The Group Dentistry Now Show: The Voice Of The DSO Industry

Frank Balkum, CEO of XPRT DSO Advisory Group, discusses:

M&A activity in the dental group practices space
Will current market values continue?
Challenges in the market now and in the future
Funding opportunities and challenges
Much more

To find out more visit https://xprtdso.com/ or email Frank@XPRTDSO.com

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Full Transcript:

Bill Neumann:

Welcome everyone to the Group Dentistry Now show. I’m Bill Neumann, and as always, thanks for listening in or watching us on YouTube. We appreciate the listener and viewer support. We are over a hundred podcast episodes now, so couldn’t do it without you and always learn a lot from our guests. So next guest here, I’ve known him for quite a while. His name is Frank Balkum. He is the CEO and the founder of Xprt DSO Advisory Group. So Frank, welcome to the Group Dentistry Now show. Thanks for being here, finally.

Frank Balkum:

Thank you very much, Bill, for having me. It’s an honor. You and Kim have established state-of-the-art in the dental space as far as DSO and industry knowledge and just an honor to be joining you today. Thank you for having me.

Bill Neumann:

So Frank, tell us a little bit about your background. I’d love to get a little download on your bio. I know you’ve been in the industry quite a while. You have a lot of lending experience.

Frank Balkum:

Sure. So the better part of 30 years, I owned a healthcare finance company and dental acquisition was probably 90% of our product mix and had a nice run with that. We can look at the landscape of the lending market now, and I went through that same change where we shifted from the HPSCs, Matscos, and RX Financial Corp model to where we now see it totally dominated by banks. And that was a bit of transition. Found myself then in the dental M&A space, spent a year in New York working with mergers and acquisitions, rolling out an advisory group there. Worked in the M&A space in New Jersey, as you and I spent some time connecting while I was there and just naturally rolled into expanding the advisory capacity and bringing in some really qualified folks that I had developed relationships with over the years.

Bill Neumann:

So tell me a little bit about Xprt DSO Advisory Group. When did you found that? Why? And tell me about some of the players that you have working with you.

Frank Balkum:

Absolutely and thanks. I looked at the industry and I really felt that as we’re seeing advisors and folks that are getting involved in the consulting space, I thought, gee, maybe if we brought some folks to the table who had experience actually developing and running DSOs, not cross section from another industry vertical, and getting into the consultant space. And everyone within our group has decades of experience growing, operating. Everyone’s run triple digit DSOs successfully and everyone fills a separate component of whether that be operations analytics. And so that’s what I thought. Let’s bring a team to the industry that has been there and done that and use that to coach and help emerging growth dental groups and DSOs to scale.

Bill Neumann:

So it’d be great to get your perspective on the activity that we’re seeing in the space right now mean. We do the DSO deal roundup every month, so myself and Kim to a larger extent, and doing a lot of research as far as who’s buying who, a lot of the Denovos going in, investment into this space. And it just seems to me that the acceleration in the past year and a half has really been incredible. So I’d love to get your perspective on things and where they are now and where you see them going.

Frank Balkum:

I can tell you one of the very interesting things that I’m curious to watch is what effect the recession is going to have on the continued consolidation. Because one thing that we see in this, as everyone talks about the large group DSOs and the big numbers that are getting thrown around between the major players in the space, according to ADA statistics, the most rapidly expanding in the segment is dental-owned, dentist-owned groups that are emerging out there.

And what I think we’re going to find is that the big boys have capital. They’re tied into private equity. As we see interest rates climbing, as we view this market shifting a little bit, what effect is that going to have on the smaller groups and the ability to access capital to continue to expand? That’s one of the things I’m interested to see. I don’t think it’s going to slow down any time soon. I think that there may be the number of units that grow as the interest rates climb and the ability to just deploy that capital at as expansive a rate as we’ve seen. I think that may bring about a little bit of slowing, but I think you’re going to see some more consolidation in the industry, that it’s just going to continue.

Bill Neumann:

So you think a lot of, even with the recession that we have, the higher interest rates, inflation, that we’re going to still see continued growth? Like you mentioned earlier, that DSOs that have private equity backing are funding are okay? They still have money. They’re still going to expand. They’re still going to hire. They’re still due to Denovo’s acquisitions. And maybe we should hold this off because your background from a financial perspective is really important. You mentioned the growth that ADA talked about was on the doctor-owned practice side, doctor-owned or doctor group practice.

That’s where it gets tricky from a lending perspective. You mentioned like the Wells Fargos and the Banks of America that are really comfortable lending at one to maybe even three locations. And then after that they stop. They just don’t feel comfortable lending beyond a certain number of practices to a dentist. And then there seems to be a bit of a gap before some of the other lenders may pick up. We’ll wait till you have X amount of EBITDA and a track record before we’ll even lend to you. And then of course, there’s the private equity option, but there does seem to be this about three, four, five locations to maybe 10 or 12 where you have a lot of trouble getting finance.

Frank Balkum:

Yeah, I’ll tell you though, I think one of the things I’d really like to see in the industry is a change in the way that dentists approach borrowing. You really have to interview your lender the same way that you interview an associate who comes to work for you. You have to find someone who’s aligned with your values and your vision, because I’ve seen far too many times folks are left with a choice to either grow or eat a large prepayment penalty, because they talk to someone, they say, “Hey, I’m sure we’ll support your growth.” And then they find out that the risk assessment criteria for a particular lender is written on a one or two max office per year. And if your model works, you should be able to continue to grow. And I think there’s someone out there for everyone. In 2018, information surpassed crude oil as the most lucrative commodity in the world.

And that’s what it really comes down to. You have to know going into the process, who you’re getting into business with and there’s a lender out there for everyone. There’s folks that will lend to groups below 2 million EBITDA. There’s folks that want you to hit a certain threshold. And I think the most important thing is laying a solid foundation. So when you walk into a lender, you say, look, these are what, These are my numbers. This is what I do with every office I touch, whether it’s one, whether it’s five, whether it’s 10. If you have a solid foundation, then the sky should be the limit if you go through the proper vetting process to find someone who’s aligned with your growth model and values.

Bill Neumann:

So how do they do this research, Frank? How do you figure out? I mean it can be pretty confusing and I would think it’d be frustrating in certain cases.

Frank Balkum:

Well, one thing I can tell you with, there is a lot of information that is out there. You and I are frequently talking at these conferences. And getting involved in any process, you want to immerse yourself in as much knowledge as possible, align yourself with people who have that knowledge if you can’t find it or possess it yourself. But there’s a lot of information. If you take the Group Dentistry Now website, anyone who goes to your website can find an abundant amount of information that’s there. The players that are involved in the marketplace are there someplace. And if you get into a situation where you say, okay, what are the steps I need to take? Talk to a couple of different lenders and see what their perspective is. One of the things is financial reported.

I see a lot of folks having to convert from cash to accrual basis because they get to a lender that says, “Look at this level of sophistication, we need you to be on an accrual basis accounting system.” So if you want to get involved in the DSO space, begin with an end in mind. Start doing things the right way. Why start a process, have your entire team be reporting and working on one model and then shifting over to an accrual process where everybody has to go through a learning curve? Start right out of the box. That’s just one example of positioning oneself to be able to scale. The other I would say is create the model that you want to duplicate. Dentistry is very profitable and sometimes that can be a bit of a drawback because folks look at doing things a certain way and say, “How wrong can it be? I’m making money.” But you have to build the model that you want to duplicate. You have to maximize the utilization of an existing office.

I’ve seen this with many of the folks that we’ve talked to and moved on from. It’s because they want to get to a certain number of units instead of creating a model that you want to duplicate and then looking to do that, whether it’s acquisition or it’s Denovo. When what your model is, you know which acquisitions fit or can be molded into your direction. Finding a location sometimes… And I think as money gets tighter, you’re going to see more of a look at Denovos because the numbers that are being thrown around on the acquisition side just continue to astound me.

Bill Neumann:

That’s a great point with the multiples that people are seeing. And I think the expectations now that docs have for their groups and why not get the maximum value? But to your point, someone from, I won’t mention who it was, but from a large DSO, probably five years ago, said to me, we were talking a little bit about M&A and he basically said that, “Listen, there’s situations where we know we want to be in a certain market and we want to be in a certain area, but we may not want to pay what somebody would like us to pay for a practice. So what we’ll do is we’re like, we want to be here, we’ll go down the street and we’ll find a better location or a location and build it exactly the way we want to.” Now you don’t have the cash flow, so you have to wait for that.

But you can do a lot of things the way you want to do them instead of making all sorts of changes. And also having to change the mindset and the processes and the operations, which I’m going to get to in a second with you, with the existing employees and trying to make those changes can be pretty difficult. And you may lose, especially now, you may lose a lot of these employees if you make too many drastic changes, because nobody likes change and now they can go somewhere else and probably make more money. So to your point about Denovo, I think that’s… Again, this was five years ago, I heard it and I was like, okay. I think it rings even more true now.

Frank Balkum:

And it has to. One of the things that, as we talk about trends, one of the things I’m seeing is a lot of doctors are calling me saying, “I got this letter that says these people want to give me four and a half million dollars for my million dollar practice.” And I came up in a world of capitalization of excess earnings. The value of a purchase price was based on what the excess capital that practice was kicking off. You could take a million dollar practice and, based on the profit margin that you see, you’re going to see a varying degree between maybe 70, 75% or 80, 85% of the previous year’s collections.

Now we’re talking about EBITDA and we’re talking about a multiple of EBITDA and people are getting these ideas to say, “Hey, come join our group. We’re going to cobble all of these dental offices together.” The last one I heard, we’ve got 24 offices that we’re working with and they’re going to convert everybody to the single source. They’re taking top line revenue for management from the dentist as they work through this. And the process is going to take three months. And I don’t know anybody who’s practically been involved in a situation where you convert to a single source database, even within the same DSO group. It takes time. It is a process that does not happen in 24 offices in three months, in my opinion. But that’s one of the things we’re seeing where this expectation of what one could sell their practice for is, I think, in a lot of instances overstated.

Bill Neumann:

So let’s talk a little bit about operations and your perspective on operations. Such an important piece, really. I mean that’s what the S in DSO really is, the support and a lot of that being operational support. Tell me a little bit about what Xprt DSO does from an operational strategy standpoint. And again, what you’re seeing out there, maybe some ideas for some groups that are forming? You get a lot of clinicians that are growing and maybe even banding together with peers, and they may be great clinicians, but maybe not, they don’t have that operations acumen.

Frank Balkum:

Well, I think what we look to bring to the table is… Really, it’s across a pretty wide spectrum. In one instance, we were brought into work with a group and are currently operating as their entire C-suite level. We’ve taken over operations of the group and one of the first things that we found was we needed to… Rather than focusing on growth and driving revenue and streamlining the process with policies and procedures and operations from a concise manner, we had to go back and do a lot of corrective measures that detracted from our focus on the growth that we initially set out for. But I think they saw a value in what we brought to the table. They asked us to take over the process based on what we demonstrated in a short period of time. That’s one instance. I mean, we just closed a loan of 11 plus million dollars, 7 million refinance, 4 million of growth capital, for DSO in New Jersey to expand.

So it really covers a very wide… It’s what the group needs. We come in and do a baseline assessment and we give a written report. And in many instances, right now, we’re working with about 20% of the people that we talk to, primarily because if there are issues that need to be resolved, someone who wants to get into the DSO space has to be able to embrace change. Sometimes the people you have working for you aren’t the right staff to scale. Mary at the front desk who’s been with you for 20 years may be absolutely perfect at what she does, but she has no intention of training someone to come in and do what she does, for any various reasons. So that’s just one example. When we take a look at something and we say, “Hey, we can give you the direction, but if you don’t have the team to implement it or you don’t have the mentality to deal with this, then we don’t want to waste our time or your money.”

We need to have a dynamic impact on everyone we touch. The same thing when I talk to a young doctor who has small children, and I have to ask them, “Are you in a point in your life cycle where you are going to be able to take on the challenges of growth?” When you’ve got a small family, I just know just for myself, running a business and raising small children, it can present its own set of challenges. But these are the things that you need to take a global approach to. When you look at something and say, I made $500,000 last year. I want to make 1,500,00. I need two more offices. It doesn’t work that way.

It’s a process of saying, “Have I maximized utilization in my office?” I sometimes will sit down with a doctor and say, “Doc, your practice is a ghost town from 11:$5 to 2:30 every day. Your 1,500,00 is probably right there in the empty chairs. We need to talk about what you want to do.” And then you get into the conversation about, “I don’t want to take those plans, because the reimbursement isn’t what I find to be acceptable.” And so I ask, “Your rent doesn’t get any cheaper, your staff doesn’t clock out when the chairs are empty. So if it’s profitable to you, fill those seats, get that incremental income. And once you get to a point, you can affect a change in your office when the fee for service or higher paying PPO demand is increased for your office. But don’t step over dollars to pick up pennies and leave any money on the table because that empty chair in your office is expensive even as opposed to being even modestly profitable.”

Bill Neumann:

And this brings the topic of same store sales. You’re maybe hearing more about it now and I think it’ll become more and more important, especially as investors realize that there have been a lot of groups that have been cobbled together, so to speak. I think you said that earlier, as far as just kind of duct taping a bunch of practices together, maybe not a lot of synergy, a lot of inefficiencies. But at the end of the day, to just continue to add practices that are underperforming doesn’t make sense from a long term perspective. You’re not building a lot of value. You might be acquiring EBITDA, but how do you do that in a way where it might be… It’s a heck of a lot easier to grow your existing practice than it is to go out and buy a practice and then have them assimilate into your systems.

Frank Balkum:

There’s no question about it. I think understanding what your model is and finding folks who align with that, even if it takes more time. I mean, look, I’ve seen private equity do tuck-ins in areas of offices that may not even be profitable, but one of the benefits that folks need to consider looking at this is what is the advantage that they have? They open earlier. They stay open later. They open weekends. They create this issue where they’re able to drive revenue by convenience. I’m just using it as an example. So that top line revenue to a private equity-owned DSO is maybe considerably different, because if you don’t have deep pockets and you can’t sustain losses while you implement a model to shift and drive revenue, then that top line revenue isn’t nearly as important as the profitability and bottom line will be to your smaller organization.

Bill Neumann:

You talk a lot about this, understanding your model. I mean, do you have a lot of docs that come to you that maybe don’t necessarily understand what their model is, or have you seen situations where it’s one model at one location and another model at another?

Frank Balkum:

That’s more the case. I think that the fact that we are seeing so much diversity within a unified group that getting everybody on the same page, having folks… You can be in a state where there are certain areas where it’s easier to find staff than other areas. And then you get into a compromise situation. One of the things that I would say as we talked about trends, look at the shift that you’re going to see in technology and AI as you and I attend Amplify and the tech summit and that we see… And someone said it, I think, at the Dykema conference, that dentistry tends to lag behind the rest of the market, right?

We’ve seen automation in auto plants for 30 years, but we’re now getting into that type of thing in the dental market. And I think that can become part of a model for someone to scale when you’re able to vertically integrate what might be centralized function as an example, without having to bring in the staff, without having to rely on the fact that they can deliver on what you see on their resume. You know, you can vertically integrate a group that’s very accomplished in those type… Revenue cycle management, just to name a few.

Bill Neumann:

Yeah, great points around technology. And so let’s go back to the finance side of things again because I know this is how important it is. And I guess, maybe go back to Xprt DSO. So if I was somebody looking for assistance operationally, or if I was somebody looking for assistance trying to figure out what my model is, or do I do a Denovo? Do I even legally set up a DSO, right? Maybe I don’t. In a lot of cases you don’t even see that, right? You have a PC, maybe you have two or three PCs, but maybe there’s not a legal DSO. Is that what you’re doing in Xprt DSO? I mean, are you really coming in and helping these groups handle these types of things?

Frank Balkum:

Exactly. We come in and do a baseline assessment. The first thing that we have to understand is where your strengths and any potential challenges that may exist.

Bill Neumann:

So what’s a baseline assessment? So what kind of questions would you be asking me?

Frank Balkum:

Well, first off, we’d want to talk to each one of the staff members. We want to take a look at your AR, but one, see if there’s any leakage in that area. See how you’re collecting, what your income mix is, where’s your income coming from? How are you marketing? It really is a complete entire review of everything that’s going on within an organization. And we have folks that are a specialist in each one of those areas and everybody takes an assignment or a piece of that so that we can give the most advantageous direction to a group and say, “Here’s the points. This is where we need to address. Here’s some areas that we would consider.” And sometimes it’s staffing, sometimes, as I talked about, a diversified income mix. Maximize utilization of your office and we want to know. Tear it down to the bare bones. What makes up this organization and what opportunities do they have to take advantage of market opportunities that may exist for them in their particular area?

Bill Neumann:

Any interesting models that you see that are evolving? I mean, we see this DSO versus DPO going on right now, where part of it is a little bit of marketing and then part of it is the equity participation with the dentists and some of it being more at the practice level versus at the top co. But are you seeing anything out there that maybe is appealing to some of the clinicians you’re speaking with?

Frank Balkum:

Well, I would say one of the cause and effects that we see after the economic downturn and the relatively no access to capital, the model that came back… Traditionally, we were doing 100% financing with additional 20% working capital to facilitate a smooth transition. But we came back after that, we saw a bank-driven model and said, “Hey, we’re not doing 100% financing.” So then what we found was a need for seller participation, where historically they had gotten 100% walk away, but the market kind of shifts. Right now, what do we see? We see that seller hold that creates an opportunity to participate in the recapitalization. And I think we heard someone use the example at a recent conference. They said they had a $10,000,000 transaction. The seller took 6,000,000 off the table. He held 4,000,000. In five years, that 4,000,000 million equated to 16.2.

So that certainly is a situation where we see a cause and effect that has worked to the favor of those one, especially emerging growth dental groups, because they don’t have the deep pockets. But if you can go to a bank and say, “I only need to capitalize 70% of this acquisition,” they’re more comfortable. Your seller has subordinated debt or he takes an equity piece which is much more favorable, having them in a situation where now they’re glued to the transaction. So it creates a benefit on both sides of the line that helps to drive the model forward. And now you’ve got a group who’s looking to grow, but they only need to capitalize 70% of the acquisition. So now their ability to access capital stretches just a little bit further.

Bill Neumann:

So I’ve got a couple… One final, actually, two final questions here. And I believe it wasn’t too long ago you actually did an article for Group Dentistry Now. I’ll put it in the show notes, but it wasn’t too long ago, and it talked a little bit about some of the issues with staffing going on. So I’d love to get your thoughts on that because I think if that’s not the hottest topic, maybe not just in the dental industry, but overall, and just about every industry. It’s got to be one or two. So talk to me a little bit about what you’re hearing from your clients about staffing challenges and maybe any tips or tricks you can share with the audience.

Frank Balkum:

Well, one of the things that I wanted to convey in that article was I don’t think folks ever really stopped and took a look at what it cost for someone in their market, a family of four, to have a modest living. I think that as we looked at the situation, we saw a shift where now the labor was coming back and forcing the hand and saying, “Look, I’ve got people offering me more money to go out and to come work for them. And as much as I like the office and the owner and what have you, for my family, I have to consider it.” And I think in any situation, Bill, we always should be thinking about the people around us who support us, who help us achieve our goals and objectives. Sometimes the most important thing a person does in their life is to help somebody else achieve their goals and objectives.

And as I see it, across the country, it’s different in different areas. There are certain places where you can find… I’ll use an example. We are trying to find staff for an office that we have in a central northern state, and we’re having a difficult time. It’s a rather small town, what have you. Conversely, that same organization, we’ve got an office in California and they’ve got an abundance. We’re asking how many of those will move to Michigan. It’s just one of those things. So I think it’s kind of leveled out. It’s a curiosity for me as I look at it because here we’re looking at these crazy unemployment numbers that are supposedly driving economic factors in this recession, but there’s people out there trying to find people to work and many people are talking about dental staff leaving the industry to go work someplace else.

We read something about an ice cream vendor or an ice cream parlor that was paying $20 an hour to people to make ice cream cones. It’s just crazy. I’m not a astute enough to figure out where this is going to end, but I think we see some easing of it. And I think if you create a model and the culture that… Right, was the big buzzword a number of years ago. I know everybody was talking about culture, but it truly is the very important point.

You know, have to make people feel cared about and you want to make them feel like this is a great place to work. And especially in the DSO market, make sure they understand that this is opportunity for you. If you like doing what you’re doing, that’s fantastic, but if you want to move up in the world, we’re creating a whole entire middle management piece, you could move in. We’ve seen it in women in DSO, which is great to see. As you’ve mentioned in on Group Dentistry Now. Look at the activity we’re seeing of women in the DSO space. It’s fantastic and bringing more and more attention to it. Those types of situations exist where folks should understand you’re not just come to work in a dental office. You’re coming to work in an area where those who excel have far greater opportunity and the people around you are there in support of you and accomplishing what your personal goals and objectives are.

Bill Neumann:

Yeah, great points. Really, really great points, where you’re not in a single practice where if you’re an office manager that the highest you’ll ever get is an office manager, or if you’re a dental assistant or a hygienist, the same thing. You can move over to the clinical management side on the hygiene or the assisting side, or procurement, something like that, potentially. And then of course with office managers, you see regional managers. You have ops positions. Great, great points there.

So I was doing a little bit of cheating here when we were talking and I pulled up… So the article that Frank wrote regarding staffing was early February. It was called Can We Talk Staffing? Desperate Times Call for Desperate Measures. I’ll drop the link to that article in the show notes. And then we also actually had one that you did for us, and it was in September of 2021. Still holds very, very true. Capitalizing Growth for Emerging Dental Groups. So we’ll drop that article in the show notes as well. So before we sign off here, a couple of questions for you. Number one, what is Frankly Speaking? So it’s right behind you, I don’t know what that is.

Frank Balkum:

So Frankly Speaking is just a piece of that we started to discuss various topics, just short little bits of food for thought, for emerging growth dental groups and DSOs. Just some of the things that we touched on today, just to bring about the thought process, so folks start to look at those items. I mean, one of the things that I’ve seen in the DSO space a lot is that there are people out there who are working for organizations and they’re struggling. They don’t know what they don’t know. And so I just wanted to create a piece that would be thought provoking, that we could put out there, and if somebody had questions, they could pick up a phone and call us. And if we don’t have the answers, we can direct you to someone who can answer the question for you. And I think we all find, especially with Group Dentistry Now, there’s an abundance of people out there who are happily willing to share information with you on their journey to make the road a little smoother for those that are coming up.

Bill Neumann:

So where can people… How can they find Frankly Speaking?

Frank Balkum:

Well, right now the pieces are in edit, so you’re going to start to see them in places like LinkedIn. Our YouTube page that we’re developing is going to have them. So we’re following the model, Bill. We want to utilize as much opportunity to get information out there and hopefully, look, at the end of the day, folks can take a look at it and say, “I may be able to benefit from an affiliation with this organization. Let me talk to them and see what they bring to the table.”

Bill Neumann:

What’s your website address?

Frank Balkum:

It is www.xprtdso.com.

Bill Neumann:

And if people want to contact you directly, Frank, how do they do that?

Frank Balkum:

Well, if they go to the website, they’ll see contact information. Frank@xprtdso.com is my email and either the phone number that’s there, the (551) 202-9944, or my personal, (813) 240-1522.

Bill Neumann:

We’ll put all this information in the show notes so you don’t have to listen back to this. But then we’ll put the links in there, the phone, the contact info. You can also see Frank on LinkedIn as well. Frank Balkum, B-A-L-K-U-M. He’s on LinkedIn. So I think with that we’re going to wind things up. Frank, thanks for taking time with us. This was really interesting. I’m excited to see your Frankly or hear your Frankly Speaking. See and hear it, right? As that comes out. So we’ll keep our eyes on that, and if you want to get an idea for where Frank is coming from, we’ve got those two articles that you can read and get some great free information. But we really appreciate it, Frank. Thanks everybody for listening in today or watching us. And until next time, this is the Group Dentistry Now show.

Frank Balkum:

Thank you, Bill. Always a pleasure to be affiliated with Group Dentistry Now.