Understanding the DSO Landscape: A Conversation with McLerran & Associates – Episode #585

On this episode of the Dentist Money Show, Ryan talks with Brannon Moncrief from McLerran & Associates to explore the complexities of dental practice transitions and the role of Dental Service Organizations (DSOs). They discuss the importance of navigating the DSO landscape with clarity, evaluating and negotiating offers, and identifying factors that influence a practice’s success and value. Brannon also talks about the potential tax implications and the emotional challenges owners face when deciding to sell. Tune in for insights about making informed and intentional decisions during a dental practice transition.

Related Readings

Learn more about McLerran & Associates

How Misunderstanding Taxes Could Cost You $10K or More

---

Podcast Transcript

Intro: Hey everybody! Welcome back to another episode of the Dentist Money Show, where we help dentists make smart financial decisions. today on the show we have Brannon Moncrief from McLerran Associates. We’re talking about the most common questions and common mistakes of selling. to a DSO in this, the year of 2024. We appreciate Brannon for all of his time and education and expertise. he knows so much about this space and subject. This was a really helpful interview. Thanks, Brannon. Thanks to all of you for joining us. If you have any questions, go to Dentist advisors. com and I would love to have a chat with you anytime. Thanks for joining us. Enjoy the show.

Ryan Isaac: We’re live. We’re recording. Brannon. thanks for joining us again, man. Appreciate it. This is a returning guest spot. I like it.

Brannon Moncrief: Yeah, man. Good to see you. Always good to be here.

Ryan Isaac: For those who might not know who you are, have missed previous episodes. Give us a little intro, who you are, what you do and, your favorite bowl of cereal.

Brannon Moncrief: I’m Brannon Moncrief, principal CEO of McLerran and Associates. I’ve spent my entire professional career in dentistry, particularly in the merger and acquisition space. So spent about a decade as a lender lending money to dentists all across the country to buy, start and expand practices. And then 13 years ago I acquired McLerran and Associates. The legacy business that I acquired that still exists today specializes in doctor to doctor, private buyer practice sales, like traditional dentistry. Practice transitions from one doctor to another. We do about 50 of those a year. And, then about five years ago, we built out a team to represent larger practice owners who are looking to monetize their business in the DSO and private equity space.

So we do sell side advisory for, practice owners to help educate them about, you know, what is their EBITDA? What’s the value of their business, private buyer versus DSO. What are all the different options and deal structures available in the marketplace? And then once they’re fully educated about what their business is worth and what their options are, whichever path they want to go down, sell to a private buyer or affiliate with a DSO, we make sure that we create optionality and leverage so that they find the right fit. Find the right deal structure and maximize their economic outcome.

Ryan Isaac: Yeah. Cool, man. I have a lot of questions. Top of mind that are the questions we hear all the time about the space. They’re probably things you all see her all the time and, repeat yourself constantly about how many DSOs are in the market right now.

Brannon Moncrief: So, I mean, there’s over 500 DSOs,

Ryan Isaac: Okay. I was underestimating. Okay,

Brannon Moncrief: There are a ton of DSOs, but DSO is, it’s just nothing more than a legal distinction, right? Dental service organization. what that means is you bifurcate the ownership of the practice between a clinical entity, a doctor owned entity that owns the patient records. And a business entity that essentially controls all the other assets, tangible assets, the business, the lease, things like that. Now, as far as, you know, how many DSOs are actually acquiring

Ryan Isaac: Yeah, like bigger money. Yeah, they’re out there growing.

Brannon Moncrief: Yeah, that are private equity backed ballpark about 200 and it’s still a lot. And we work closely with about 60 because you know, they’re good DSOs. They’re bad. DSOs were pretty protective about who we allow to sit at the table and bid on our client’s practices. So we work with a select group, a subset of those DSOs that buy practices that we know we trust. Our clients have had good experiences and they’re aggressive in bidding, have plenty of money.

Ryan Isaac: The follow up to that comes from a question I had from a client, which was, should I just go direct and shop the DSOs myself? And as I was trying to explain this out of the hundreds and hundreds, the deal structures across all of those are very different, right? Depending on what they want and what the doctor wants. Can you talk to a little bit about how that can differ?

Brannon Moncrief: Yeah. The short answer to that question is not no, it’s hell no. That’s a really bad idea.

Ryan Isaac: Yeah. That’s what I said.

Brannon Moncrief: Yeah, I mean, especially given what I just said, there’s good DSOs, there’s bad DSOs that are some that are set up for long-term sustainability, and there are some that are not. You know, a handful of them will fail and a handful of them will get a unicorn positive outcome and everything else will. Fall in between, but we say this a lot. If you met one DSO, you met one DSO. There’s a lot of different flavors out there in today’s marketplace. Every DSO has a different financial sponsor, a different deal structure, a different level of management and infrastructure. they’re all at a different stage in their recapitalization cycle.

They all are carrying a different level of leverage. They all have a different approach to supporting and managing, you know, the businesses that they acquire. So. The most important thing is you’ve got to create optionality. You’ve got to create optionality for really two reasons. One, because you’ve got to find the right fit, the right partner. You’re going to have a three to five year post closing commitment, so you’re not going anywhere. So it’s going to be important who you partner with. The deal structure is going to involve cash and equity. So that equity is going to be substantial and could have great upside or terrible downside, depending on who you partner with. And the only way to ensure that you get maximum value is to hold their feet to the fire and put them in a competitive bid process. When people ask what we do for our clients, essentially I tell them, we create a bidding war. Among as many buyers as possible.

Ryan Isaac: Yeah. Assuming someone got through that entire hurdle of selecting which ones meet their needs, which ones are viable out of hundreds and hundreds, how much do the offers and contracts change during negotiations?

Brannon Moncrief: They can change remarkably about half our clients already are talking to a DSO. Maybe their buddy sold to that DSO or, you know, they got a marketing piece in the mail or whatever, and they already have an offer on the table. so I could tell this story over and over and over again, but we just had a client on the West coast, OMS client that had a, what they thought was a pretty attractive offer from a legitimate DSO that’s relatively well known in the world, and they were referred to us by their CPA.

We did a EBITA analysis and came back with a valuation expectation that was considerably higher. Then the offer they had in hand and they hired us and allowed us to run that competitive bid process. We gave that same DSO a seat at the table and ultimately our client chose to sell to the DSO that had made that unsolicited offer, but they chose to sell an evaluation of 2.6 million higher. Then the initial offer simply by following the process. Nothing really changed other than the fact that, they thought they had a good offer. They just didn’t know how good it could be. When you put the DSOs in a competitive environment,

Ryan Isaac: These are just not things that the average dentist, even maybe the above average dentist who even has a high degree of interest in this stuff is going to have time or expertise to pull off. And. when you’re talking about these numbers, you’re, like you said, you’re talking about seven figures, sometimes multiple seven figures that are on the table or left. And, that seems like a dangerous sport to engage in without any proper guidance and coaching. those are some of the common ones. Oh, one more. Actually, it’s really common right now is how many of those DSOs out there are in trouble? Struggling.

Brannon Moncrief: There is a fair number of DSOs that have been, in trouble. And that’s a product of the fact that the macroeconomic environment has changed quite a bit over the past 24 months. All private equity backed businesses carry a heavy amount of leverage, or debt. And when that debt, Gets exponentially more expensive and harder to acquire. It puts these businesses, under duress to some degree. So there have been a handful of DSOs that have failed. And when I say fail, that means that the private equity firm has had to give the keys to the DSO to the lender. Now, what will happen over time will be interesting. I mean, some of those lenders will just, you know, divest the assets and take a huge loss.

And some of those practices will close. Some lenders will, whether themselves or through hiring a third party consulting firm, they’ll turn the business around and eventually sell it to a private equity firm. And that DSO may survive longterm. knock on wood, because we’re so protective and who we allowed to bid on our practices, we have yet to have a client lose a dollar of equity. We’re just very visual and how we vet DSOs, who we work with and how we navigate the process. there are other DSOs that have hit multiple recaps and You know, generated a 15 X return on invested capital over the past 15 years. and then, like I said before, all the other outcomes have fallen, you know, somewhere in between, but it is critical to discuss the fact that the equity component does have risk.

And I think that’s one of the reasons why we are busier today than we’ve ever been. Uh, it’s because doctors have realized that we know what they don’t because we’re at the Dykema meeting. We’re at the. The ADSO meeting, we hear all the water cooler talk, right? We know who’s in trouble and who’s not. And when you interface with all these DSOs on a daily basis, we can pretty quickly tell if we were going to bet our money on a particular DSO, who’s going to make it and who is not based on their management team, based on their financial sponsor, based on their deal structure and based on their buying behavior. You know, what are they buying? Do they use any discipline? What does their underwriting look like? What are their guidelines as far as, you know, what type of practices they’re looking to And, you know, there are some that are That have been relatively undisciplined and paid elevated multiples.

Those are the ones that have gotten into trouble, you know, more recently. And there are others that are, have a very defined game plan, a deal structure, that’s going to be sustainable longterm. They’ve done a good job of aligning incentives with their partner doctors at both. The DSO and the practice level, and they’ve got a great management team and a great financial sponsor. So we’re constantly evaluating, you know, who’s who in the zoo and, you know, who do we want to allow in the door and who do we want to keep out?

Ryan Isaac: Yeah. I was going to ask what, how do you even go about vetting, but you just did that very well. And that seems like a very, Overwhelming list of things to understand and know and what to look for. yeah, it’s your full time job. It’s not a dentist full time job. That can be a very daunting. You said something about the, they’re placing a lot of risk when multiple seven figures at times, of these deals are sitting in equity of these, of these bigger, companies. And sometimes I’ll put it to my clients like, Hey, you know, you’re going to get A sum of money and you’re going to put a million dollars or maybe 2 million into a single privately held stock, you know. What kind of, do you want to do that by yourself? Or like how much on the inside do you want to see before you put a million dollars on one stock?

Like what company would you ever be comfortable doing that with? And it’s, you know, that’s always kind of like a realization for them. Like, Oh yeah, that, that is what I’m doing. This isn’t all just like, Oh cool. There’s my offer. I’ll just sign it. Let’s go a giant chunk of your money that you’ve earned from building this company. Is in a single stock. So how, how much, how much help do you want figuring this out?

Brannon Moncrief: Yeah. And I do want to mention there are pros and cons to that, right? So right now you own a business that has a lot of key man risk and you have a hundred percent invested

Ryan Isaac: It’s like key finger risk. It’s not even like key key person risk. It’s just like,

Brannon Moncrief: And risk, whatever you

Ryan Isaac: Like key hand risk. Yeah.

Brannon Moncrief: So you currently have 100 percent of that equity vested in one business that in large part is predicated upon the performance of one individual.

That’s risky, right? So through monetizing a piece of that business, you’re taking some chips off the table, giving it to somebody like you to diversify it in other asset classes. But then there is this one component, right? That is getting invested in a privately held. non marketable stock. The difference is, you know, that stock to some degree is more diversified than your own. Now, if it’s diversified in a bunch of practices that are not high quality, that’s not necessarily a good thing, right?

Ryan Isaac: Yep.

Brannon Moncrief: But if it’s diversified in a lot of good assets, a lot of good practices like your own, I think it, it can be a positive thing.

Ryan Isaac: Yeah. But even the list you just mentioned, thinking about like, Oh, okay. I’m going to take one of hundreds of companies and, um, How am I as a dentist going to know what, what their capital structure is and like what other deals have they done and who are their partners, who are their managing team? What kind of experiences everyone has just not researched. The average person is going to be able to pull off or even know what to ask. I mean, you don’t even know the questions asked. So yeah, I think you’ve detailed that really well. while we’re on the subject of common questions, what are you getting a lot 2024. You’ve been to a lot of conferences lately, tons of activity. It seems like it’s picking up a little bit more with rates changing. What are the common questions you’re getting right now?

Brannon Moncrief: I think what we’re seeing right now is because of the level of uncertainty with the election cycle, because of, that’s causing some people to sell because they’re worried about which administration is going to go into power and how that’s going to impact the economy. for some other people, it’s paralysis by analysis and they’re holding until after the election. But I think most people, are concerned about taxes. And we can all agree that, I mean, taxes are going to go up. The, the Trump tax breaks are going to expire in 2026 and regardless which administration is in power, they’re not likely going to be renewed. So ordinary income tax, some of the pass through, you know, taxes are going to, uh, tax breaks are going to go away. And then there’s a real threat that even if the right is elected, the capital gains tax is going to increase substantially. And when you monetize a business like a dental practice, the majority of the sale is taxed as a capital gain. And currently that rate is as low. As it’s ever been, you know, currently sitting at 20%.

There are threats that it could go as high as 35 to 40%. And it’s been at that level in the past. A lot of people don’t remember that because it’s been so long. So right now there is a tax arbitrage advantage associated with monetizing your business. And when you do that, you’re converting EBITDA, future ordinary income tax at your highest tax rate, converting it into a capital gain. Well, right now that’s converting income at a 38 percent rate into a capital gain at a 20 percent rate. There’s some significant tax arbitrage there that could disappear, you know, at some point in the future when capital gains rates increase.

Ryan Isaac: Sure. Yeah. And folks talk to your CPAs, ask your CPA. okay. So yeah, I think that’s probably, that is really top of mind for people just like what’s going to happen in the economy. What’s going to happen with the election? what are, yeah.

Brannon Moncrief: You know, people are also asking about like, well, you know, obviously the market was super frothy and 21 and 22 valuations went up in the DSO world by 30, 40 percent post COVID. And then when the macroeconomic conditions changed, the market softened slightly, I would say it softened more so for like class B and C assets. Class A assets are still trading for. Elevated multiples still near a high water mark, but a lot of people are asking. Hey with interest rates going down Are multiples going back up or valuations going back up because valuations in our world, from my opinion, really haven’t been depressed. I don’t think they’re going to go up remarkably, but I think you are going to see more buyers in the marketplace in 25 there has been in 23 and 24 cause you’re going to see some recaps. Private equity is not going to be. under as much pressure when interest rates are a little bit lower. So I think you’re going to see, you know, more and more DSOs come back to market and start acquiring practices again.

Ryan Isaac: Yeah. Cool. another question that has been. Really common lately. And this, this comes from people who are. They’ve made the decision to sell. That’s what’s best for them. It’s what they want to do in their lives and their practice, their businesses. Sometimes they’ll ask, well, what if I just spent a little bit of time trying to make these more valuable? What if I just spent a little bit of time trying to make my EBITDA go up? And most of these people are either running one very large, you know, multi, producer location or multiple locations. So these are big operations, you know, a lot of times. And they’re asking the question, what would it take?

Or maybe I should just spend. You know, a lot of times they’ll throw out like 12 months or 18 months just building up EBITDA and we’re assuming a business that’s already running pretty well. how would you respond? I’m sure you get that too. You know, what can we do? Like, what can we juice this up? How do you respond to that? What do you think about that?

Brannon Moncrief: It depends. So it depends on a lot of different variables. but we. Try to encourage people to start this conversation early to do an even analysis, to do evaluation so that we can unpack, you know, where you currently stand. What is the current value of your business? How does that compare to, you know, your ultimate goal?

And if you’ve got time on your side. Then how do we help reverse engineer the outcome you’re looking to achieve? And what levers do we need to pull within the business to get there? So we’re doing a lot of that, early on valuation work. Yeah. And then coaching them to the outcome that they want to get to, but at any given time, we’ve got 40, 50, practice owners that we’ve done valuations. And we’re tracking them like every six months, every year, we’ll roll forward the numbers, update the EBITDA analysis and talk about, you know, where we’re at. In fact, I listed a practice yesterday in Chicago, and I’ve been talking with that practice owner for three years and his EBITDA went from 400, 000 to 600, 000 to 800, 000. 800, 000 was the goal. Once he hit it in a trailing 12 month period, I got the phone call. Hey, let’s roll it forward. I’m ready to rock and roll.

Ryan Isaac: Yeah, but you just said three years. I mean, that wasn’t, and I assume those three years weren’t him doing like just what he’s been doing up to that point. He had to do new things. He probably had to invest in the practice, hire people, I assume, maybe spend more time. It wasn’t just a passive thing, sit around and wait. He had to like do a lot of work over three years.

Brannon Moncrief: He relocated his office, to a new facility, added a couple of associates and really intentionally ramped it up. And I think he’s got it now where it is going to be sustainable, you know, longterm. Year after year, I think his practice will continue to grow, but not grow at the clip it has over

Ryan Isaac: Yeah, it’s not gonna double. Yeah. how often do you see practices where you can easily find, I don’t like the phrase quick fix, but a relatively easier fix than a three year problem or project, In your valuations where you’re like, hey, let’s give this a few quarters. Let’s give this six months or whatever. How often does that happen?

Brannon Moncrief: It happens periodically. I think the two things I’ve seen most recently are being overly aggressive and writing off personal and discretionary expenses through the business to the point that they’re very difficult to pull out of the business. like, you know, you’re writing off hundreds of thousands of dollars a year in personal expenses through office supplies and dental supplies.

But you haven’t really tracked it and you can’t provide like clear evidence of that. And then not reporting cash. we we’ve seen that quite a bit. And when you don’t report cash, every dollar you don’t report is a dollar of EBITDA. These practices are trading for seven to nine times EBITDA. So you can imagine if you’re not reporting 50 grand worth of cash, you know, that could be 350, 400, 000 in value.

Ryan Isaac: Yeah, huge. Yeah. I, and thanks for kind of spelling that. I, I, when I have these conversations, I try to make the distinction, you know, you might have a practice owner who’s already kind of maxed out spending as much time as they really can or want to practice might actually be doing fairly well and the concept of, you know, big growth in order to sell or to raise EBITDA, like it’s just going to usually require either like there’s an obvious small fix, something that can be changed in a matter of months, or it’s, you know, like the previous example where it’s like, okay, you’re going to have to spend, I imagine you’re personally really relocated in Chicago, spent a lot of money to relocate, build it out. I mean, you,

Brannon Moncrief: And it worked out, but yeah, it was a big adjustment. It was a risk.

Ryan Isaac: It was a risk investment. It was time. It was probably more of his time for a while. So yeah, I just want to make that distinction because I think sometimes people get caught up in the okay It’s time to sell this is right for me. I’m ready for this They get some preliminary stuff done and then and then they I don’t know get cold feet Which is understandable or they just feel like maybe you can just juice this a little more, you know, a little more, even a little more, even a, do you find that like, is that a common people just get scared?

Brannon Moncrief: Yeah, I think

Ryan Isaac: Back away?

Brannon Moncrief: They get scared, they get cold feet, whether it’s before we go to market or, you know, two weeks before close. And I think that’s a natural emotion that most clients go through, you know, because it’s, it’s impactful financially. It’s also impactful emotionally, you know, professionally, personally, you’ve got to unpack all of that before you decide.

To go down this path, but I do think it’s funny sometimes when we have a conversation with a client their business has been successful, but relatively flat and they’re looking to sell because they want better work life balance or They want help from an administrative perspective and they’re like, well, I think i’m gonna ramp this thing up before and i’m like, well

Ryan Isaac: Why haven’t you yet?

Brannon Moncrief: Yeah You’re talking about moving the business the opposite direction. The reason you called me is because you want to take a step back. Now you’re talking about taking us leading in

Ryan Isaac: Exactly.

Brannon Moncrief: For two years, three years to build it up and, and try to generate this, exponential outcome at sale. Oftentimes what we find is they get six months into it and they’re like, yeah, nevermind and they call me and they’re ready to go to market.

Ryan Isaac: Yeah. what are the reasons you tell someone it’s not time? How often do you, go through someone’s, you know, situation and you, you tell them, Hey, hold off for X, Y, or Z.

Brannon Moncrief: So, if they had a bad day

Ryan Isaac: Okay.

Brannon Moncrief: Or a bad

Ryan Isaac: Bad month, stressed at work.

Brannon Moncrief: And that’s why I get the phone call, I’m like, Hey, you know, I think this is maybe a temporary issue, yeah, emotional response, you know, why don’t you wait another month and then let’s talk and see how you feel,

Ryan Isaac: Can you spot that pretty well? We, I mean, we get, we get the same stuff too. You’re like, I think this decision you’re trying to make.

Brannon Moncrief: Yeah, don’t make a decision in haste or under duress. You know, you don’t want to make an emotional business decision. They normally don’t turn out great. You know, occasionally we’ll have a doc that says, Hey, I’m 40 years old. I’m not going anywhere. I want to be in this practice for the next 15 years. And the management isn’t really a big deal to me. I’m happy. I just want to see what this looks like economically. Rarely does that make sense,

Ryan Isaac: Yeah. Okay.

Brannon Moncrief: If your runway is that long and you’re not looking to de risk or you’re not looking for administrative

Ryan Isaac: No major life change you’re trying to make.

Brannon Moncrief: Yeah, you’re not going to relocate or pursue another career. I don’t know why you do it other than than FOMO and FOMO is not a good reason to monetize, your business. So those are two things that we run into from time to time. We just try to take a holistic approach to like getting to know the practice, but also getting to know the person and we’re plenty busy. I don’t need to convince somebody to take their practice to market when it’s not right for them. So we’re always talking about the why, right?

Talk to me about your professional goals, your personal goals, your financial goals. Talk to me about your runway to exiting the business. Talk to me about what keeps you up at night. And what gets you out of bed in the morning. And once we’ve unpacked all of that, we know the practice, we know the person, then we can make some recommendations as to, you know, what’s in your best interest and that’s how we’ve built our reputation and that’s how most of our clients have built a reputation with their patients. So, you take care of them. Everything else kind of

Ryan Isaac: Yeah. It’s like extensive discovery before there’s any like solutions or strategy presented. And from what you said earlier, Being hundreds of options in the market, even the narrow group of, 60, it’s still like a lot. And, once you get to know those dentists, there’s probably like some DSOs that would really work for them and what they want. And then some that totally wouldn’t. And you have to be able to match those up because it’s like you said, you meet one, you meet one.

Brannon Moncrief: Yeah. And occasionally we will, you know, we might bid it out to 15, 20 different DSOs and I know that there’s going to be DSOs that bid. That no way in hell I’m going to let my client based on their why sell to that particular DSO. But I think it’s important for you to see what you don’t want just as much it is to see what you do want. Cause that’s how you build perspective. And we go through that process of taking that holistic approach. I’ll just be honest. Not only for the client, it’s also a bit selfish because the reality is two weeks before close, if this wasn’t right for you, you’re going to know it in your gut and you’re going to pull back.

So let’s not waste our time, your time, the DSO’s time going through all of this, which is, can be a pretty stressful process. When we haven’t done the work on the front end to make sure that this really makes sense for you.

Ryan Isaac: Yeah. Totally, man. what are you seeing right now is like, and maybe we’ve already covered them in, in some of these questions, but what are you seeing is, some common mistakes people are making when they’re approaching the decision or selecting a partner?

Brannon Moncrief: I think, I mean, we hear about the horror stories. We hear about seller’s remorse. We don’t really have it with our clients because of how we’ve designed the process, but that’s typically, you know, selling prematurely, selling to the wrong DSO, selling for the wrong reasons. And or leaving money on the table.

So we already covered, you know, some of the mistakes, like don’t respond to unsolicited offers, create a competitive environment, control the narrative regarding EBITDA, make sure you’ve got a great team of advisors, all the people that it takes, you know, to get a deal done, that’s a sell side advisor. You know, like us, that’s your financial planner and advisor, your CPA, your attorney, we all need to be at the table to make sure that, you know, get the outcome that you deserve and then falling for a gimmick. You know, we’ve seen a lot of these rollup concepts out there. Hey, your practice is worth 6x on your own, but if you join our co op, we’re going to sell for 13x and you’re going to pay me a bunch of fees along the way in exchange for that unicorn outcome.

Ryan Isaac: Mm hmm.

Brannon Moncrief: Unicorn outcome has not come for any of us,

Ryan Isaac: You bring up a good point, man. We’ve seen the hype, a lot of groups trying the roll ups. It seems like a lot of them have fallen short, a lot of deals have fell out, fell through, never even made it to the finish line, leaving dozens, sometimes maybe hundreds collectively of practices that were planning on this event now. Back to square one. Any more you want to say about roll ups and what you’re seeing there?

Brannon Moncrief: Look, I’ll just say that that concept was invented in a completely different environment. That was very, very frothy, where several DSOs were eyeing an IPO. And the concept was that these DSOs right before they IPO, We’ll acquire this huge bundle of practices and they’ll pay an elevated multiple because the IPO, they’re going to hit a 20 X return. Well, guess what? IPOs have been sidelined. They’re not going to happen anytime soon. even if they do happen at some point in the future, recaps have been delayed and muted over the past 24 months, private equity has had to get a lot smarter. in dentistry because of the macroeconomic conditions changing because of the fact that look, there have been some private equity firms lose money. Now in the dental space, it is not completely a no brainer. You can’t just throw money at it and think that you can buy practices for eight X and sell them for 15 X

Ryan Isaac: That was all the low hanging fruit like five years ago, huh? It just got naked up and yeah.

Brannon Moncrief: That acquire and flip game is dead, it’s dead. You actually have to build a sustainable business, be prepared to operate it.

Ryan Isaac: Yeah.

Brannon Moncrief: So that concept, is not palatable to the marketplace at all. And, those that are pitching it either don’t fundamentally understand our industry DSOs and how private equity works, or they’re being predatory. one or the other.

Ryan Isaac: Yeah, yeah, I totally agree with that. thanks for indulging all of my questions. It’s taken the bulk of our time

Brannon Moncrief: Oh man, this is great.

Ryan Isaac: What messages would you want to give people as we close out 2024? And I mean, anything that we haven’t covered already, what’s important to you to tell people right now?

Brannon Moncrief: I think the most important thing is plan in advance, get educated, make sure that you’re getting objective guidance so that you can have a clear head and can make, you know, the smart decision for the future of your business. And that’s how we try to position ourselves is to be that voice of reason to help filter all the noise and all the bullshit out in the marketplace.

cause you hear wildly good things and wildly bad things. And. You know, trying to sort through like what’s real and

Ryan Isaac: Yeah. What’s the in between? Yeah.

Brannon Moncrief: Exactly. So, get educated about your options. If you’ve got a large practice, you’ve got a lot of options available to you. So we’d love the opportunity to have a discovery call, a casual conversation to get to know each other and see if it makes sense to do evaluation.

Ryan Isaac: Yeah, man. I’ll have you, tell everyone where to find you in a second. I thought of one more question that seems kind of, poignant. It’s from the other side of the owners. It’s the associates that have been in practices, not, uncommonly. I’m hearing more and more stories of associates who were kind of blindsided in a lot of these transactions thinking like, Oh, you know, I joined this practice. Maybe I took an income hit or I lived in a city. I didn’t totally want to be in, but I had this partnership opportunity. You know, the owner got an offer and took it and now I’m kind of left like, Oh, there goes my, you know, is there anything you could say to associates navigating this? It’s a new world. I mean, it’s just, it is what it is. Is there anything you, you could say to associates to maybe, have a heads up or plan ahead when choosing a career or a practice to be a part of now that this is part of the equation for a lot of owners?

Brannon Moncrief: I’ll kind of talk to the both sides of that fence. I think it’s a great point to bring up cause we’re, we’re seeing it and hearing about it,

Ryan Isaac: And it is a both sides thing. Totally. Cause

Brannon Moncrief: It is a both sides thing. Look, if you are, especially if you’re like moving across the country to join a practice or what have you with the promise that you’re going to become an equity owner at some point, we have on our doctor, doctor side of our business, what we call an associate to purchase transition model. In that model, you have to agree to all the terms of The future partnership before you ever work a day in the office and you have a honeymoon period where either party can back out, but at least the rules of engagement have been clarified. Like, when is a buy-in or, or a sale going to take place? How is the practice gonna be valued at that point in time?

What’s the relationship gonna be up to then and after then I would wanna know all of that if I’m gonna bet, you know, change my life. to join this practice. I would want to lock in as much of that on the front end as I possibly could, via some form of written document, whether it be a letter of intent or even just an email that you can reference later and say, Hey, this is what we agreed to. I think that’s important on the sell side as the practice owner. Just be very mindful of the conversations you have with your associate doctors. If you promise them equity and you mentioned a date or you mentioned how the practice is going to be valued. They are paying attention. That is not a casual conversation.

They’ll be able to tell you what you were wearing and what the weather looked like outside the day you had that conversation. so make sure that you make promises thoughtfully. and then if you have a multi doc practice, if you are going to bring in equity partners, you’re communicating to the outside world that they are critical to the success of your business, whether they own 5 percent or 50 percent of your business. And when a sale. takes place. If you want to monetize the remaining equity in a DSO transaction, even if you have a drag along tag along, right, you can drag that minority partner with you to that sale. If they’re a big producer, if they’re important to the business and they’re not complicit with that decision and the DSO knows about it, your deal’s dead.

So you’ve got to figure out a way to one, have those conversations on the front end. If the ultimate goal is to sell to a DSO so that everybody’s swim in the same direction. day one again, establishing those rules of engagement, up front and then checking in, you know, along the way to make sure that everybody’s still swim in the same direction. I think that’s critically important. And if for some reason you’re not all swim in the same direction at the time you want to monetize your equity in the DSO world, just understand that you might have to incentivize them with whether it’s associate or minority partners with You know, some type of transaction bonus, retention bonus, equity, whatever it

Ryan Isaac: About that. is that getting more common to say like, yeah, Hey, uh, this wasn’t on the table when we started talking and building this together, but now it is, we’re going to do it, but you’re going to get kicked a certain percentage or a certain bonus dollar amount to stick with the practice and keep going

Brannon Moncrief: Especially if we have a senior partner or a senior owner that is not planning to fulfill that five year commitment share side, then, you know, the associates or the minority partners, the more youthful doctors, they’re the future of the practice. The DSO is going to want them to have some skin in the game. So yeah, whether it’s a retention bonus, transaction bonus, Some type of, equity gifting, whatever it may be. Yeah. You’ve got to find a lever you can pull to keep, you know, everybody, aligned moving forward and make the DSO comfortable that there’s going to be continuity of

Ryan Isaac: Asset. Yeah These conversations just remind me of the two sides of the coin, which is dentistry is such a cool profession There’s so much opportunity more than there ever has been for all different types of careers, but it is more competitive than ever. And it’s more crucial to be so well informed and to do everything. So in such an organized way, when you do things, there’s, you know, it’s not the days of like, I mean, it wasn’t that long ago, man, that dentistry was a spit in a handshake. It was, you know, a sign outside and no website and no growth plan. And like that, you just did that for 40 years and it was wildly successful.

Brannon Moncrief: I remember. I mean, I, you know, early on in my career, that’s what a lot of practices look

Ryan Isaac: That’s all it was.

Brannon Moncrief: It’s a different animal now. It’s a totally different animal. And you got to be a lot more intentional. Yeah. A lot more mindful about the decisions you make because there’s more at stake. Yeah,

Ryan Isaac: There’s more at stake. thanks for all this, man. By the way. I appreciate it. This has been really good. Where, where do people find you? Where do they reach out?

Brannon Moncrief: I always give away my cell phone number. All I do all day long, I know I’m crazy. all I do all day long is, is talk to large practice owners. That’s my job with our, within our company. So my cell is (512) 660-8505. best thing to do is probably to text me and then we can set up a time to call.

My email is Brannon@dentaltransitions. com.  Brannon@dentaltransitions.com and check out our website, dentaltransitions. com. It’s got a lot of conversations just like this. It’s kind of designed to educate people regarding your private buyer versus DSO. And uh, yeah, I would love to schedule just a casual discovery call with your audience and, get to know them and educate them and see what makes sense.

Ryan Isaac: Yeah. I appreciate it. I appreciate the education piece for always doing this with us. Thanks for your time, man. Thanks to all you for listening and tuning in. We’ll catch you next time. Bye bye now.

Brannon Moncrief: Thanks Ryan

Keywords: Dental practice transitions, DSO market, practice valuation, selling dental practices, private equity, tax implications, motional decision-making, business strategy, roll-up strategies, associate transitions

Practice Management, Practice Transitions