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Episode 205 – Requested Replay: When the DSOs Come Knocking

“There’s so much pressure from the DSOs right now…what’s in it for you?” ~Dr. Bruce B. Baird

You’ve probably gotten at least one unsolicited offer from a DSO. I’d be more surprised if you haven’t and those numbers can look very tempting when you see all the zeros on the end.

But it that really what your practice is worth? Is selling right now the best option for you? A DSO wants to buy your practice…and the real question you need to ask is what’s in it for you?

I’ve said this before: most DSOs are better at buying dental practices than dentists are at selling.

I want you to be knowledgeable. I believe you deserve to get the most value for all the hard work you’ve put into your office. So today I am sharing some information and questions that will help you determine what’s in it for you and what your best options are for selling, including :

  • Your 3 selling options – what option are you building?
  • Hallmarks of scams to watch out for (and run away from)
  • Selling your practice for multiples – should you take advantage of it or not?

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EPISODE TRANSCRIPT

Dr. Bruce Baird 1:49
Hi, this is Dr. Bruce Baird with the Productive Dentist Podcast. For those of you who listened to last week’s program about private equity, if you have questions, feel free to reach out to bruce@productivedentist.com. You know, I always get lots of questions, and that usually about every 15 or so podcasts I like to just go through and answer questions that doctors have, about what we’ve talked about, because, you know, you notice my podcasts are a little different. I don’t do a lot of interviewing of other people and I just really do the podcast to share my thoughts and my ideas about dentistry and based on my experience over the last 40-plus years. It’s exciting. I also share my experiences through productive dentist academies. My experience there which were going on 19 years this year, helping dentists to create productive profitable, what I call unicorn practices, and that was definitely confirmed by this group that we’re putting together called Lampa Dental Group. Lampa comes from the name of my grandfather, who was a dentist in New York City. I’m a Texas boy, but he was a dentist in New York City and my team surprised me by doing the logo and announced, announcing that the name of our group is the Lampa Dental Group.

Dr. Bruce Baird 3:22
So but all of those things, all my experiences, I want to share that. I’ll be bringing in some experts over the next probably the next six months to give us their ideas and their thoughts on, because there’s so much pressure right now in the DSO market. One thing I want you to know for sure, is today we’re going to talk about what the dentist, what’s in it for the dentist and I think it’s important, because there’s a lot of confusion, you know, why would I sell my practice at 41, which is the average age, why would I do that? And it’s because you can take money off the table. So you don’t want to take money off the table when you have an EBITA of $50,000 that when you build a successful office, there were options.  You could go one of three ways. You could go one direction where you just continue to work, you might bring in an associate, and you just work and work and work. After 20, 30, 40 years you sell it to another dentist and when you do that you’re gonna get to, today it’s gone up, it’s around 80% of the previous year’s collections, it used to be 65%, but, you know, if you want to look at what your practices were, just multiply your last year 12 months’ collections, multiply that by point eight and that’s going to give you an idea. It’s not a final deal, but of what your practice is worth, what your life’s work has value and it’s worth x.

Dr. Bruce Baird 5:00
So let’s use this scenario that you have a million-dollar practice and you know that one option was just to grow it and sell it at some point. The other option would be, you begin to sell to partners as you bring in associates. So you begin to, and that was a strategy that MTS Manji taught and they’ve used for years, is you actually bring in a partner that they by 50%, you keep 50%, and then you grow the business by, because a partner in business produces a lot more than an associate. I’m just telling you, somebody who has skin in the game, has a much different motivation. So what you do is you add a partner, that million-dollar practice now grows to a million and a half. But you now own 50% of a million and a half dollar practice, maybe you grow to 2 million, so you own 50% of a 2 million where you used to own 100% of a 1 million, you bring in another partner, now you own 33%, you guys grow that to three and a half million, or 4 million. Now you own 33% of a $4 million practice and it’s a process that you go through over the time of your career. It becomes a real active group practice. You bring people in that do the other dentistry that you don’t like to do, or you know, there’s lots of different strategies and the third route, you could go, well, I guess there’s a fourth route, you could just hang up your shingle, if you’ve invested well, and you don’t want to sell it, but we’re gonna leave that on the side, that goes back to the 50s when you just used to give your patients to the guy down the street but the third option, which is the one that’s so active right now, and everybody’s getting unsolicited offers from DSOs, and all these different things.

Dr. Bruce Baird 7:08
My point in saying that is I just want you to be knowledgeable about it and I’ve become extremely knowledgeable about it because I’m working with our PDA Doc’s and I’m trying to find the best option. Now, what I can tell you is you need somebody to be looking out for you. You know, because there’s a lot of scammers out there. There’s a lot of people out there that really don’t know what they’re doing, but let me let me make it crystal clear, if somebody is doing seminars and saying you need to come to our seminar, and we’ll teach you how to sell your practice and its practices from all over the country, just you know, no association, no, no connection, no common core, no ethos, you know, what I call a cultural Northstar, which is what we have in PDA. All the docs are extremely profitable. They all follow pretty much systems that have been put in place, but if you go to a seminar, and there’s people from all over the country, and they say, “Oh, yeah, join our group, pay us money and then we’re going to give you multiples that are ridiculously, high multiples and you’re going to pay us 10,000, 20,000 to do an evaluation and then you join our group that will do real estate for you and you pay another 30,000 to join the group.” I would say and you can go to dental town and look, look these things up, but run as fast as you can run. Again, what happens when dentists all get together and do something together, they get hosed together and so you need to have a trusted adviser and really that’s what PDA, Productive Dentist Academy does but how does a dentist and when you start talking about a DSO environment, there are 250-something DSOs. Every one of them has a different plan, every one of them has a different offering and what’s in it for the dentist?

Dr. Bruce Baird 9:12
Well, there are some like a Heartland that buys 100% of your practice and they put some of the purchase price into to getting hygiene revenue, so you don’t get distributions, but you actually get stock in the company. So when you buy you know for two 250,000, you get 10% of hygiene revenue, but you have stock also and that stock has value, and it grows and, and Heartland stock has been very good. It’s grown and grown and grown. There are other groups like MB2 that are doing things, kind of in a combination and all of these continuing evolves. So don’t hold my feet to the fire, if it’s different, but, you know, an MB2 might buy 60% of your practice, leave you with 40% with, you know, 10% of the 40 or 20% of the 40 going to stock and the rest you own as your practice. So it’s combination, or a hybrid of a joint venture, which would be private equity owns 60%, I own 40 to a combination of where maybe private equity owns 60%, I own 30% and I have 10% of company stock and there are reasons that that is a kind of an attractive way of doing it because you get a piece of the whole, but you also have your own practice that you can drive forward and so we were looking into all of those different options as far as the Lampa Dental Group as far as what to do.

Dr. Bruce Baird 11:18
But why would a dentist sell? Well, first of all, why would they not sell, they wouldn’t sell because they’re worried that someone else is going to tell them what to do. We’re independent practitioners, we’re fragmented, we’re out there by ourselves and we’re afraid someone else is going to take control away from us. Now, if you’re a crappy practice, you probably don’t care if someone else takes control and so we have lots of crappy practices that are out there trying to sell to a DSO. We have dentists that are forming multiple offices, two. three, four, five offices and their five crappy offices. Private equity is not going to buy those. Why? Because they are crappy offices. You may think they’re going to buy it, but it just doesn’t work that way. There’s no ethos, there’s no common core, there’s nothing that is done similarly in these offices. So a dentist gets to a situation why would I not sell? Well, I’m worried about losing my autonomy, I’m worried about losing that but if I told you, you could do that without losing your autonomy, but take money off the table, and continue to grow your business and take more money off the table and continue to grow your business and take more money off the table. Well, this consolidation of dentistry is going to last I’ve said it multiple times. It’s going to last another seven years, eight years, nine years. After that, there will be no such thing as multiples of your practice, it will go back to, and this was confirmed last week when I was on a tape, a, not a podcast, but on a panel discussion in San Antonio with 250 dentists in the room, that Yeah, it’ll probably go back to 80%, 65% of your previous year’s collections.

Dr Bruce Baird 12:39
So you have this opportunity now, do you take advantage of it or not? Well, it depends on yourself. It depends on what you want to do, what your thoughts are. I know that if you have a million-dollar practice, and you decided to sell it, you’re gonna get 700 to 800,000 for your practice. Not bad, nothing to you know, nothing, nothing to poke at. I mean, that’s, that’s a pretty nice deal. But what if you could and you had an EBITA, and let’s just say your EBITA, it was 200,000 on that $1 million practice, that’s a 20% EBITA him. Anything about 15% is good, 25 is kind of the benchmark for what I like to look for, but let’s just say it’s 20%. So you have $200,000 and even now, you look at the DSO and they say we’re gonna give you a 6x of your EBITA, 6x. So now your practice, and we’re gonna buy 100%. So now your practice is worth 1.2 million, but if they’re buying 100%, you’re actually no longer making any dividends, you’re no longer getting any distributions. However, the stock value that you have there may grow, but other than that, they’re going to change where you used to be making, you know, 20 cents on every dollar and production you were paying yourself 38, 40% as an owner now goes to 25%. You have to evaluate that and say, “Gosh, that’s a that’s a great deal or that’s not a great deal.” I mean, how much are they paying you? You know what, what’s going on? I actually like the joint venture much better because that’s another option that you have joint ventures where somebody comes in and say buys 60 %,  70% of your practice, and we talked about this two podcasts ago, but as let’s say by 60% and instead of what we’re doing is going straight to private equity.

Dr. Bruce Baird 14:46
So we’re forming a DSO, but we’re going straight to private equity and sharing that with our doctors. So now, let’s say we have a 10x on the first, on the first capital event, which means a 10x of your 200. Well, that’s 2 million, whereas you could sell it for 800,000 but now you could sell it for 2 million. So okay, but I’m only going to sell 60%. So you get a check for 1.2 million, and you reinvest 800. I’m sorry, you get a check for 1.2 million and you reinvest, or you still own $800,000 worth of your own practice that grows over the next three or four years and let’s just say your EBITA, it goes from 200 to 400 over that next five years, and there’s another capital event where somebody else comes in. We talked about closed, closed deals for private equity where they have to sell, so now you have a sale, and a bigger, badder private equity group comes in and buys you. Well, that’s where you see, that’s where you see a new multiple, that multiple might be 14x, or 15x. Now what you do is you subtract the 10, or the nine that you got and so actually, what you’ve reinvested would be, let’s just say it’s a 10 and the next bite of the apple is a 15. You’re not going to get a 15 times the four the 400 400,000 EBITA and the reason you’re not is because you don’t own or no, you only own 40%. So you’re actually going to get a return very similar to the private equity group, looking for a 3x, 4x, 5x on that and so your 400,000 and EBITA and now that you and 40% out, now becomes worth a couple million. So you’ve actually sold for 1.2 plus picked up another 2 million plus so the practice that you were gonna get the cash of 800,000, you’re now getting three, three and a half a million dollars for it does not make any sense. You just kind of shake your head, how in the hell does that happen? But it’s the truth and so I’m gonna go into more detail about those options and on our next podcast, and appreciate you guys listening, tell your friends to send me questions at bruce@productivedentist.com and I look forward to the next one.

Dr. Bruce Baird 17:19
Thank you for joining me for this episode of the Productive Dentist Podcast. If you found this episode helpful, make sure you subscribe, pass it along to a friend. Give us a like on iTunes and Spotify or drop me an email at podcast@productivedentist.com don’t forget to check out other podcasts from the Productive Dentist Academy at productivedentist/podcast.com Join me again next week for another episode of the Productive Dentist Podcast

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