Large Practice Sales

Chip Fichtner explains how it pays to know your practice value to a silent partner

Understanding your practice value in today’s bubble is important for several reasons, including estate and insurance planning. It is even more critical when negotiating potential associate buy-ins. It may also surprise you how the value of your practice today may entice you to monetize part of it for cash now from a “silent partner” to secure your financial future at today’s low tax rates. You continue to run your practice under your brand as a partial owner benefitting from your new partner’s resources.

For decades, Dental Support Organizations (DSO) have been eagerly acquiring dental practices. Thousands of general dental practices have become affiliated with DSOs. Estimates range from 15% to 20% of all U.S. dentists are now affiliated with a DSO with a 15% annual growth rate.

A decade ago pediatric dentists were the targets of specialty DSOs. About 6 years ago orthodontics became the most popular specialty. In the past 2 years, OMFS practices have achieved stunning values, and finally in 2019, the money tree sprouted for endodontists.

This is not to imply that DSOs did not acquire endodontists prior to 2019, but there are now dozens of groups interested in acquiring endodontic practices, which is driving values higher for now. The old value of your practice was typically 60% to 90% of collections. Today the values of large practices can exceed 200% of collections from certain buyers and even more if your advisor can create a bidding contest with multiple suitors.

The groups paying the highest values for endodontic practices are the Invisible DSOs (IDSOs). These groups quietly own interests in dozens or hundreds of practices across the country in which they become silent partners with doctors of all specialties. The IDSOs’ goal is to invest in great doctors who have larger practices and a growth plan. They are eager for doctors who will remain as owners, running the practice under the doctors’ brand, team, and strategy for 5, 10, or 20-plus years.

The IDSO strategy is to choose endodontists who can benefit from the resources of a larger partner. IDSOs quietly purchase between 60% and 90% of a practice for cash up front with the doctor retaining ownership in the practice, the parent, or a combination of both. IDSOs look for practices in which their resources of purchasing power, payor negotiation leverage, and synergies with other practices within their group can accelerate the growth of their new endodontist partners.

IDSOs can also ease the burdens of practice administration. While they do not run or micromanage the practice, they can be very helpful in areas where size and scale can add value and enable the doctor to focus on patient care rather than administrative minutiae.

While an IDSO partner will ultimately acquire the balance of the practice when the doctor is ready to retire, these transactions are attractive to doctors even younger than 40. Doctors can utilize the IDSO partner’s resources and capital to grow through new office buildouts, acquisitions, and external marketing with no risk to the doctor. With the right partner, a doctor can grow the value of the doctor’s retained ownership over many years to be worth multiples of the 100% they owned today. This long-term wealth creation can be at the practice level and/or through ownership in the parent. Billions of dollars have been harvested in the DSO industry, and many doctors have been participants.

An IDSO partnership is very much like a marriage rather than a one-time transaction. The doctor and the IDSO partner will in most cases be working together for many years. Choosing the right partner and a structure that meets the doctors’ goals is critical to a great, long-term marriage. It pays to “date” multiple suitors, not only to increase value, but also to find the perfect fit.

Many of these IDSOs will contact you directly in the coming quarters. Their goal will be to urge you to complete a transaction directly with them without the assistance of a professional advisor. This is a trap. The right advisor will introduce you to multiple potential partners, thus driving up the value to you and allowing you to select the partner that meets your objectives both short and long term.

To confidentially learn the value of your practice in today’s bubble, Large Practice Sales is happy to help you at no cost or obligation. In the worst case, you will learn something.