that’s a full-time job.

Ryan Isaac:
There’s no way you can answer this very specifically, but I’m just curious on the ones that I know you’ve seen like either go under or be on the verge of it. Are any of those things that you saw coming? You’re like, oh, I was scared of those too.

Brannon Moncrief:
Definitely DSOs that don’t really have any type of infrastructure at all. Like it’s basically transparent that they were accumulating EBITDA in the hopes of flipping it to the next buyer and having the actual operation of the business long-term be their problem. There were quite a few DSOs, you know, over the past decade that were built in that manner, they don’t have a corporate headquarters, they don’t really have a leadership team, they have no infrastructure. I mean, those businesses are not really set up to be sustainable or scalable long term. So as a result, private equity has not taken a favorable, you know, look at them when they went to recap. And then, you know, DSOs that are structured in a way where the doctors hold only holding company equity. They have no incentive at the practice level to keep their foot on the gas. If there’s not the appropriate structure in place. And then when a recap happens, if they can exit their equity in full, they’re all gone, right?

Ryan Isaac:
They’re all gone. Yeah. Why wouldn’t you be? Yeah. I mean, that just makes me think of so many questions that’ll be private conversation I want to ask you about. But, okay, any other parting words? I mean, we’ll just do a part two on this very soon, I’m pretty sure. And I want to say something about our upcoming summit that you’ll be present at and doing a lot of things with us at. But any parting words here that you haven’t said already?

Brannon Moncrief:
Well, every interaction with us just starts with a casual phone call. You know, we call a discovery call just to get to know each other, you know, talk about your why, talk about your practice, talk about the, the landscape and see if it makes sense to do a deep dive, do an even analysis, do evaluation. So anybody listening that is thinking about monetizing their business in the next five years. I encourage you to reach out. You know, people think I’m crazy, but I always give out my cell phone on your podcast. Text me, call me, email is Brandon, B-R-A-N-N-O-N at Dent And our website’s got a lot of podcasts like this, a lot of webinars, articles. That’s Dent Encourage you to check it out.

Ryan Isaac:
Yeah, I’ll just say again, every person that I’ve had interact with you guys, if I had a positive experience, you’re incredibly knowledgeable and you’re just, you’re really responsive and on top of things. And that’s what people want, man. They just want someone who’s going to respond and, you know, be genuine and try to teach them something and not force or sell them into something. And you guys are really good at that. I also want to say that you are a key sponsor at our upcoming dentist money summit. Everyone can go to Dentist Advisors nd sign up and register. It is June 21st and 22nd in Park City, Utah in the summertime. So it’s going to be awesome. Uh, we’re going to do a couple of events with you guys will be sponsoring, speaking, have a booth there, interacting with people. Um, so thank you for doing that, by the way, we’re really excited to have you guys out and stoked to see you guys in the summer up there and, uh, and that’ll be cool. So if you want to come chat with Brandon team up there in Park City and meet some other great people and get some other good education and content.

Brannon Moncrief:
Absolutely.

Ryan Isaac:
Thanks man for doing this again. I appreciate it. We always generate a million questions around DSOs and I’m sure we’ll do this again. So thanks for being here. Yeah. Thanks everyone for tuning in. We’ll catch you next time. Bye bye now.

Brannon Moncrief:
Thanks for having me, Ryan. Good to see you.

Practice Transitions