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Chip Fichtner from Large Practice Sales joins the podcast to discuss the booming seller market. Invisible DSOs, which have been around for 30+ years, are now becoming more popular. He discusses the invisible DSO and the specialty-focused invisible DSO in depth. He also examines how doctor owners are getting younger and younger. Just last month, LPS did over $50M in transactions for doctors under the age of 40. Learn more about the market trajectory for sellers, PE, family offices and more.
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Full Transcript:
Bill Neumann:
I’d like to welcome everyone to the Group Dentistry Now show. I am Bill Neumann, and as always, we appreciate everybody listening in to us on Spotify, Apple’s platform, Google, or you might be watching us on YouTube or listening to us on YouTube as the case may be with this podcast. Without an audience, we wouldn’t have a show and of course, without great guests, we wouldn’t have an audience. So our next guest up here, you may have seen or heard Chip on some different podcasts. He’s been in the dental industry for quite a while. We have two Chip Fichtner. He is the Principal of Large Practice Sales. So Chip, welcome to the Group Dentistry Now show.
Chip Fichtner:
Thank you, Bill. Appreciate your having me.
Bill Neumann:
Just some background. Chip and I have known each other for, gosh, it has to be a dozen years now. I think I met you in Boston at the Yankee Meeting if memory serves me correctly. Chip’s been in the dental industry before he got involved with Large Practice Sales. So Chip, I’d love you to kind of paint a little bit of a picture for the audience what your background is, how you got into the dental industry and then why you started Large Practice Sales.
Chip Fichtner:
Sure, absolutely. Well, again, I appreciate you having me on the show and yeah, I think it has been 10 or more years. Given the number of shows that you and I have been to, I’m sure we’ve run into each other at many of them.
Chip Fichtner:
My background’s pretty simple. I’ve been buying, building, starting and selling companies primarily for my own account for the last 40 years. Some of them were public and some of them were private. A buddy of mine approached me about 10 years ago. He was a venture capitalist who had invested in a unique dental technology. He asked me to look at it because he thought I could help him market it. I looked at the company and said, “I don’t want to market it, but I’ll buy the company.” So we bought the company. It was a company called TruDenta that we built up and sold in about five years.
Chip Fichtner:
One of the clients from that business came to me, he had an 18-office multi-specialty group and said, “You’re an ex-investment banker. Maybe you can help me sell my practice.” I said, “I don’t know anything about selling practices, but I can learn if you’ll pay me enough.” So that was our first transaction, and since then we got lucky in that our niche was we focused only on larger practices. Our typical client is going to have at least $500,000 in operating income and up, and we’ve grown a lot. In 2019, we did about 200 million in transactions, in ’20, we did about 300 million in transactions and 2021, we got to about 500 million in transactions. Then in this quarter, we’ll do over 300 million in transactions just in the first 90 days. That gives you an idea of how the whole dental consolidation is accelerating.
Chip Fichtner:
I would guess that there was a new DSO formed at least every week during 2021. All of them are eager to find great practices to partner with. The invisible DSO, which is a term that we coined, which focuses on DSOs that are not interested in rebranding their partners, and in their model the doctors remain as owners, either in the practice or in the parent. They’re invisible because they don’t rebrand and they don’t try and micromanage the practices. They are functionally silent partners, and that has become, let’s call it, the new standard of DSOs in that many of the ones that were rebranders are now not rebranding.
Chip Fichtner:
So the invisible DSOs really are where the future is for doctors because they can find a partner that they can work with who can provide resources to them to help them grow, but not be micromanaged. It’s an interesting category, especially given the ages of our clients. Five years ago when we first started, our typical clients were 50+. Just last month we did over 50 million in transactions for doctors under the age of 40, which is shocking to a lot of people.
Bill Neumann:
That’s interesting. Let’s talk a little bit about that. So what is an under 40 doc looking for as far as a partner? They have a practice, they’re not near retirement age, so why would they want to transact now, and then what does that partnership look like after the transaction?
Chip Fichtner:
It’s interesting in that you’ve had a number of these groups, and keep in mind, invisible DSOs have been around for over 30 years. This is not a new concept. It’s just becoming more popular primarily because owner-operated practices who retain their own brands are more successful than employee doctor-operated practices that might be within a regional or nationally branded chain. Owner doctors perform better than employee doctors. At least that’s what the numbers tell us.
Chip Fichtner:
So the reason the younger doctors are becoming interested in this concept is because number one, it enables them to monetize a part of their life’s work, but not all of it. That equity ownership that they retain can become extraordinarily valuable. Again, this is 30 years old. So just in the last 60 days of 2021, there were over $4 billion of recapitalizations, which means the investors who formed the invisible DSO monetized their investment for the benefit of the doctors and the investors. Those monetization events can create staggering wealth for the doctors who have retained equity. In the case of all of those, they were all relatively young, and some of the doctors in those transactions multiplied the amount of their retained equity by anywhere between three and seven times.
Chip Fichtner:
Had you gotten into let’s call it two of those three groups three years prior to their monetization in November, and you kept $1 million in equity, all of a sudden your equity is worth three to five and in some cases, $7 million in less than three years. So it is for the younger doctors, really a wealth building part than a path to a transition. There will be tens of billions of dollars of monetizations of DSOs this year. So the doctors in those transactions stand to reap significant gains, far more than they would get working as a dentist for the next 10 or 20 years. That’s really what’s driving the younger doctors to it. They are seeing the success of the recapitalizations and the monetizations of these groups.
Bill Neumann:
So there’s a lot of wealth creation going on. There’s there’s a ton of activity. You talked a little bit about Large Practice Sales’ numbers. So you talked about 2021 … $500,000 in 2021. Is that right? Did I get that right? 500 million?
Chip Fichtner:
Yes sir.
Bill Neumann:
Okay. Then just in Q1 of this year, you’ll be at 300 million.
Chip Fichtner:
Yes, sir. We sure will.
Bill Neumann:
Gosh. Okay. So there was a lot of talk around 2021 being a really active year because of the proposed capital gains or the speculated capital gains tax. It hasn’t happened, not yet anyway. So we go from a really active year in 2021, and it doesn’t look like 2022 is going to slow down at all, not for Large Practice Sales, but for the industry et al. So I’m going to not so much talk about that, but kind of leave that out there. Towards the end of this podcast, I’ll let you speculate on where the industry’s headed and what consolidation looks like.
Bill Neumann:
Talk about Large Practice Sales. You talked a little bit about transition from a dental … Was it a dental manufacturer you were making … You had a dental product. You got out of that business, you sold that business, and then you helped an 18 location group transact. Then you started Large Practice Sales after that. Tell me a little bit about your relationship with these invisible DSOs as a company and then also your relationship with the docs that you bring to some of these invisible DSOs.
Chip Fichtner:
Sure, absolutely. The invisible DSOs come in all shapes, sizes and flavors. To give you an idea of the growth … Let’s just look at specialty for a second. Five years ago, there was really one ortho only consolidator. Today, there are 13 groups interested in partnering with great orthodontists. In oral surgery, there are also 15 oral surgery only groups. Two of those 15 are focused on groups that are implant heavy. The other 13 are focused on general oral surgeons, and that’s up from zero oral surgery invisible DSOs four years ago. On top of that, you have 10 endo only groups. Just in the last months, there have been four perio focused invisible DSOs. So all of those doctors who five years ago their options were primarily multi-specialty groups for partners, today there are dozens of specialty focused invisible DSOs that are all very well financed.
Chip Fichtner:
Then on top of that, you have two other types, which are the dental trifecta invisible DSOs. These are groups that buy pedo, ortho and oral surgeons only, in particular communities with their goal being to lock in referral relationships. They get a very accelerated growth. When you own a pedo and ortho and an ortho in town and you add an oral surgeon, you get a lot of internal growth because everybody’s motivated to refer within the family because they’re all equity holders at the parent company.
Chip Fichtner:
Then the newest type is the dental surgical trifecta. These are invisible DSOs that are buying perio, endo and oral surgery only. So the growth in these groups, the number of them that are eager for great partners is really staggering. I’ve been in a lot of businesses in my life, and I’ve never seen one that has grown this rapidly.
Chip Fichtner:
The capital that is funding all of these groups is long-term patient capital. Many people are under the mistaken impression that private equity groups are the only backers of these groups, when in fact last year over half of our transactions were done with family office backed invisible DSOs. A family office is functionally a billionaire’s personal private equity fund. We really like dealing with those groups because you usually have one decision maker, whereas with an invisible DSO, you have the management of the invisible DSO plus you have the private equity firm that’s often run to some degree by committee. Whereas, when you deal with the family office groups, you get decisions very rapidly, which is from our perspective a very good thing. But clients of ours will typically have at least five different bidders, and in many cases, the larger ones will have 10 or more.
Chip Fichtner:
We had a great 34 office practice that once we started marketing it, we signed 82 nondisclosure agreements with groups that were interested in it. Those were primarily private equity and family offices, but 10 of the 82 were potentially strategic buyers, meaning invisible DSOs. So the interest level in funding dental consolidation is mind-boggling. That’s a good thing for doctors because it’s driving up values, and probably more importantly, it’s giving them more choices in who they want to partner with because we sort of liken these relationships to a marriage in that in our transactions, the doctors are typically sticking around for at least five years, and many of them will stick around for two or maybe even three decades given how young the doctors are that are doing these.
Chip Fichtner:
So the doctors need to understand all of their options, and they will have many, and they’re all different. Each one of these groups operates a little bit differently and will have a different prospective upside in the gains on their equity. Some are better managed than others, and some frankly we would not even show our clients to. So it’s really the Wild West at the moment.
Bill Neumann:
You talked a little bit about family office versus PE. As far as how long they hold onto a platform for, do family offices hold longer? About the same as PE? Does it vary?
Chip Fichtner:
Yeah, it really does. That’s a great question. So for instance, a family office from Europe acquired one of the 10 largest invisible DSOs in the US in October of ’19, I believe it was. This is a group that’s very clear that that investment is a generational investment, meaning they’re not planning to sell it in the next 100 years. They also happen to own the largest DSO in Europe. So this was a Transatlantic potential consolidation for them.
Chip Fichtner:
In some of the family office transactions, they are perpetual, and so what they’ll do is they’ll have mechanisms for doctors to monetize their retained equity under a formula based on future performance. So doctors in a private equity backed, or in most private equity backed invisible DSOs, are hoping for an event where the financier, the private equity group, monetizes that platform by selling it. They typically talk about lifespans for their ownership of three to five to sometimes seven years. So the doctors are always hoping for an exit when the backers of the invisible DSO monetize their investment, and the doctors then have the opportunity to monetize theirs as well.
Chip Fichtner:
In the family offices, you have some of them that operate like the PE groups in that they have a three to seven-year timeframe and other family offices again, are looking at this as perpetual. They’re different, but they all have the same kind of upside opportunity because if the family offices that planned on having these groups perpetually didn’t have an exit mechanism for the doctors that was comparable to what the doctors could make from a private equity backed group, they wouldn’t be able to buy any practices. All of these groups, I won’t say all, but the majority of the ones we deal with are based on an acquisition model.
Chip Fichtner:
Their goal is to acquire interest in, but not all of, great practices and then provide them with the resources to grow bigger, better, faster, and more profitably. A lot of doctors perceive those partnerships as, “Wait, they’re going to come in and tell me what to do and how to do it, what insurances to take and who to hire and who to fire and what to pay them.” The reality is that’s not what they do. They don’t have the capability nor the desire to micromanage these practices. They’re paying premium values to buy premium practices. Their goal is to try not to break what they just spent a lot of money buying. So they don’t come in and try and cram down policies, procedures, and tell the doctors what to do. That is not what the invisible DSO model is.
Bill Neumann:
Large Practice Sales, you’re there to represent the dentist or the practice owner and not the invisible DSO or the private equity or family office. Correct?
Chip Fichtner:
Yeah. That’s a good point. I appreciate you bringing that up in that we’re unique in this industry in that we are only paid by doctors. Our fee structure is very simple. We get a percentage of the value of the transaction when it closes. If we can’t close the transaction for whatever reason because we can’t find a doctor a partner at the value we’ve quoted or a partner that they like, they don’t do a transaction and we get paid nothing. We being only paid by the doctors and not paid by any of the DSOs or the family offices or the private equity firms, we’re highly motivated by design of our agreements to get the doctors the highest value with the best partner.
Chip Fichtner:
When you’re not getting paid by the buyers, you have the ability to show doctors to everybody, not just the groups that would pay us a fee. I think that’s part of why we’ve been successful in getting values. It’s certainly why we’ve been successful in attracting the great invisible DSOs to us because we don’t cost the invisible DSO anything, except we may force them to pay a premium price. But they don’t pay us any fees, and that’s different from pretty much everybody else in this business.
Bill Neumann:
Really interesting, Chip. This is good to know. You mentioned earlier in the discussion that you had a client that you were representing and you had, I think the number was 81 or 82 LOIs. Is that the number?
Chip Fichtner:
No. 80 NDAs. Nondisclosure agreements.
Bill Neumann:
NDAs. Okay. NDAs. Okay.
Chip Fichtner:
Meaning-
Bill Neumann:
Got it. All right. Out of that, how many LOIs … So the NDA means that you can have discussions, talk about the model and what a transaction may look like confidentially. Out of that, how many LOIs does somebody typically get or maybe use that a for instance on that? That one example.
Chip Fichtner:
In that example, because it was a 34 office group, it was very attractive to the hundreds of private equity firms that are not yet in dental consolidation and looked at that practice as potentially becoming a platform for them to build a new invisible DSO. So when you do that, you get a lot of people that are contemplating it, but not necessarily ready or serious about getting into it. So I think on that transaction, we had 12 letters of intent or functionally offers, which is not surprising.
Bill Neumann:
Still, a lot of offers.
Chip Fichtner:
Well, yeah, that’s a lot of offers, but the interest level in this whole category … We had another large, a really unique practice … It was a two office GP practice last year that did over 45 million in collections. So think about that. A two office practice doing 45 million in collections. When we started marketing that group, same thing. We had dozens of interested parties that signed nondisclosure agreements to take a look, and we end up getting about 10 let’s call it qualified offers. Part of our process is to make sure that we expose our clients to all of the prospective partners that may or may not be a fit for them that we believe are qualified and quality groups. We try not to waste their time and our time with groups that may not be properly financed or may not be well managed, but we try and introduce our doctors to a wide swath of opportunities.
Chip Fichtner:
So for instance, we’re doing, oh, probably $100 million in transactions in New Jersey this quarter. The oral surgeons, of which the majority of them are, are going to be getting offers from the oral surgery only groups. They’ll get offers from the dental trifecta groups, they’ll get offers from the surgical dental trifecta groups, and they’ll have offers for from the multi-specialty groups. Each one of these groups is different. We want the doctors to understand the differences between each group, and these transactions are not about the top dollar. These transactions are about picking someone you can live with for the next five years or longer, who has the best potential upside in their equity because that’s where the money’s made in these transactions. It’s not so much the cash up front. It’s what kind of money will your partners create out of the value that they’re building?
Chip Fichtner:
I think my favorite story on that one is we sold the largest orthodontist in Montana and Wyoming. Closed in October of ’19. It was through a relatively small, relatively new invisible DSO. The doctors who were classic conservative folks from the mountains said, “I’m not sure we believe in this equity, but we’ll be happy to take their 12 million in cash.” Here it is two years and four months later, that group’s going to recapitalize, and my doctors who were skeptical of the equity piece of this are going to make about six to seven times their money, meaning their 5 million in retained equity is going to turn into $30 to $40 million in less than three years. So it’s important that you understand who your partner is because that upside is what you’re playing for.
Bill Neumann:
That’s one of the reasons that these docs, these small groups, these large practices should work with LPS because, you’re right, it’s not just about the dollar amount. It may be. It may be that. What am I going to get paid now for somebody that might want to be leaving in two years? But for somebody that wants to stay on, create long-term wealth, there are so many other things that go into this. One is the retained equity, certainly some of the cash up front. That’s a good thing. But then it’s also can you work within their system. You said that there were 12 offers or whatever it was with this one we talked about that had the 82 NDAs. How do you sift through because each offer is probably similar, but some can be pretty different too?
Chip Fichtner:
Well, again, first of all, the opening offer is never what the final offer is. We see that problem regularly with doctors trying to represent themselves is that they don’t know what they don’t know. So a good example would be an orthodontist came to us in August or September. He was not a client. However, we had done a value of his practice. We understood his practice, and he called me and said, “Hey, look, I know I didn’t hire you, but I’ve got an offer from this DSO. It’s a great group. I’ve been to their headquarters. We drank whiskey together. I really like these guys. Should I take the offer?” I said, “Don’t tell me what the number is, just tell me how many bidders you had.” He’s like, “Well, what do you mean?” I said, “How many offers do you have?”
Chip Fichtner:
He said, “Well, just from them.” I said, “Okay, I guarantee you, and I’ll put it in writing that I can get you at least $5 million more than whatever the offer is or you don’t have to pay me anything, and I’ll help you close the transaction.” He said, “How can you do that? You don’t know what the number is.” I said, “I know your practice. You would have 10 bidders if you went through a proper process.” He said, “Okay, the number’s 19 million.” I said, “Well, you know what? I’m going to change my guarantee. I’ll get you at least 10 million more, or you can pay me nothing.” He said, “You’ve got to be kidding me.” I said, “No, I’ll send it to you in writing. We’ll put it down and let’s go through the process.” Well, low and behold, we got 10 bidders for this doctor.
Chip Fichtner:
The original bidder at 19, once we got involved, all of a sudden miraculously decided it was worth $30 million. So they raised their bid from 19 to 30. What was funny about that was they didn’t even make dinner. When we get 10 bidders, we will typically cut it down to five to get to come do an after-hours practice tour and dinner. Then we expect bids from them after that five fun nights at the steakhouse. So we ended up getting that doctor who was about to sign a $19 million transaction with a good group that we knew, we had sold them practices and he ended up signing a deal, and we closed it December at $42.5 million.
Chip Fichtner:
If you’re a doctor with a great practice and you don’t have at least five bidders and preferably 10, you are leaving massive amounts of money on the table. More importantly, you’re missing out on understanding who really should be your bride. This is like dating. Unfortunately, those stories happen far too often. I think for some reason, while you have dentists who are definitely specialists and they know teeth and trust me, I couldn’t do a root canal, but whether you use us or use somebody else, you should absolutely be advised. These are life-changing transactions. A typical closing document’s going to have 350 pages in it. It’s not all about the legal words, it’s all about the terms and various items that you’ll miss if you’re not advised by somebody because these are complex transactions, and you owe it to yourself to see all of your options is my view.
Bill Neumann:
Chip, you mentioned something about proper process. Let’s talk a little bit about what the process looks like from LPS’ side. I have a practice, I engage LPS. Talk about the process after that.
Chip Fichtner:
So we start every relationship with what I call the education call. I talk to doctors all day, every day, six days a week. Most of my calls are doctors saying, “Hey, I’ve heard about this invisible DSO thing. I’d like to learn more about it.” So I’ll set a call. That’s usually a 20-minute call with the doctor and say, “Let me tell you about this process. Tell me a little bit about your practice so I can understand whether we’re qualified to represent you.” Then we’ll sign a nondisclosure agreement with the doctor and take a look at three years of profit and loss statements. We will go in depth into their financials and ask the doctors questions. We’ll come up with our belief of the operating income of that practice and the value of it. Then I’ll have another conversation with the doctor and tell him what we believe those values are and give him an idea what structure options will be available to him based on the bidders that we know.
Chip Fichtner:
That’ll either be of interest to the doctor or it won’t. If it’s not, that’s okay. The doctor got a free practice valuation that’s based on market values, not math like all of their valuations are. We get to look at all of the transactions that are happening every day, so we know what the market value of a practice is better than anybody. We did deals with 24 different invisible DSOs last year, and they change on a regular basis. So after that call, the doctor can say, “Yeah, that’s not enough,” or, “It’s too early for me,” and go on about their way, and we hope that they call us in the future. Or doctors will say, “Wow, that sounds great.” If they engage LPS, they’re basically giving us a six-month exclusive to find them a partner that they like at a value that they love.
Chip Fichtner:
If we can’t do that, they have paid us a total of nothing. We’ll have invested our time and money on the hopes that we can bring them a great partner. In today’s market, we really don’t even take a client if we know who the five bidders are for that doctor. There are far more buyers than sellers at the moment, which is a good thing for doctors. So we go through the process, which functionally entails showing the information about the doctor to the prospective partners, and then typically setting up five to 10 conference calls between the doctor, the partner and us, and just introducing each other and talking about the practice and about the potential partner. After that, we’ll ask those groups that had phone calls to send what we call an indication of interest, which is functionally an opening offer.
Chip Fichtner:
That indication of interest will lay out what they see the value of the practice being, what they propose as future compensation for the doctor and any restricted covenants that may be involved in that. So we’ll sit down with the doctor and take a look at all of those indications of interest or initial offers, and we will pick some number of them to come do an after hours practice tour and dinner. Then after those dinners, we’re going to ask the doctor, “Who did you like the best?”
Chip Fichtner:
“Okay, who’d you like the second best?” Before we take any other steps, we’re going to put our client on the phone with other doctors that have done transactions with the groups that he is considering because we believe that the most important thing in these transactions is that the doctors fully understand exactly what’s going to be different after they enter into a partnership. We want the doctors to have that conversation with other doctors who have done transactions with the groups that the doctor thinks he likes. Those are sometimes eye-opening for the doctors.
Chip Fichtner:
But the idea is we call it the meet the family part of the process. You would not get married to someone typically unless you met their family. Long before we get down to negotiating a final price and terms, we want the doctors to be comfortable with what they should be expecting. Then we sign what’s called a letter of intent, which functionally gives the prospective partner typically a 60 to 90-day period to do their due diligence and close the transaction. The due diligence part of this is really important because it includes a mini-audit, what’s called a quality of earnings test. It includes legal due diligence, and it gets down to minutiae such as pre-closing, you’re going to have to deliver pictures of every serial number of every piece of equipment in the office and pictures of every tag on every fire extinguisher in your building or on the floor of your building if it’s a multi-tenant building. We facilitate that because doctors have better things to do than that. We send a team to the office after hours or on a weekend to actually collect all that data to get a deal closed.
Chip Fichtner:
It’s a fairly complex transaction. The quality of earnings part, the audit is where millions of dollars are won or lost. You have to understand how to what we call fight QOE because the doctors will want to add back certain things and the auditors will say, “No, you can’t add that back.” Every dollar that you win in the Q of E argument will typically result in $6 to sometimes as much as $12 in value. If a practice trade did a 6X multiple, every dollar that you win in that battle is worth $6. If the doctor’s trading at a 12X multiple, it’s worth $12. So winning the minutiae is important in achieving overall value.
Bill Neumann:
That actually leads into my next question here. So we talked a little bit about one trend that you’ve been seeing, which is this. Explosion of specialty platforms, specialty invisible DSOs out there in the past three, four years. COVID, I’m sure, accelerated that. You mentioned valuations and multiples of EBITDA. Tell me what you’re seeing as a trend to valuations.
Chip Fichtner:
It’s definitely higher. I would say that in the last 12 months, the value of a typical LPS client has gone up at least 10 and in some cases, 20%. That’s just because there’s more bidders, and there are more groups with capital out there competing for the same assets. When they have to compete, they have to raise their bids. We have seen a significant increase in practice valuations. We’ve seen a significant decrease in the average age of the doctors who are doing these transactions.
Chip Fichtner:
Another interesting thing as a result of COVID is what we call the COVID earnout. During 2020 many doctors were reluctant to enter into these partnerships because they said, “You know what? I want to wait until I get back to 2019 practice level performance,” whether that’s top line or bottom line. The doctors were not doing transactions. Well, all of these groups are driven by acquisitions, and so it became common to do what’s called a COVID earnout, which functionally pays a doctor for future performance after closing. Every one of these earnouts is different. We’ve seen them as long as five years, where the doctor is getting paid additional purchase consideration for their practice as their practice grows post-closing.
Chip Fichtner:
So they were invented to solve a problem during COVID. But at the moment, if you’ve got a growing practice, the COVID earnout can add 10, 20, 30, and sometimes even 40% on top of the value if your practice grows post-closing, which most practices do because they’re now getting the benefits of their partner. Unfortunately, we’re beginning to see offers, not include earnouts. Those groups, we go back to them and say, “Look, all of your competitors have earnouts. You don’t. If you want to be in the game on this practice, you’re going to have to have an earnout.”
Chip Fichtner:
The earnouts may be as simple as deliver … Here’s a real simple one we did in June for an oral surgery group … It was a growing oral surgery group. All of the doctors were under 45. It was an eight office group, really phenomenal practice. The buyer said, “We really want you to do something now rather than waiting until you’re back to ’19 levels. So what we’ll do is if you’ll grow your top line revenues by at least 10% a year for the next three years, we’ll pay an extra $10 million in purchase consideration at the end of the third year.” The doctors were like, “Well, that’s easy. We’re already growing faster than that, except for the COVID speed bump. It is a trifecta group, so we’re going to get all the referrals from all the pedos and orthos in the family. Yeah, we’ll do that in a heartbeat.” They’re way exceeding it already. So they’re going to get an extra $10 million due to COVID earnouts.
Chip Fichtner:
So from a timing perspective, we don’t have the tax pressure of 2021, but in 2022 doctors would be smart, especially growing doctors, would be smart to understand the potential bump they get from the COVID earnout.
Bill Neumann:
Interesting. So besides specialty growth, valuations increasing, what else are you seeing in … What did you see in 2021 and does 2022 look like it’s increasing? At least it is for you, but is 2021, could it be a bigger year for consolidation than 2022 across the entire dental industry?
Chip Fichtner:
No. 2022 is going to be much bigger than 2021 because you have groups, they were still repairing themselves in the first half of 2021 and weren’t buying anything. There are multiple top 10 DSOs that were very inactive in let’s call it ’20 and the first half of ’21 that are now back in the game. So the number of bidders goes up because of that.
Chip Fichtner:
In addition, you’re seeing these recapitalization events that are very well publicized. As an example, US Oral Surgery Management that recapitalized in November … This was a group that went from an idea 42 months prior to November to 141 oral surgeons in 20 some-odd states. They recapitalized at a value of about $750 million, and that whole project took 42 months. That little announcement spread throughout the oral surgery world really fast. We’ve picked up over $100 million in new oral surgery clients in the last 30 days.
Chip Fichtner:
Doctors are realizing that having an invisible DSO partner is not a bad thing. They’re not going to tell you what to do and that there’s potential huge upside in the retained equity. Fortunately for oral surgeons, they’ve got 13 different options just on the oral surgery only DSOs. The multi-specialty guys more eager for oral surgery than ever, and that’s true in the other specialties as well.
Chip Fichtner:
The most valuable practice in the jungle today is a large pedo practice because a pedo practice is the gateway to a dental trifecta. If you’ve got a large pedo practice, you’ve got a goldmine in value. When I say large, it doesn’t have to be that big. If it’s a 1.5 million in collections and up. The endo practices have been getting attacked directly by the now 10 endo only groups. So every endo in the country, no matter how big they are, has been contacted by one of those endo groups. They’re trying to do deals direct because they’re able to buy practices at lower prices because the doctors don’t know what they don’t know.
Bill Neumann:
This is a question that I always have, and maybe you have an idea because there’s a lot of speculation on the percentage of consolidation. Some say 25% of the industry’s consolidated, some say it’s 35% practices that are affiliated with a DSO. But at what point and are we getting there with what you see or what might be on the horizon as far as quality practices that an invisible DSO would be interested in acquiring? There’s plenty of subpar practices we’ll just say. Are there still a good amount of quality practices out there for all these different platforms and family offices and private equity investors to invest in?
Chip Fichtner:
Oh yeah, absolutely. It’s interesting, the ADA reports that in 2019, the average GP practice did about $747,000 in collections. That average practice is not going to be acquired by a major DSO. It may be acquired by a small 10 office DSO or a regional DSO, and it’s not going to be acquired at any kind of premium. It’s going to be at the value of what I call the old doc-to-doc transactions, where the doctors sell their practices for somewhere between 60 and 90% of collections. So those average GPs, when you do the math on 747,000 in collections, those are not businesses, they’re jobs, and there’s nothing wrong with it. There’s nothing wrong with them being jobs, but they are not businesses with value because once you subtract the overhead and subtract compensation for the doctor, those businesses functionally have no profit for anybody to acquire.
Chip Fichtner:
Many people talk about the consolidation heading to where it is with MDs. I think the latest number on the MDs is that 77% of all MDs either work for a large group or a hospital. I don’t see dental getting there certainly any time in my lifetime, and I’m 61 so it’s not that much longer. But because there are so many small practices out there, they’re not going to be consolidated. Those doctors are going to be forced to compete with not just the branded DSOs on every corner but the invisible DSOs that may own the practice next door to you, and you don’t even know that they have a partner who’s getting them higher reimbursement rates from payers and who’s paying 20% less on supplies and probably 70% less on implants than he is. So for the smaller doctors, it’s going to become competitive. But no, we’re not even close to 20% consolidated.
Chip Fichtner:
I’m going to use ortho as an example, because I had dinner last night with the founder of the largest ortho consolidator in the country. We were going through the math of how consolidated is ortho. The reality is less than 10% of the ortho practices in the country are related to or partners with a DSO of any type. So we are a long way away from completing this consolidation cycle.
Chip Fichtner:
Oral surgeons, probably in a similar vein. GPs, the ADA would tell you that less than 15% of GPs are affiliated with a DSO of any type. I think they may be a little light on that because if you look at the graduates from dental school this year, half of them went to work for a DSO.
Chip Fichtner:
You’re also seeing a mind change or a sea change in the fact that the younger dentists are less interested in the entrepreneurial thrill of owning their own practice and are happy to work for the DSOs or practices as associates. So we’ll call it the smaller practices that relied on the old doc gets out of school, becomes an associate and ultimately buys the practice, I think those transactions have declined dramatically. I don’t know because we don’t play in that world, but yeah, there’s definitely a lot of change going on in the makeup of practices and where consolidation is going. It is absolutely growing and doctors become interested in it for different reasons. COVID caused a lot of older doctors to not reopen after the shutdown, so it’s changing.
Bill Neumann:
So it sounds like growth of the specialty DSO, valuations are up substantially, a lot more activity in 2022. I thought 2021 was busy, so that’s encouraging. Still a lot of opportunity for consolidation in the next 10, 15 years easily. Anything else I missed there as far as the future of the industry?
Chip Fichtner:
I tend to talk a lot of specialty because we do a lot of specialty. This quarter, a hundred million of our transactions will be GP and the other 200 million will be specialty. Again, that’s due to the new capital in the specialty consolidation, but there’s still probably five times as many transactions for GPs going to invisible DSOs as specialists because the GP focused invisible DSOs are also growing rapidly.
Chip Fichtner:
Again, I apologize for focusing on specialists, but the GP invisible DSOs are growing mainly because the doctors don’t have an exit. So let’s say you’ve got a $3 million GP practice that’s making industry average margins of 25%, so they’re making $750,000 in EBITDA. In my world that practice is going to be worth over $5 million. So it’s now worth almost two times collections instead of the old associate buy-in model of 60 to call it 80% of collections. So doctors with practices of that size, ultimately if they want to get a market value for their practice on exit, their only option is a DSO or an invisible DSO because their associates can’t afford to finance or pay them the market value of their practice. That’s created, I think, a lot of the growth in the GP consolidation is because doctors with larger practices have no other exit because their associates can’t buy them.
Bill Neumann:
Yeah. Great point. So listen, as we close everything down here on this podcast, I just want to make sure that people … So a couple different stakeholders can get in touch with you. One is any of the invisible DSOs that don’t currently work with Large Practice Sales. Chip, how would they get in touch with you?
Chip Fichtner:
The best thing to do is go to our website, which is pretty simple. It is largepracticesales.com and fill out our magic entry form or our inquiry form or give us a call. Our main office number is (954) 300-2644. It’s also on our website. But we’d love to talk to any doctor who’d like to learn more about this. We’re always interested in talking to the invisible DSOs that we’re not dealing with now and the prospective investors trying to get into the dental consolidation [inaudible 00:45:06] because there’s a right way to do it, and not all of them are following the right path.
Bill Neumann:
Chip mentioned the doctors as well. So again, whether you’re a specialist or you’re a GP, Large Practice Sales can help you find the right partner, whether it’s a family office, whether it’s private equity, whether it’s a strategic, which is one of the invisible DSOs. There are a lot of options out there, and Large Practice Sales and Chip and his team can really help you navigate what’s becoming a much more complicated landscape. But it also presents you with a lot more opportunity.
Chip Fichtner:
Again, there are far more quality interested, we’ll call them buyers, although they wouldn’t call themselves buyers, they would call themselves partners than there are great practices that are interested in this concept. It’s growing, but it is definitely a seller’s market at the moment and the values are going up.
Bill Neumann:
That’s great news. By the way, we’re going to drop Large Practice Sales’ website information. The phone number that Chip had given out, we’ll have that in the show notes so you’ll be able to call or fill out that form on the Large Practice Sales website. Chip Fichtner, Principal of Large Practice Sales, thank you for joining us today on the Group Dentistry Now show. Really appreciate all that great information. Sounds like there’s just a ton of opportunity for docs in the space that are looking for partnerships, ways to transition, ways to have some earned equity. It’s a great time to be in the dental industry, and I thank you for being a part of the Group Dentistry Now show, Chip.
Chip Fichtner:
Thank you, Bill, for having me. I appreciate it. Have a great week.
Bill Neumann:
All right. Until next time, I’m Bill Neumann, and this is the Group Dentistry Now show.
