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Insight from a founder and CEO of several dental groups and DSOs
If you are in the dental group or DSO business, sooner or later you will realize that the value of your company is directly related to the number and quality of the dentists and hygienists operating within your affiliated dental offices. The value of a dentist and dental hygienist as a one-unit team can be worth anywhere from $1.2 million to $2.8 million in company valuation. How is that possible? Assume that for every doctor/hygienist combo they produce a revenue average of $1.0M annually. Assuming 20% EBITDA, this equates to $200,000 of annualized EBITDA. With multiples in dental groups and DSOs ranging in the 6 to 14X, this translates to $1.2 to $2.8 million. The valuation EBITDA multiple will vary on a number of factors depending on overall total EBITDA dollars, management team and several other important growth drivers but that is for a separate discussion.
Based on these assumptions, the value of the company is truly dependent on the number of dentists retained by the company. Supporting dentists to help raise the standards of care and proper implementation of a great preventive and hygiene/periodontal program has enormous value and adds to your practice, but attracting and retaining these talented providers is where the true value lies. Having quality dentists with low turnover will also demonstrate stability and predicted sustainability within the company and its future. [The purpose of this discussion is on how to incentivize and retain associate dentists, maintain a positive culture, and support a doctor-led company in order to increase the value of your group].
As dentists evolve in their professional career due to the entrepreneurial nature of dentists and their pride – they will look to have some ownership. Dentists will look to leave and establish their own practice; creating incentives to stay via real or virtual ownership is in the best interest of the company and dentist. Having been 31 years in the dental group/DSO business and worked and consulted in hundreds of practices in the US and Canada, I can safely attest that a majority of dentists have a better quality of life and earn more money working in a dental group and DSO than they do on their own without all the administrative and management headaches that come with ownership. The magnet to your owning a practice is strong however; I also see the trends shifting away from ownership in our industry because of multiple factors.
As the dentist’s relationship with the company evolves and the dentist has defined themselves as a good employee to retain within the Dental Group/DSO, there are many ways to consider how the associate can receive equity/ownership interest in the company.
One of the first challenges is to determine the existing valuation of the company. Regardless of how the associate enters into the company, unless the valuation is reasonable or market based, it will be difficult to convey equity to the associate to become an active or passive shareholder without either party feeling like there was a fair deal in place.
Beyond setting the valuation of the company, the three equity options to consider are;
1. Earned equity. There are two ways for an associate to be incentivized to earn equity. Both paths have a variable which includes being based on time;
a. Through compensation. Existing compensation/wages can be converted into bought equity. For example, 5-10% of annual compensation is deducted from the associate compensation and can be matched by the company to create incentives.
b. Through performance. New and additional bonus compensation schemes can be created and used as incentives in order to be converted into equity.
2. Granted equity.
a. Stock Purchase.
i. Sale of equity from an existing shareholder. While it is not recommended to treat company stock as marketable security during a certain defined period in the year, a shareholder may be able sell a portion of their shares to an associate with the approval of the company.
ii. Acquired stock from the company; the company may deem after an annual valuation and/or during a certain defined period in the year to sell a portion of its shares to an associate in order to raise capital or offer an associate equity.
b. Restricted stock grants – the company may wish to incentivize and issue restricted stock to an associate under certain time periods and/or milestones.
3. Virtual Ownership. If the company shareholders do not wish to dilute themselves, the company can set up an internal pooled fund and a stock plan that is redeemable under certain goals and milestones.
a. In a pooled fund, an associate can earn via compensation or bonus dollars that reside in a company bank account. The company can create incentives in matching funds in what multiple range it deems appropriate to pay out for the sale, capital event, or certain company milestones.
b. Stock options exercised under certain conditions. The dollars that go into the pooled fund or are granted as stock options can vest on time and/or on performance as well. In both cases, it requires tracking of the amount earned by each associate and which stock options are issued. The dollars in a pooled fund pool could sit on the company balance sheet as cash too, but there are tax implication and certain tax and legal requirements which need to be met. There are also insurance companies that can create and manage these funded pool programs.
In all cases there are important questions to take into consideration to in designing the equity ownership. We need to answer “the what,” “the how,” “the when,” “the which” and “the what ifs;”
1. From the list above what is the main program. Will the equity be earned, granted or be virtual?
2. How will this equity be granted? Will it be earned, bought or sold?
3. How will this equity be financed? Will the associate pay cash or go get a loan? Will the Dental Group/DSO loan the finance or possibly act as a co-guarantor?
4. When will this occur?. Will it vest at once or over time? If over time are there milestones or performance that needs to be reached?
5. Which rights does the associate have upon receipt of the equity/ownership. What rights do owner dentists have in the Dental Group/DSO management and control? Does is vest over time or is it instant?
6. What if and happens if the current owners want to sell the Dental Group/DSO, or bring in a new majority owner? What happens when the dentist leaves the practice? What happens when things go wrong?
It is vitally important to work with legal and tax advisors to fully understand your existing legal structure and agreements as well as tax implications for the company, its shareholders and potential associate. A great advisor will also understand whether there is a philosophical match between the company and the associates, especially as all the parties converge. While the ultimate responsibility is to make the decisions to all the choices, the advisors should be in a position to find solutions to solve problems and identify barriers, objections, issues, and solutions. A successful outcome to the process enhances the value of the company and shareholder value.
Written by Dr. Alex A. Giannini
Dr. Alex Giannini has founded and served as CEO of several dental groups and DSOs. He has over 31 years of experience in the clinical, administration and management of dental practices, across 10 states, including its related businesses. Dr. Giannini has historically doubled and quadrupled dental practice revenue and profitability within a year while creating a platform with national prominence. Dr. Giannini was the founder of Comfortable Care Dental Group’s initial office in 1989 which in turn became the first group in Florida as part of the Heartland Dental growth at the turn of century. In 2008, he founded Dynamic Dental Partners Group (DDPG) which in 2014 was listed at #14 on the Inc. 500 list for the fastest-growing private companies in America. Dr. Giannini practiced high-end fee for service dentistry in Florida for 9 years, after which time he co-owned and managed dental practices in Florida, Arizona, Virginia, New Jersey, Pennsylvania, and Georgia. In addition, Dr. Giannini has been featured as a guest speaker at many Practice Management conferences throughout the nation. Dr. Giannini has worked with Institutional, Private Equity, and Family-Office Investors. He has turned around hundreds of practices including distressed Dental Groups and DSOs. His role is strategic, and includes shaping the philosophy and delivery of quality dental care along with implementing Clinical and Operational Policies, Structure and Protocols for his Management Team to deliver productive and profitable dental offices. He has also been involved in Doctor recruitment, complete business development, and strategic planning as a business analyst. This has allowed him to oversee the financial operations including the dental systems, forecasting, budgeting, and goal setting of each individual affiliated office and company. Dr. Giannini is immediate past President of the AAGDP (American Academy of Dental Group Practice, www.aadgp.org) and a former member of the ADSO.
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