By: Dr. Robin Bethell
Be prepared: DSOs are going to mass-market and try to buy your practice amidst the coronavirus pandemic. It’s already happening. Why? Because investors are sitting on cash they NEED to flip and many dentists are scared and willing to sell. Some of you might even be considering selling or consolidating. Please, take pause.
Winston Churchill’s adage, “Never let a good crisis go to waste” is certainly the mindset of DSOs looking to acquire and roll-up dental offices. And why not? It’s about to be a buyer’s market. Dentists are looking to sell their furloughed and closed offices while they can in the same way people are liquidating their 401ks.
This would make sense if your practice was on the decline pre-COVID-19 and/or you were retiring soon. But, if you were growing before the coronavirus crisis hit, you are probably going to get hosed (or worse) selling to a DSO that doesn’t want this crisis to go to waste.
Speaking from Experience
Why do I think this way? Well, I am a group practice owner and I’ve been down this road before. In 2019, I was lured in by a high multiple investment (7X!) and a promise to be able to control and manage my company, only to find out after nine months that this deal was NOT what I thought it was. Long story short, I backed out when the Private Equity group tried to change the terms of the deal. I would have lost control of my company only to be bought low and sold high in an arbitrage—and I wouldn’t have been the biggest benefactor.
Sound like I was going to get hosed? Absolutely, and I wasn’t the only one. Data from 2019 shows massive interest in the dental industry from Private Equity groups with more than 70 firms backing DSOs in the U.S. and more than 200 looking to invest in the dental market. I expect that to continue to accelerate in these difficult times, as investors are sitting on uninvested cash. Additionally, data from 2008 to 2012 shows dentistry recovered more than 10% faster than other industries after the recession (although dentistry suffered 10% more during the recession). They know this and are hoping to take advantage of our COVID fears.
Do the Math
Let’s look at this a different way. I’ve seen offers between 3 to 5X multiples of EBIDTA (earnings before interest, taxes, depreciation, and amortization) from the major DSOs in the early days of COVID-19. EBIDTA, the most important key practice indicator (KPI) DSOs consider when evaluating an office, is essentially net profit.
Here’s an example. Let’s say you have 300,000 in EBIDTA (that’s great!) and you owe a major bank loan of $300,000. After taking a windfall of $1.5 million, paying taxes and paying the debt (you will be required to do this), you may be left with $630,000 (1.5 million - (1.5 million x .38 tax rate) = $930,000 - $300,000 debt = $630,000).
Would you trade your position as CEO of the business you built to become an employee of a DSO for $630,000? This is how we need to look at it. This is an awfully simplistic approach, but still one we need to consider.
Joining A DSO Isn’t the Only Way to Scale
The goal, for me, has always been to IMPROVE our profession. Bring better quality care, more efficiency, and a better patient experience to the people who want and need it most. Great dentists and practice owners definitely know how to do this but lack the scale and economics to compete against big DSOs. Groups, and the benefits of scaling, represent a great strategy to achieve these goals, but selling to a big DSO isn’t the only way to be part of a group. I’d like to propose another.
Dental offices can maintain their autonomy, brand, culture, and identity while collaborating and outsourcing the parts of their practice that would benefit from scaling. For example, if they form groups, practices can outsource and share costs of insurance verification and negotiation, CFO style accounting, marketing, supply buying and continuing education for team members. They could pay equitable fees OR share some equity in their company (minority) to accomplish this.
Looking even bigger, if fundraising and selling your practice someday is the goal, the whole group could opt to roll-up together and raise much higher multiples (8 to 15X depending on size, maturity and market) and set up the rules for operations. None of these options have dentists becoming employees of their own business, or investors trying to operate practices to increase profits. This is how successful dentists need to think about scaling practice ownership in 2020.
If you’ve built a successful practice with positive reviews, positive community impact, profit, and a strong culture, you have something valuable. If that sounds like your practice, DSOs NEED YOU much more than you need them. Don’t give them leverage because of COVID-19 fears or a temporarily down economy.
Don’t Try to Compete with DSOs Alone
Today, the big DSOs are like dinosaurs. They are big and once dominated the earth. They have an advantage over small practice owners with better benefit packages, better in-network insurance fees and lower priced supplies. You don’t want to directly compete with them because they will stomp on you.
We, the small practice owners, are like little mammals. On our own, we don’t stand a chance. But if we organize, we can compete with better marketing, culture, supplies, and benefits AND we can maintain our own culture and have REAL equity. It's about time dentists band together to take a stand against what is happening to our profession. We can form communities of smaller groups that are efficient and smart and take advantage of scale.
Come Together
If you are interested in how we as dentists can help save our profession and not let this coronavirus crisis lead to a mass extinction of the single practice owner, talk to your friends and colleagues in the industry. Together we have strength, options, and access to capital. Together we can protect the patient experience and our profession.
This is a personal mission of mine, and if you would like to collaborate or help out with this mission, please reach out to me at robin@forestdpo.com.
