The Business of DSOs: A Conversation with Accelerate Dental – Episode #595

On this episode of the Dentist Money Show, Mike Baird, CEO and founder of Accelerate Dental joins Matt to explore the evolving world of DSOs and their growing impact in dentistry. They discuss why dentists are considering DSOs, the different types of DSOs, and important factors like debt and recapitalization. Mike discusses some of the trends in raising capital, valuing practices, and the need to understand share structures and risks. Tune in to hear Mike Baird’s insights for dentists who are looking to navigate the DSO landscape and make informed decisions about their practice’s future.

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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 a amazing show today with Mike Baird, founder and CEO of Accelerate Dental. We go deep into the DSO space, private equity, how recaps work, how multiples work, what Mike is seeing now in the current DSO landscape, why you may or may not want to consider a DSO offer. Pros and cons, the different types of DSOs that are out there. we go deep into this topic. Mike shares such incredible knowledge from his perspective, being in the dental space for a long time, different companies. Uh, he brings a really, really unique perspective and he’s so willing to share his knowledge with the dental space. We are so grateful to have Mike Baird on the podcast as always. Hope you enjoy the show. Hope you get a lot of value out of it. Enjoy.

Matt Mulcock: Okay. Welcome everybody. so excited for this conversation, Mike Baird back. I realized Mike, we haven’t done a podcast. I thought we did because we did a webinar earlier this year. And, I’ve got to tell you right out there as we start this so much great feedback, people are still bringing that webinar up. So we thought, why not bring back Mike Baird? CEO and founder of Accelerate Dental to kind of talk about similar things, things that may be changed a little bit, but just talk about the DSL landscape, that the private equity landscape, this is like almost always top of mind for dentists. So we thought, why don’t we just do the webinar again, but via a podcast. And get this out to more people. So welcome Mike Baird to the Dentist Money Show.

Mike Baird: Thanks, Matt. I’m thrilled to be on. It’s, you know, I’m a big listener of the podcast. So to be on the podcast is like the highest honor for someone like me.

Matt Mulcock: Yeah, it’s so honestly we are honored because you’ll, we’ve talked about it before, I’ll get texts sometimes from you after you listened to like the most recent show and I’ve told Ryan and some of our team, I’m like, it’s so cool that we have Mike there listening to us. And we’re, again, a lot of the shout outs that come are just natural shout outs. I share this with people all the time. Like I’ll just start with this. And I mean this genuinely. It’s so nice to meet somebody and meet a company that you can just tell truly shares the same values and approaches we do, and it just kind of like connects and we, and that’s how we felt about you guys this whole time of the fact that you’re so willing to come on so genuinely like, Hey, let me just share some stuff. Not self promotional, just like, Hey, can I share? In fact, for people that don’t know, we did this webinar together and you said, well, cause we’re like, we got to talk about your company a little bit. And you’re like, well, we’ll save it till the end. We can just throw it into the very end. Like you just want to share your knowledge and we respect that so much.

Mike Baird: Appreciate that.

Matt Mulcock: So good to have you on. Let’s just start with people that maybe didn’t listen to the webinar. Maybe don’t know who you are. just maybe let’s just start with that. Just introduction of you and who you are. You may be some of your background.

Mike Baird: Super. Well, appreciate that. And I appreciate all the kind words. my background historically has been, running technology companies. So I’ve run a number of software companies, primarily in the healthcare space, telemedicine, and I worked in a number of tech companies and SAS companies. in 2020, I ended up getting recruited to be CEO of Henry Shine one as which many of our. The folks that listen to this podcast know is a relatively large dental software organization. And I really loved my time there. I got so much exposure to the dental industry, got to meet so many dentists and really had a profound respect for the work that they do. And really coming out of that, had some various thoughts and ideas on other ways to serve dentists and ended up starting my company, Accelerate Dental. So long story short, I’ve been in the healthcare arena for a while now. And, Always looking for ways to to bring good solutions to physicians of various forms. But right now in the dentistry,

Matt Mulcock: Yeah, no, I love that. And Mike, I feel like people with your background, people that are entrepreneurs that have had tons of different industry experience. when you go, when you strike out on your own, it’s usually to solve a problem that you’re seeing. at least it’s from my perspective. Is that true for you? And if, and I would imagine it is what’s the kind of overarching problem you’ve seen in the DSO space, the thing that you are trying to solve,

Mike Baird: That’s a great question. There are, a plethora of options in

Matt Mulcock: Like, where do I start?

Mike Baird: Space, which is a great lead into our conversation. There are so many options in the space today, which is fantastic. It means there’s a lot of innovation as companies try to find different solutions. when we started Accelerate, we really felt like there was a part of the market that was ignored, there’s a broad spectrum from going out alone on your own as a solo dentist or a solo practice and, you know, joining up with a very large DSO. And there’s a lot of options in between that. And I’m not here to say that we solve all those options. And frankly, the discussion today is more to talk about the range of options and the things of the marketplace than really to talk about us. But yeah, we, we feel like, that there ought to be, different things for dentists to consider as they try to figure out how to grow their practices and find success with their careers.

Matt Mulcock: Yeah, I love that. And we’re going to get into this. And I already kind of know a little bit of, I mean, obviously we did the webinar together. We’ve, you and I’ve talked a lot and we talked to a lot of dentists. I totally get where you’re coming from of saying, again, we’ll jump into this of just how the DSL landscape has changed, how dentistry is changing, even in the last couple of years, it feels like But let’s start with maybe kind of taking a step back and saying from the dentist perspective, Like, right now, this is top of mind, why even join the DSO? What is prompting dentists to even consider this?

Mike Baird: Awesome. I think for a lot of dentists that the initial answer is a monetary one. They think this is a way to monetize their practice and their hard work. And that’s certainly true, but that’s really only one facet of why a doctor might choose to join a DSO. And there are many, many, many things to consider. So if you think about, how industries shift and move, I mean, dentistry is in an interesting position. I think there’s the whole wave of consumerism, you know, patients want more choice than ever before. They’re, they’re looking for. Whatever service they’re getting in the marketplace to be something that meets their needs I think we’ve all seen the various economic trends in our country whether it’s labor supply Issues that definitely have impacted dentists inflationary issues that impact, you know, when dentists are buying supplies There are a number of things like that that come into play and I also think there’s something just around For some dentists, it’s trying to find a support partner to guide them through the experience.

This is a uniquely lonely profession. Uh, you know, you’ve got a dentist who’s gone to school for a number of years. They probably got, a sliver. Of business education, when they went through dental school, but now they’re expected to be the CEO of what is often a multimillion dollar corporation. And yet generally the size and scale of a practice, isn’t one that supports you having all the resources that you’d like to have as a multimillion dollar corporation, you know, you’d like to have a full marketing team and an operations team and a procurement team, and all those things. But often it’s, it’s you and your office manager and you’re trying to figure things out. So, I think there’s a number of reasons when the ADA, talks to dentists every year, they always pull them on the things that are top of mind for them. And just a couple of quick stats that, that come out of that almost half of dentists have seen staff wages go up more than 10 percent in the last couple of years. Half of dentists talk about their lab fees going up more than 10%. A quarter of dentists feel like, their cost of supplies have gone up by more than 20%. at any point in time over the last two or three years as they, as they surveyed dentists, more than a third of dentists are actively hiring either a hygienist, an assistant or an office manager.

And obviously most dentists will tell you that they’ve had insurance rate decreases or challenges there. So if you think about it from that side, there’s a lot of things that dentists are trying to juggle as they want to be successful in their practices. And it’s interesting if those things are aligned and working really well, dentistry is a fantastic profession that will make lots of money for a dentist that’s running well. If you’re not on the right side of the equation, it can be incredibly stressful and hard to make the profit that you hope for. And you know, when you’ve invested, A decade plus of your life in secondary education to be a dentist. It can be very discouraging So all those are factors that might lead someone to look for help in a number of areas So that might be working with consultants. It might be going to training classes But for many folks it ends up being a reason to join a dso in addition to the normal monetary considerations

Matt Mulcock: Yeah, no, I love that you brought all these up and so first of all, I’d say from our perspective, we’ve, we’ve seen this anecdotally working with hundreds of dentists, that this, everything you just highlighted, we’re seeing not only in the data from the ADA, but just in conversations we’re having, um, All those stats bear out in the, in the experiences that we’re having with our clients, but I wonder if you can speak to a little bit of just from what, and I know, I know you haven’t been like specifically and accelerate founded accelerates relatively new, but you’ve been in this space for a long time.

And I know you’ve had a finger on the pulse from a really unique perspective. I wonder if you can speak to the evolution, even just recently, it feels like. It feels like Mike can tell me if I’m wrong, but it feels like, you know, Even over the last like five years ish, it feels like it’s gone from DSO kind of came out of the four letter word stage to like, okay, now it’s a viable option, but it was still only an exit strategy for like larger practices or dentists that were kind of on their last, you know, kind of their final years to now, it feels like it’s evolving to what you’re describing. I feel like there’s some pros and cons and some benefits it’s creating in the space, but I don’t think some challenges as well. I wonder if you can speak to that a little bit of just the evolution we’ve seen just in the last five years,

Mike Baird: Yeah, it’s interesting if you were to go back even 10 years ago, you know say to 2014 2014 And depending on where you get the stats, these might change a little bit, but it was roughly 5 percent of dentists that were affiliated with the DSO. So if you think about that, that’s one in 20 dentists. So the odds are that you knew someone that was with a DSO were relatively low. Coming into 2020, it was closer to 15 percent and post COVID, there was a huge jump in the number of dentists that affiliated with the DSO for obvious reasons. They suddenly faced a lot of those same challenges. in a very exacerbated way. My supply costs are really crazy. There’s no labor, like at all, because everyone’s stuck at home and I can’t even practice. And I think that was a catalyst to a lot of people deciding to affiliate. So, kind of coming post COVID in 2023, most of the market estimates are that around 25 percent of dentists were now part of the DSO. So, in a 10 year period, you went from 1 out of 20 dentists, you know, working with the DSO. So, odds are you may have, you know, maybe Knowing a friend of a friend that was probably in a DSO, when it’s 25%, that’s one out of four.

Now it’s very highly likely that you know someone. And that usually corresponds with a period of acceptance too. You know, if it’s just a few, you know, you haven’t had personal experience. You think this is probably just a terrible, terrible thing. And look, it may be, I’m not here to defend DSOs necessarily, but when now, you know, five or six of your friends from dental school who’ve joined DSO, they’re all going to have different experiences, some of them positive, some of them negative, and that’s more likely to get you to think about these things. So you’re spot on that in the last, four or five years. It’s changed quite a bit. The other thing that’s impacting that is when these business models start to have success, it attracts other people to the market. So there were really a handful of DSOs a decade plus ago. That number has exploded, over the last couple of years.

So, depending on how you categorize DSOs, you’ll, you’ll get different numbers on this, but the way we look at it, kind of private equity backed DSOs that are, you know, of a size of more than 10. meaning not group practices. there’s about 250 DSOs in the marketplace today. And so what, what happens is as they see this success out of COVID, a lot of private equity firms who have lots of money they want to deploy and get investment returns, see this as a market where they can make a good investments. And so they’ve really flooded the space. What that means is there’s a lot more people. Pitching these same ideas to, to dentists. So once upon a time, you might’ve gotten a postcard, once a year or something from one of the, you know, 20 DSOs that were out there. Well, now think if there’s 250 of them, you know, that’s quite a bit. And they’re all trying to find the right fits for their practices. so it’s not an illusion that, that has changed, uh, quite a bit over the last few years.

Matt Mulcock: I’d imagine that’s the good and bad of this. Right. I guess that’s the good and bad of the free market. Maybe if we, if you will, of saying it’s good that there’s competition, I’d say it’s Bad in some ways, because, and you tell me if I’m wrong, Mike, but this is what we’re seeing is that a lot, they all use the same pitch. They all use the same pitch. So it’s kind of hard to like differentiate for dentists out there of, you know, okay, you’re going to help me with support. You’re going to help me with marketing. You’re going to help me with like, everyone has their pitch down. So, but I think this leads, I’m so glad you went here. I think this leads into kind of another part of this that I want to dive into, which is the different flavors of DSOs. I think one of the biggest misconceptions out there is that. DSOs, like they’re all created equal, but it’s could not be farther from the truth. So again, this is a perfect lead in like the different types of DSOs, what are the broad categories? Then we can kind of go into some examples and the differences and things to be aware of within these categories.

Mike Baird: Excellent. Yeah. Back to that consumerization trend we talked about. This is like the Baskin Robbins of dentistry. You know, there’s, they say, if you’ve met one DSO, you’ve met one DSO. So you have 250 flavors to choose from. But, as I’ve looked at those different categories and as I worked with many of them, you know, over my career, there’s kind of three broader buckets that I’ll highlight. And I’ll give you a few ways that they kind of differ between those buckets. At the end of the day, they all fall under the same category of DSO. And by the way, for those that don’t know, when we say DSO, we usually mean a dental service organization or a dental support organization, depending on the term. And that just means some sort of corporate entity. That partners with a dental practice to help them with a lot of the back office things, right. They’re helping you with your HR. They’re helping you with your payroll. They’re helping you with accounting, you know, et cetera. because in the vast majority of States in the country today, you know, you have to be a dentist on a practice.

They build these complicated legal structures to have some sort of ownership and control. but, but ultimately it’s about providing that back end service. So in that respect, when we say DSO, they are all the same. They’re here to help you with some function of the non clinical parts of your practice. But that’s where things start to change a little bit. And so I generally use three broad buckets to define this. The first is what I’ll call a traditional DSO. The second is what is kind of a new in vogue term, DPO, a dental partnership organization. And the third, there’s not really a market term for this yet, but I usually make one up, which is a dental entrepreneur group and each of those have different ways that they work with dentists, depending on what their ownership model is, how many services they provide, what their investment horizon is, et cetera. So let’s talk about a few of those and I’ll give you some examples. So when we talk about DSO, you know, the original folks that started doing this, 20 years ago. So think of like a Heartland is probably the best known, entity, you know, very well respected in large, DSO. Heartland has almost 2000 practices. You know, if you think about that’s almost 1%, you know, of all dentistry in the United States. that model was usually typified by, what I’ll call a full control model. So it’s private equity backed. They would buy 100 percent of a practice and because they have that ownership, they usually have a very standardized operational model. So I always liken it to the McDonald’s playbook. You know, there’s a reason why every McDonald’s does well.

They have a very specific standard operating procedure. And, that model tends to be very attractive to dentists that are on the later stages of their career. because they’re selling all the way out and, and, you know, they usually have a work back of a couple of years to make sure the patients don’t disappear. But, but typically, they’re in that less than five years of timeline left. and there’s a couple of things, you know, if you as a dentist have sold a hundred percent of your equity, you really move from being the entrepreneur owner of the practice to being an employee of the practice. And again, there’s pros and cons to that. Some dentists really like this because they don’t have to deal with the headaches and hassle of it anymore. but again, in that highly standardized model, it’s not really your choice, what marketing you use or even who you hire or what the formulary is, et cetera. And in some ways that’s okay. Cause you don’t have to worry about it. Your job is just to produce. now that model, because there’s no equity ownerships, there’s usually some small profit sharing, but it also changes what the profit distribution of practices, because that equity is now a hundred percent owned by somebody else. You get paid as an employee for the work you do, you know, on your production.

So imagine you’re getting 30 percent of your production, but if there’s any profit left over, well, the profit goes to the owner and the owner is somebody else. Again, I’m not saying it’s right or wrong. This is just the way that those are structured.

Matt Mulcock: Well, and stick just to this point, Mike stage of career matters here. To your point. This is why I think the evolution is you’re pointing to the perfect example here of where DSOs, you should just be an exit strategy for most older docs that were tired anyway. And they were like, I don’t care about a hundred percent sale because I want to be out anyway, but I want to highlight this really quick from our perspective, something that dentists see that and forget the Heartland, just, just these traditional models, when dentists see them numbers, a lot of times they’ll start to like.

Change they want it to, to make sense because they want the money. And we’ve seen this, but one thing as a cautionary tale here is I can’t even tell you how many times, Mike, I’ve seen dentists, youngish dentists at younger, like not ready to retire, go with something like this or consider it and, and after the fact, not realize the psychological and emotional and mental impact it has on them of building up this thing and now being an employee of this thing. Like that, just wanted to highlight that, what you just said there of like, that’s a big, forget the money for a moment. Just the psychological impact is huge.

Mike Baird: That’s right. And it’s a choice that, again, there’s lots of models. Cause there’s lots of dentists. Right. And they all have different goals and objectives. And I think it’s even not totally fair to characterize that traditional DSO model as only being for older dentists. I think that’s just sort of where it started. You know, you have people that are selling a practice. They could probably make a slight premium than they would have selling to another dentist. You know, obviously, these investor backed DSOs are generally looking for the best practices. You know, you know, think of these as practices doing more than one and a half million or so of collections. And so obviously if you’re at the tail end of your career, that’s probably more attractive. But the other group, cause you know, if you were to ask one of these large DSOs, they’d say, look, it’s not just, you know, 60 year old dentists that are selling to us. is folks that literally want none of the business side.

So there are lots of dentists who really want none of the business side. They have zero desire to be their own boss. They love that it’s very structured and their job is just to show up and take care of teeth. That could be a good fit for you in that model, but to your point, while that was probably the predominant model 10, 15 years ago, when these got started, as new investors came in and want to look for ways to distinguish themselves, new models were created. So the secondary model, and I’ll use MB2 as an example here, another very well respected, DSO, and they really pioneered what we’ll call the DPO model. The dental partnership organization, still very similar in some ways to that DSO model, but a couple of key differences. So number one, it’s still private equity backed. It’s investors that come in and buy your practice. But the first big change is instead of buying a hundred percent of your practice, typically they’ll buy 75 percent or 70%. Now that could be anywhere from usually it’s 60 ish percent up to 80 ish percent. I’ve seen it as low as 51. It’s probably as high as 90.

But, there’s a key difference. They’re not buying a hundred percent of your practice, but they will always buy more than 51 percent of your practice, a controlling interest in your practice. So the next thing that you think about here is that probably gives a little more flexibility. You can think of it as being somewhat proportional to the ownership. Now, the reality is if push comes to shove, they are majority owners. And if they want to do things and change them, they can. Okay. But that model is usually, pitched and perceived as you still have more autonomy in your practice because you’re still an owner in it. and the second big thing is because you still have equity ownership when those profits are distributed. If you own 20 percent of your practice, you get 20 percent of the profits. So this, has become very attractive. You know, it, it almost opens it up to, well, let’s say you’re a 45 year old dentist and you don’t really want to sell out completely or have someone give you, you know, have total control. You still want to have a say in certain things about your practice. Well, this kind of matches that, uh, that framework. There’s another interesting layer here that I would add in, in that original DSO model. When you sold your practice, sometimes you could roll a little bit into the top co. So think of when heartland, you know, is bought by new investors.

There’s a sale event and some money made for some dentists that can be a nice little Additional investment just as if you were investing in some other stocks you’re investing in a dental company that that may or may not sell someday almost proportional to these models as you came in the dpo. They generally let doctors participate a little bit more You In buying into that topco and sometimes that can end up being an interesting, investment return for dentists So they’ll talk about a recap and we’ll talk more about what a recap is in a

Matt Mulcock: Yeah.

Mike Baird: But this recapitalization which is a fancy way of saying it’s being sold to somebody else and so because of that sometimes there was a way for these dentists To, sell, you know, the majority of their practice to the DSO. But when there’s a future owner that buys that DSO, hey, they could either sell the rest of their practice, hopefully, and potentially as a small minority shareholder, they could have a little bit of investor return as well. So, again, very attractive. I think this is probably the most popular model today and, and part of the explosion Of DSOs that are talking to dental practices, you’ll hear most of them talk about autonomy and, you know, we’re a DPO type model, et cetera. Now, there’s a couple of distinguishing factors here that I’d highlight. It does depend a little bit on the longevity goals of, of the DSO that you partner with.

I would say if I were to break out the DPOs into a quick sub bracket, there’s a few that are more long term focused. You know, I’ll use me too. They’ve been around for, I think they’re coming up on almost 20 years. Uh, so, you know, it’s the same management team that they’ve kept going with the explosion of the DSO popularity coming out of COVID. There’s a lot of, shorter term focused, DPOs. Where, because for a hot second post COVID valuations got very high, there was kind of a thesis that, Hey, if we go by 50 dental practices, we can sell them and make a quick return, you know, sell them to an MB2, sell them to a bigger DSO, another investment group. And so I would caveat that there is still a lot of variety in this DPO category, a little bit driven by that, that time of hold. And sometimes if there were to be a negative. this can be an area where dentists will sign on with a group and think, Oh, this is going to be really great. And they might like the first group, but then they get sold to another group who has a different managerial philosophy. And because they sold the majority of their practice, where the first group may have been very open to flexibility on certain decisions, the second group may not be. and so these are some of the considerations that go along with, selling a, majority portion of your practice. Again, in the DSO example, you sold a hundred percent.

There’s no more to sell, you know, what you’re getting into. and there’s not a secondary owner. That’s a little bit different in this DPO category. But just to finish out the autonomy thing, generally, those models will give you a little more choice on certain things. So they’ll run the accounting, HR. But they may say on something like marketing, Hey, we have a marketing program you can use, but if you want to use your own, you can. And because you have direct linkage to some of the profits, you tend to follow what they do. I’ll continue just to shorten the dialogue a little bit.

Matt Mulcock: This is great.

Mike Baird: Group looks like, and this is a more new kind of category that we see emerging. So again, on the spectrum between a solo practice and a, and a DSO on the solo side, you you’ve long seen group practices of dentists that have kind of formed a group. They generally don’t have as much business expertise or management, but they use some scale to get to five or 10 practices. There’s kind of a new hybrid sort of dso coming out that I call the dental entrepreneur group I don’t know if that’s that’s just a term i’ve made

Matt Mulcock: With it. Let’s go. We make stuff up all the time.

Mike Baird: Um, but a couple things that I would highlight is being different, generally speaking this will be The biggest difference is they are not majority owned. So think of a group that partners with dental practices and has a sub 50 percent ownership. Now that has a lot of implications because now there’s literally nothing you can force, right? So it’s more of a coaching group. It’s more of ways to help you grow and use best practices and use data. And it’s definitely going to be much further on that autonomy, lead side, for doctors. Because they literally can’t be forced into doing certain things. generally these groups tend to have even higher top co ownership. So they want the dentist to be the owners of the top co, and by top co, we mean that the broader DSO, meaning they have ownership in the other practices that are part of this, and depending on, you know, the way that’s structured, that can also be a nice benefit for dentists. So you’re, you’re starting to see these different flavors and, you know, And again, it’s not that any one of them is right, is right or wrong. It sort of depends what dentists are looking for. If you want a hundred percent autonomy and you’re going to do this on your own, you should really stay solo practice.

If you just don’t want any stress whatsoever, and you want someone to tell you what to do every day and just know that you’ve got a steady paycheck, well, a DSO could be a great option. And in between, obviously you’re going to have hybrid variants of it. But I think those key variables are the ones that dentists should think about when they have DSO discussions, because there are. You know, by my count, there’s roughly 250 private equity backed DSOs, in the United States today. And so in that 250, you’re going to find someone that probably matches you best. And so when you’re thinking about How much ownership do I want to give up and or keep how much autonomy do I want to have? Do I want to have options to participate in the top co what’s the overall service level they’re going to provide? Because obviously in a DSL model, they own a hundred percent. They have a natural reason to build out very expansive services to run that. On the flip side, some of the DPO models, especially if they’re one where they just want to sell you to another group.

They may not invest in any services other than kind of basic accounting. So I think the number of services provided can be very different. And I think back to your motivations as a dentist, where do you sit on that employee versus entrepreneur scale? All of those things will sort of drive you to a natural fit. So I think on the positive side, there are lots of options, and if you choose to go down this path, you can find, many good options out there, if you’re interested.

Matt Mulcock: So helpful, Mike. Such a good summary of these different concepts. Categories, broad categories. I’m curious from your perspective, I know one of the biggest risks for dentists in our conversations and what we’ve seen is what you highlighted, which is the timeframe, the shot clock, if you will, that some of these groups are under. I wonder if you can speak to like, I’m a dentist out there. How do I even know, like, how do I even know these different groups I’m talking to? What are things I’m looking for as a dentist to say, okay, this is a group that’s under a shot clock. This is a group that’s more long term. Cause, cause I’m sitting here thinking they’re all going to tell me the same thing. They all have the same pitch. What are, what are some cues or red flags or things that I’m looking for as a dentist?

Mike Baird: It’s an excellent question, and it’s a hard answer, especially for a dentist, where often, you know, this is an experience good. You might have discussions with two or three of those 250 DSOs and not really know which category you’re in. I mean, the first thing I will say is reputation does matter and you know, I, I highlighted Heartland and MB2 on purpose. These are two top 10 DSOs that have hundreds and hundreds of practices. They wouldn’t be that big if they didn’t have some sort of stability and great reputations and the things they’re doing and I’m not

Matt Mulcock: They’re doing something right.

Mike Baird: We’re doing something right. I’m not trying to say that’s the right answer for everybody. But, whereas, you know, if you, when you find groups that are, and again, I run a very small group, right? But, when you find a smaller group that maybe hasn’t been around and, you know, a lot of this comes from talking to their dentists and seeing, you know, what their history is, but there are a couple of key things to note here Questions you should ask and how the question is answered is a big part of this. So number one is how long have you been at this and, you know, and how long are you going to be at this? So when you look at something like Heartland, you know, I can’t remember when Mark Workman’s founded Heartland, but again, I think it was 25 years ago. This is a very long term entity, right? You know what their policies are, whether it’s right or wrong, it’s consistent. Right. Whereas if you find a group that says, yeah, we’re all here. We’re going to make a ton of money in two or three years. Well, how do you know that? Right. so. Asking about the term and horizon, is a very important part of this. The second one that I’d highlight is, how they’re financed and what the, the debt is.

A lot of DSOs will use debt to acquire practices and there’s nothing wrong with that. it’s leverage, but there is something wrong when it’s, when it’s too much debt, if that makes sense. So imagine a DSO that’s using 95%, debt, to get into their practices, or another way is to ask, what’s your debt ratio? So a very simple way is how much debt versus how much, revenue do you have? And, meaning if you’re a DSO that has. You know, a hundred practices and you’re doing a hundred million in sales and they’re all million dollar practices But you have ninety five million dollars of debt. That’s a lot of debt to service and one of the things that we’ve seen over the last two years as interest rates went up is roughly 1 6 or 1 5 depending on the numbers that you get of DSOs have gone into receivership That’s a fancy way of saying the bank took them over because they couldn’t meet their debt

Matt Mulcock: They’re going broke

Mike Baird: They’re going broke Well, or what happened was they took out a lot of debt And when it was 3%, that was great. When those rates went up to 7%, suddenly they were in big trouble because they couldn’t pay it. So another one to ask is what does that debt ratio look like? And, you know, I tell you when you see entities that have debt ratios that are sort of sub 50%, you know, of their revenue, meaning it’s relatively easy for them to make their payments. They’d have to have half their practices go out of business before that’d be a challenge versus a dso that is 95 Now most of the time they’re not going to answer that question for you

Matt Mulcock: I was just going to ask that. Are they going to even tell

Mike Baird: Probably the answer, so when you’re asking hard questions if you’re not getting good answers That’s usually because they don’t want to tell you the answer now I will tell you at the day almost every single one of these dsos are owned by investors Investors want to get a return generally in the private equity industry. They talk about three to five X and three to five years, meaning they want to triple their money in a three to five year period dentistry usually is on longer than that, but I’d say most groups are looking for a five year period where they can recap again, sell to somebody else. Now that’s true even of a Heartland, you know, Heartland has been traded multiple times. There’s different owners that have owned it, but it’s a consistent management team. That’s true of an MB2. That’s true of many of these large DSOs. so generally speaking, when you ask them, what is your plan to recap or sell? One of the flags in there is, is this for the current management team to continue on, as the leadership of that, but they’re just bringing in new investors because they can unlock, you know, some of that value.

Or is it, we’re going to sell this somebody else. And I would generally say if you’re selling to somebody else, that should raise a little bit of a red flag because you don’t know what that management team looks like. And in particular with these models where you’re giving up, control, you know, majority control of your practice. A lot of the horror stories that DSOs from dentists friends and things is because they were with a group that they liked. That got bought by a group that they no longer like, and yet they’re sort of stuck when you’ve sold two thirds or, you know, three fourths of your practice. You don’t, there’s no outsies on this. You’re really stuck in that. You don’t want to stop and start all over. And generally they have very restrictive competitive covenants. So it’s like I got to move to another state and start all over again. Nobody wants to do that. So in reality, you’re kind of stuck. So those are a couple of the red flags and I’m going to give you one more. That sounds like a positive, but it actually can be a negative. And it’s when groups try too hard to, market on this idea of a recap. Well, we’re about to have a recap. You know, our recap is right around the corner. We’re going to reach out in nine months, you know, and think of that almost as a hard sale tactic to sort of say, they’re excited.

Now let, let me tell you why they’re so excited. If they’re at the point where they can finally sell their asset and make some money. Of course, they’re excited about a recap. And by the way, the more people they can get in their DSO before they recap, the better it is for them. But that actually for you can almost be a warning flag because what they’re saying is in nine months, we’re going to have a different management team. In nine months, you have no idea what’s going to be happening here in nine months. And again, little different if you’re on an entity that has a long term management team, but that can be very different. And I don’t know if this is the right time to talk about recap

Matt Mulcock: I would love to talk about recap economics. And can you add to this as you’re going through this, Mike as well, recap economics, including like how the equity works and the different things to be looking at with equity and the things that were being pitched out there. Yes.

Mike Baird: Let’s just break it down to what a recap is. So again, recap is a shorthanded term for recapitalization, which again is an investor term. When you own a company, there’s what’s called a capitalization table or a cap table, which is literally a listing of hall of who all the investors are. So if you own your own dental practice, your cap table is you, there’s one entity, you know, I, Dr. Smith own a hundred percent of Smith Dental, right? Well, when you end up, you know, becoming part of these DSOs, that cap table could have, it’s usually one big investor, you know, a private equity firm that usually will own 60, 70 percent of it. There’s probably a lot of dentists in there. And so the recap means We’re selling a big chunk of that DSO and there will be new recapitalization new people on the cap table Usually it’s that the private equity firm is selling their interest to a new private equity firm Again, simple example, I think Heartland’s original investor was the Ontario, like Canada teachers association and they sold their stake to a new investor. I think KKR, you know, came in as the owner. So it’s still Heartland, but the capitalization table changed. So that’s what the term recap means. It really just means a sale. Well, they’ll talk about how, Hey, we have a recap coming in. Generally people make a lot of money in recap. Let’s just talk about. Common sense numbers, and I’ll, I’ll try to use really simple numbers.

So imagine this is a five year investment and in year one, the investors come in and they value this at a dollar a share, you know, they bought their first couple of practices, a dollar share, and let’s imagine just for simplicity that every year it goes up by another dollar a share. So in year two, we’re now worth 2 a share. Year three, it’s worth three, year four, four, year five, it’s now worth 5 a share. So as the investor that bought in a dollar a share, and hopefully you’re having your recap and selling to other investors in year five, well, you went from 1 to 5, you’re making a 400 percent return. That’s fantastic. It’s really good. You can understand why the investors are very excited about a recap. But often when they say to you as a new dentist, let’s say you’re entering in year four, one year before the recap, but we have a recap coming, recap coming. Obviously they’re excited. They have a 400 percent return coming their way. But what are you coming in at? If you have the opportunity, which sometimes they’ll let you purchase a small amount of equity in that, that DSO, well, you’re not buying at the dollar that they bought

Matt Mulcock: You’re

Mike Baird: At one. You’re buying at the 4 rate. And so let’s just do the math. If I bought at 4 and let’s say in a year I sell at 5. It’s still not a bad thing, but you’re getting a 25 percent return. That is very very different from them getting a 400 percent return. And again, there’s nothing wrong with that. You came in a later state. You can still keep going under the new private equity firm who’s now buying in at five, and by the way, their goal will be to grow it to 10. But you, you, I’d be very cautious when they say things like, well, in our last few rounds we got a three x, you know, we got a 300% return. They did because they were in for a much longer period of time, and they bought at a much lower dollar value. You may not be. And so I think this is one of the biggest red flags. It’s not that it’s a bad thing. In fact, in some ways, if you know, you have a management team that you like, and you like the way that their philosophies and they’re actually in year one, well, now you’ve got five plus years of stability with that, that entity.

So this is one that I commonly see with, with dentists that we chat with, that they’re like, but there’s a recap next year. I got to, I got to join in right now. There’s a recap. There’s a lot of energy around a recap. But we should be really honest about what’s going to happen there. So then let’s go to the next couple of red flags around this. Getting into the nuts and bolts of what private equity agreements look like can be very confusing for doctors and so there’s a lot of ways look a private equity firm’s job Is to take money that they’ve raised from lots of investors and make the best returns that they have and there’s nothing wrong with that Right, you know, we all do investments. That’s the part of dentist advisors Hopefully your dentists are making great investments But the power can be very different between the pe firm Who’s the majority holder in that dso and you as an individual doctor and I won’t say always but I will say often There are very different relationships in that ownership structure.

So, you know, imagine generic DSO, and a private equity firm owns 60 percent of it or 70 percent of it and the other 30 percent they’ve allowed the management team to have some and all these dentists to buy, you know, a little sliver of that. Often there are different shares that make up that entity. So we’ll say, Oh, If I’m the private, I own a hundred shares of this DSO and you, the dentist, you own one share and we’re, we’re super excited. Or I own 99, you own one,

Matt Mulcock: Welcome to the team. Welcome to the team.

Mike Baird: Sounds great for the team, but what they may not tell you is, but my units are a little bit different. I own what’s called a preferred share and you own what’s called a common share. And so often those shares can have special rights in them, such as, well, once we make. Two times our money on our preferred share. Then we distribute things the same. So you may not realize that even in that, that 5 example we gave before, as long as they got their five X. It’s great and you can have your portion, but let’s say things didn’t go as well as they wanted to And it was only it went from one to two dollars and they may say well We actually get three times our money before you get anything So you got to be really careful about what the specific terms are Around your ownership in that company and again, there’s a wide variety of private equity firms out there But it’s a very common thing and they’ll say look we were the original investors We put way more money in we have more risk Therefore we have a right to something different.

So one of the big questions to ask is around what those shares look like. And if your shares are the same as everybody else’s shares, do I have the same rights? Do I have the same preference, which is a key word of who gets the money first? You want to be asking some of those questions. And again, a non answer is an

Matt Mulcock: Is an answer. Yeah.

Mike Baird: A non answer is an answer. An answer is great if they can tell you, yep, we only have one class of shares and you have the same class as us. That’s a good thing. but I think because dentists have never been through one of these before, they don’t know what to ask. And therefore, sometimes they may end up with something that was different than what they had hoped for.

Matt Mulcock: Mike, you’ve highlighted so many things that we’ve seen in real life. And the last one you just highlighted is like this preferential treatment of certain shares over other shares and dentists not understanding that, which is where we see this bear out in the real world, which is, man, I was promised something that they didn’t deliver on or, you know, I was expecting something so much better at this recap or whatever. And it’s because of what you’re highlighting from what we’ve seen. A lot of these groups are throwing out what we’ll call the gross numbers, kind of like pre all this stuff that sounds great on paper. And then when it really comes down to it, they’ll explain away later on.

Well, yeah, that was after the two X pref treatment of the top co shares that went to the management team. And then here’s this, this, and this, we got to pay off our debt. This is all in the fine print. Okay. You know, and then it comes out to that, even that 4 to 5 example you gave, it’s a gross return of 25%, but after the fact, it really came out to, let’s say 7 percent or whatever it is. We see this all the time.

Mike Baird: And what’s tricky here is it’s, it’s not that anyone’s necessarily trying to rip you off. They are genuinely trying to make as much money as possible and grow this investment. But like all investments, you know, dentists advisors will tell you this all day long, you know, past performance does not equal future results is one of the taglines or it involves risk. and so what’s hard is dentists will hear that one of their friends happen to have a really great return and we tend to have an anchoring bias where we think, well, then of course I’ll get that return. But the reality is not every DSO is going to be successful and not every DSO is going to have a great return and Depending on when you enter may have dramatically different outcomes so in my theoretical example before with the 1 share if you were one of the first 10 dentists in that DSO and you bought It 1 share and you happen to be on the five year journey Well, you’re actually gonna make a lot more money than the dentist that entered the exact same DSO in year four Again, not bad. And in fact, you had more risk when you came in at a dollar a share. You didn’t know if this was going to be a successful group or not, and the doctor who came in at four dollars a share when this is already an established group. But those same principles apply to a DSO. Another interesting point about this, that can sometimes be, somewhat bad about an established DSO is, a DSO that is already very, very large and established.

For better or for worse, they’ve captured a lot of that early return. And so, it’s kind of like if, if I buy a share of General Motors today, you know, very, very large car company. It’s a very successful company. There’s relatively little risk. They’re going to go bankrupt tomorrow. They’re going to pay their bills and make lots of cars. But the odds of General Motors stock doubling, you know, over the next two years are relatively low because I have to buy in at what it’s worth today. Today I don’t get a say I get a buy in at general motors. 1920, you know IPO price that would be great if we could because they’ve probably gone up a hundred times since then but there is a reality there that just like any other stock risk and reward are trade offs and so sometimes you’ll hear dsos talk about well listen in our last two or three rounds we’ve had a three times return, you know, and that’s wonderful. But the bigger they get, the harder that is to duplicate or the longer the timeline is for that to duplicate. So imagine a group that has 50 practices that grows to 100. Well, that’s doubling the company and then they go to 200. That’s quadrupling the company. Well, let’s imagine a 200 group practice. If they add 50 practices, that’s only a 25 percent growth.

So the metrics aren’t the same. And for better or for worse, Investments like this are always priced at market. so if it sounds too good to be true, like, well, you know, somehow we’re going to get a three times return in three years, but you’re a 500 practice DSO, what would that have to be? You’d have to actually triple in size with zero new cost and, you know, zero new invest. And some of those things just may be a little bit difficult. That doesn’t mean, I mean, look, we’re all believers in the business of dentistry. Dentistry is, I think is a great investment. I think most DSOs can be a good investment, but they’re probably more like investing in other large, stocks that might have a 20 percent return or a 30 percent return. Then that theoretical three to five X that maybe your friend got because they happened to be one of the early, practices that was part of Heartland. I mean, that’d be amazing. We would all love to be one of the first practices in Heartland, but that may not be, you know, the case going forward.

Matt Mulcock: I love that you just highlighted that Mike, the context is important of understanding the comparisons that you’re making with other dentists out there, or, you know, even if you’re. Considering a DSO and they’re like, Oh yeah, talk to this doc or this doc. That’s part of this. I think it’s really critical to understand the context of their situation when they got in. I think it’s a really, really important thing to understand. I want to be respectful of your time, Mike. Do you have a couple more minutes to, to keep, to you? Okay. Just want to make sure I know you’re, Really busy. I want to just, final thing on the recap, what we’re seeing, and this can kind of lead into like what we’re seeing right now in the kind of current landscape today, but I wanted to highlight one thing that we’re seeing a little bit more lately is DSOs. and you’ll have better words or better understanding of this than me, but from our perspective, what we’re seeing is Lately, we’ve been seeing offers coming in, not as a recap, but almost just like, they’re just raising some capital. Could you highlight me with the differences there for a dentist out there that are like, well, we’ve seen a few of these over the last just year. And maybe we can parallel this, like with what are we seeing in the recap space right now? We haven’t seen a legit recap for a while. I wonder what you’re seeing. And then again, maybe highlighting the differences of like a capital raise versus a recap.

Mike Baird: Interesting. Well, first let’s just talk about multiples because this is one that dentists love to talk about because their friend will say, Oh my gosh, I got a five X on my practice. And then the recap was a 12 X or people will throw around all these numbers. So again, what does that mean? When a company is being sold to private equity, they’ll take your EBITDA, again, another term to define, but just assume it’s your profit. We’ll take the profit of the company and multiply it by some number. so imagine that you have 100 of profit and you have a 5X multiple on it. That means it sells for 500. If that’s a 10X, it sells for 1, 000, right? So bigger multiples means bigger exits. Coming out of COVID when there was so much excitement around the space, multiples for DSOs that were recapping, remember that means to be sold.

We’re hitting double digits. So 15, 16, 17. So that’s a pretty amazing, right? Think of a, of an asset that has, you know, a hundred dollars of profit being sold for 17, you know, a hundred dollars, that’s a pretty big return. but as you said, Matt, starting about the end of 2022 when interest rates raised, that was a big hit to the model of the vast majority of DSOs because they used debt to acquire practices and between kind of November of 22 to really about now, there have been very few, if any, recaps or sales. Now, part of that’s because people, it’s almost like a tech boom, if you remember the.com boom or, or various booms that we, the AI boom that’s happening now.

People were overpaying so many people entered the market. They started paying a lot You know, they’re more people competing for your practice. So they started to pay more and more And so, you know imagine that they used to buy a practice at three times earnings and now they’re buying it at six times earnings Well, that means for them to get a three times return If they bought you at three, a nine times return would get me, sorry, a nine X would get me the three times return. I want, if I bought you at six, I have to get to an 18 X multiple to get the return I want. and so people really weren’t willing to sell or investors weren’t willing to buy. We’re starting to see the first few recaps that have happened after that very long pause. So, you know, side note, many people were told multiple times, Oh, we’re gonna have a recap in nine months. And I, that didn’t happen. I mean, literally almost no DSOs have recapped. And instead what you’ll see is they’ve raised more debt. They’ve raised more money to help finance their operations. We’re starting to see the first few, DSOs recap. And. I see these numbers as I talk with investment bankers and they tell you what’s going on in the marketplace and they’ve come down dramatically.

So what was once kind of 12 to 15 or so, we’re now seeing 9, 10, 11, 12 as more of those multiples. So again, that may mean that a DSO that bought at a really, really high, they’re not going to get the return that they hoped for. Most of those long term ones that have been around a lot longer, you know, they they had more financial discipline They’re still going to get you know, decent returns, but I would say one of those trends is there was definitely a peak in valuation. That’s kind of softened like many other things in the market. You know, we saw used cars got to be three times as expensive as they, so they should have been in 2022. They’re back to normal now. Right? so that same trend has happened, in DSOs to your second point. there is an interesting one where some of them have used their dentist to raise more money. That’s because. the last time they raised money might’ve been in 2022. They raised it at these really high multiples and really high expectations of an outcome. And frankly, investors are relatively less interested in the space today than they would have been in 2022. It’s not that they’re not interested, but relatively less interested.

And so they may not be able to raise money as easily. or at the values that they wanted to. And so they’re looking to other avenues for sources of cash and, you know, one other potential red flag negative I’d highlight is some DSOs will offer to do. 100 percent equity swap where you give up your whole practice, but you actually get no money and you just get, you know, equity. Look, if you knew that that was going to be a great outcome, great. But that is highly, highly, highly risky when some of these groups, if that group has a 20 percent chance of going bankrupt, which is kind of the base metric in DSOs today, you have a 20 percent chance of literally losing a hundred percent of your practice and so I’d be cautious of some of those, those models as you highlight. Now, it’s not all bad, right? I think, I still think the business of dentistry is good and some dentists want to have some investment. I think being able to participate in Topco can be a good thing, especially if you have similar rights and preferences as the investor class. But I’d be wary of what I’ll call multiple hype. And there’s another side note, sorry to keep adding on,

Matt Mulcock: No, this is great, Mike.

Mike Baird: Often, you know, let’s talk about stock trades, right? So. Matt, when you make a great investment and you’re working out of the gym with one of your friends, or you’re surfing with Ryan or something,

Matt Mulcock: I’m never doing that, but I will be working out at the gym. Yeah. The first example was

Mike Baird: You’re the gym. Okay. Are you going to tell Ryan about the best investments you made or the worst investments you made? You’re going to tell him that, Oh my gosh, I bought Tesla at a hundred. I sold it at 800. It’s amazing. What you’re not going to tell him is, and then I bought some more at 800 and it went down to 200 and I lost my shirt on it. We never share those data points with each other. So I’ll tell you as you know, we all are, we think we’re data driven people. What we don’t realize is the data we hear is not a full set of data out there. So the numbers that you hear from your friends are probably the best case scenarios, what you’re not hearing are the worst case ones, your buddy that went to a DSO and you know, there was going to be a recap and then they went bankrupt and he actually made nothing off of it, or he made 10 percent off of it instead of 10 X. He’s probably not going to tell you about that. and so just know that we tend to gravitate towards what we hope will be the best case scenario when the reality of the range of options out there, we don’t have visibility to because people won’t share them with us. And so there’s a challenge there.

There’s a second corollary to that. We’ve talked mostly about recaps and DSOs reselling. This also will come in when we talk about what your practice is worth and what it sells at is often your friends will tell you the highest possible valuation for that instead of what actually happened. But we can get into practice valuation, here in a second, but hopefully I think that’s a pretty exhaustive deep dive into what recaps look like and red flags and things you ought to be thinking about there.

Matt Mulcock: So much good stuff. And again, things that we’re seeing, and I just to reiterate the red flags that you’ve alluded to multiple times of just this coming from different angles of the psychology of this, Not only is the DSO that you’re talking to going to, let’s be honest, they’re incentivized to sell you on something and they want to get you on board. They’re probably not going to highlight, you know, if they talk about past returns, yeah, they’re going to be like, yeah, we just three X or four X or five X, whatever it is. I love that you’re bringing some light to this, Mike and say, absolutely. That’s probably true, but it’s not necessarily true for you. So that’s a good thing. And then also at the individual level of just the psychology of the reason people are going to, people are more likely to share their incredible wins or that story of those wins are just going to circulate around much more than someone losing their shirt on something or someone just being like, Oh, it was just kind of normal or,

Matt Mulcock: No one’s, no, one’s really beaten down your door to share those types of stories. So. it’s this bias that people have towards these being better than they really are. I’m curious, Mike, because we kind of wrapped this up, getting down to the individual practice valuation level. Are you seeing similar softening as far as these offers? I’d imagine there’s a ripple effect.

Mike Baird: There’s a ripple effect there. Yeah, I think both the interest rate levels and I think just there were so many people competing over it that, you know, there’s probably still a little bit of demand side pressure that keeps it up a little more than it has been, but that’s probably come down as well. And I think again, this is an area where you hear things. Oh, my buddy sold his practice for eight times revenue. what your buddy didn’t tell you is if he hits certain numbers for three years and you know, if everything’s good and if he doesn’t, he actually gets three times revenue, right? They don’t ever tell you that part of it, but I do like giving kind of rough dimensions on this. Now it’s really hard because. Dental practices are wildly different in size and scope and scale, right, Matt? You, you guys support hundreds of dental practices, in what you guys do, and they’re just very different. So let me give a couple of rules of thumb on how practices are valued, because you’ll usually hear multiples in reference to an EBITDA multiple, meaning profit.

But, but here’s the thing. if you have a practice, that’s 5 percent profit. So again, We’ll use easy numbers. You make a hundred dollars and you have 5 of profit. Well, I could put a 10 times EBITDA multiple on that and it would be worth 50, right? whereas you could get 70 percent of revenue, which is kind of the norm for a solo practice. And then we were 70. So that EBITDA number is actually somewhat irrelevant because of where your profits at. So I’m going to give you a quick rule of thumb on this. Generally speaking, If a practice has less than 15 percent profit. It’s going to be valued on a revenue multiple or a valuation. If it’s more than 15 percent profit, it’s going to be on an EBITDA multiple. Now, if you need a general rule of thumb to figure out, and we’ll use EBITDA, which stands for earnings before interest depreciation tax amortization. That’s a fancy way of saying profit. For most dentists, they’re not even sure what that means because your tax accountant usually is not calculating your EBITDA. But think of it this way. If you looked at your collections and your practice and you subtracted all of your staff costs and your rent and all those things, and then you subtracted what I’ll call the normal labor rate for a dentist, 30 percent I’ll use as a general dentist of your production. Call that your costs.

So whether it was you or another dentist, someone has to be paid to see those patients. left beyond that is your actual profit. Now, as a dentist, you usually take all that. But I would distinguish between the 30 percent you get for production and everything else as profit. So, you know, imagine you’ve got, 55 percent overhead, you had 30 percent dentist production, that’s 85%. 15 profit, right? So if you’re below that mark, you’re probably going to be on a revenue valuation and generally you’re going to be a smaller practice in that range If you’re a solo practice selling another sole practice i’d say 70 is kind of the norm You’re going to get 70 of your collections which is generally a ratio of how many patients you have because when you leave The new dentist is probably not gonna be able to keep all those patients.

And so, you know, it’s gonna have different value now Is it always 70%? No, if you’re in a super rural area with a 3 op practice and you know It’s very small You’re probably gonna get 50 percent or 60 percent because it’s just not as

Matt Mulcock: Or you, or you can’t sell it.

Mike Baird: Or you can’t sell it all and you literally just walk away, which is what usually happens If you are a one and a half million dollar practice that’s been growing like crazy and you know, you have other associates in ways that that’s gonna continue in, in the future, and, you’re closer to that 15% profit, you could probably get a 75 or an 80 or even an 85%, you know, revenue, multiple. So a practice is not, a practice is not a practice, but in general, I’d say those. Practices tend to be around that 70, 75 percent range of, a revenue evaluation. Now, interestingly enough, that profit tends to correspond with size and that tends to also highly determine what your outcome is. Most practices that aren’t over 15 percent tend to be smaller practices. There are a million and less. Another interesting fact. Almost all DSOs, not all, but the majority of them, are looking for practices that are a million and a half or larger. That’s on purpose. They don’t want to have a practice that has a lot of things that they need to fix or work on. And so another issue you have is simple supply and demand here is that you’re less likely to have a DSO buyer if you’re a smaller practice. And so really you’re going to sell to another solo most likely, or maybe you sell to a group. And so that, that 70 75 is probably the best way to think of it. Now, things change pretty dramatically when two things happen.

One, you’re over one and a half million, and two, you cross that 15 percent margin threshold. Now it starts to change a little bit. I would say, most practices that are kind of in that 15 percent margin, a profit margin are probably going to be at a four or five times multiple again. So take your profit and multiply it by five, because now. You may remember my example before a hundred dollar practice, 15 of margin. If I put a five or a four X on that, now we’re talking about, let’s see on a five X, what is that? 36, 75, you know, so we’re talking about 75, 80%, you know, valuation to your revenue. So you can see that’s kind of the crossover point as that profit grows. Now you’re 20 percent margin. Hey, a five X on a 20 profit in our example is now worth 100. It’s 100 percent of a revenue valuation. You can see how that starts to go up as it should. Because that practice creates a lot more profit, which is really what the DSO is buying or someone else buying your practice. So again, I would probably say most practices are going to trade in that four or five range as you get closer to 20 percent and higher profit, you’ll start to see. Five and a half, six, as you see it go to 2 million, 3 million, 4 million practice. Again, it will tend to drift towards that upper range because of how much profits being created. And generally a larger practice has more ways for a DSO to create profit. So imagine they just bring in new suppliers and they instantly find you 3 percent more profit. Well, that’s a 4 million practice. That three percent is a lot more profit than if it’s on a one and a half million dollar So I generally give those multiples and when you hear things like oh my buddy got a seven or an 8x.

Well odds are either a they have really restrictive things that they will get an 8x If they hit certain numbers over a three year period and if not, it’s highly punitive Or they’re just a very profitable practice. We’ll also see things like, you know, specialty practices like oral surgery tend to be a little higher. Well, cause guess what? They tend to be way more profitable. You know, there’ll be a 25 or 30 percent margin. And so again, if I put a five X multiple on a 30, now we’re talking 150 for a hundred practice, you know, that, that’s 150 percent of a revenue multiple. So it tends to follow logic. And so what happens is dentists think, Oh, well, my buddy, he got a five or six X, maybe I can too. I would go back to where are you at on your profit? Where are you at on your size? And that’s going to be the driving factor in, what that’s worth. And one of the key red flags and things to ask will be. What is that contingent on? Because I can tell you almost no DSOs are going to say, here’s a five X your practice and you get to quit tomorrow and go retire on your island.

The higher that multiple goes, the more they expect you to stay because it gets them security and or the more covenants they’re going to put on you. Look, I’m happy to give you five or six X for your practice. If you’re going to stay for three years, I’m happy to give you five or six X for your practice. So long as you guarantee that we’re going to hit the exact same levels or more of profit over the next few years, which you don’t know, that puts risk in the equation. So often, back to the data points that you share at the gym, you’re hearing things that may not reflect the full data set of what’s actually happening in reality.

Matt Mulcock: Well, and not only that, Mike, I’d imagine not only are you not hearing things because they’re not wanting to share their losses, but also a lot of times we’re seeing the dentists who are sharing these things, don’t fully grasp what they’re even sharing. They don’t understand the details, the nuances, the covenants they’re under to your point. Mike, so much good stuff here. It is fantastic. Like this is probably going to be like a, an episode or multiple listens because you’ve thrown out so much good stuff. I want to highlight and summarize a couple of things. and tell me if this is a fair summary of just some of the highlight points of some takeaways that people, the dentists out there need to understand. The first thing, that you’ve mentioned is that You’ve met one dso means you met one dso and that’s really critical to understand as a dentist that Look no further than that than when you’re comparing your buddies You’re comparing friends of friends of whoever whatever stories you’re hearing Is every dentist or every dso was created so differently and you multiply that To the power of, or you, you know, to the power of every dentist that’s out there is different.

So the offers are, you just can’t really compare, right? the other thing that I’m hearing you talk a lot about, or this theme is coming out of this is just be really thoughtful and intentional with your questions and the things that the research you’re doing on these DSOs, if you’re out there exploring offers. And then from our standpoint, as dentists advisors is. You really got to understand not only the numbers that are being thrown at you, things like the equity, the covenants, all the nuts and bolts, but you highlighted the three different areas of the three different kinds of pillars of general DSO kind of categories. You got to understand your own situation and how this DSO or this offer, this company, you’re going to go. How’d you hit your wagon to how does this offer impact my personal situation and how does it align with my personal situation? Cause again, another thing you can’t compare your buddy to your buddy’s not going to be the same situation that you, that you’re in. You got to really, assess that anything that I missed there. I mean, high level summary, but anything that you’d add to that.

Mike Baird: I think those are the right points. I would add if there were just two really easy things. Number one, you want to talk to their dentist. One beautiful thing about dentistry is dentists love to talk to their dentist. And that doesn’t mean the referral that they’ve given you. It means go look online and find out a couple of dentists that work for this DSO and take them out to lunch and find out what their experience has really been like because that will tell you much more about what it’s like, working there than other things. The second is, I can’t, state enough how valuable having a financial advisor is. And this isn’t meant to be a push, you know, for you, Matt, but, Investing is all about bias. You know, we have positivity bias. We have anchoring bias. We have recency bias. We have all these various biases and we want to believe, we always want to believe that we will invest better than somebody else, that our practice is better than someone else. You know, we’re always above average in the way we think about things and having someone to help you remember all these questions that you’re asking, you know, let me actually value that because again, I can give you a 10 times EBITDA multiple.

On five percent profit and it’s not the best deal and you can go brag to your friends that you got it ten times But you know an advisor will say actually you’d way rather take a seventy percent of revenue In that example, and so I think it’s really important, for better or for worse dentists are Fantastic at taking care of patients. They’ve learned how to do wonderful things to you know to improve our lives But generally speaking, they’re not as deep in all these things we’ve talked about today. Heavy financial terms, recaps, preferences, investor rights, and things of that nature. And so having a sounding board, whether it’s someone like dentists Advisors, whether it’s your accountant, whether it’s, you know, a trusted, friend or resource, I would make sure to do those things. Too often, We get shy about some of the biggest decisions of our lives. And we sort of go with our gut cause we want it to be true so bad. We all hope that we’re going to make way more money than we should and work way less than we would have to. And then it’s all going to turn out right in the end, but it just doesn’t always work that way. And so I think it’s really important to ask the hard questions. And again, some of the questions we talked about, remember that a non answer is an answer. There’s a reason that doesn’t want to be shared. and so I think I’d be very wary of that in the marketplace.

Matt Mulcock: That’s a great one too. Then the non answer is an answer. You got to ask the question. And I love that you said that because we’ve seen that a lot. I could not stress enough. We share this all the time of having a trusted third party again. Whether it’s an advisor, whether it’s a CPA, someone is removed from that transaction itself, that is not going to be paid on that transaction itself. Someone that’s removed, they can look at the big picture, understand your situation. I think that is invaluable. so I love that you highlighted that, Mike, again, I could, we could keep going, maybe we have to do another, part of this, another podcast, but, we’d love to finish this with how do people find you, accelerate dental, your company, what’s the best way. If somebody hears this and there’s going to be a ton that do that might have more questions or want to understand your model or how you approach this, how do people find you?

Mike Baird: Appreciate that. Yeah. you can email me, mike@acceleratedental.com. You can go to our website, Accelerate Dental. we are one of those groups that’s on that dental entrepreneur group, so we’re trying to create a new model where it’s minority investments where the dentists have control. We’re actually in this really weird state where we’re not trying to ever sell. We, we have a strong thesis that dentists should own their practices perpetually when they sell, they should own, they should sell to other dentists. So we do a couple of things a little bit different, but if that’s of interest to you, you can track me down. Or if you just have generic questions about DSOs in general, look, I’m a big fan of the space and happy to be a resource for anyone just, just like Matt is, but you, you’re more than welcome to email me or find us on our website.

Matt Mulcock: That’s awesome. I really appreciate that. Thank you so much for being here. I’m sure we’ll have to do another just from popular demand, just like on the webinar. we’ll have you back here pretty soon to talk about the DSL landscape, as things continue to evolve and change in the space. So really appreciate you being here, everyone.

Thank you so much for listening. if you want to know more about us or talk to us, share your story with us, or connect to people like Mike, to Mike specifically, or other partners that we have check out dentists advisors. com feel free to click on the book free consultation button. We’re always happy to talk and educate and talk about your own personal story situation. Mike, thank you so much again for being here. Thank you everyone for listening till next time. Bye bye.

Keywords: DSO, dental service organization, private equity,  dental partnerships, dental industry trends, recapitalization, dental practice valuation, private equity, investment returns, market trends

Practice Management, Practice Transitions, Practice Value