Actual Practice Values in 2024 and 2025 Value Forecast

WEBVTT
00:00:02.424 --> 00:00:11.752
Hello doctors, I'm your host, chip Fichtner, co-founder of Large Practice Sales, and you're listening to Practice Partnership monetizing your dental practice.
00:00:11.752 --> 00:00:22.929
Hello doctors, in this episode, we're going to be talking about the results of LPS-advised, invisible DSO partnerships in 2024.
00:00:22.929 --> 00:00:36.823
In summary, we set new records across hundreds of millions of dollars of partnerships created, and we're going to look at the forecast for 2025 and what potentially could happen in 2025, because it's going to be different from 24.
00:00:37.084 --> 00:00:55.378
I promise, thank you know 2024 has been a very interesting year from a value of practices standpoint.
00:00:55.378 --> 00:01:12.754
We started the first half of the year with over $5 billion of new investment and financing provided to invisible DSOs across the country, and that's a lot of money and we are not going to have that same number come in in the back half of 2024.
00:01:12.754 --> 00:01:27.153
So, fortunately, that new capital and financing enabled many of the invisible DSOs to become actually more aggressive in their pursuit of new invisible DSO partners.
00:01:27.153 --> 00:01:46.552
So, contrary to popular belief, while interest rates did increase and did impact multiple invisible DSOs, they were functionally replaced by recapitalized invisible DSOs which now had the financing and capital to be able to bid aggressively on great practices.
00:01:46.552 --> 00:02:06.683
However, despite that new capital and despite the fact that we did achieve hundreds of millions of dollars of new record value for our clients in 2024, it was different in that the new capital has been far more selective in the type of practices that they're interested in partnering in.
00:02:06.683 --> 00:02:17.132
So they have been targeting practices with younger doctors that are growing faster and, interestingly, geography has not played as big a part as you might think.
00:02:17.132 --> 00:02:25.873
We did some record value transactions in what I'll call the non-growth states, which would include Kansas, iowa, michigan and New England.
00:02:25.873 --> 00:02:40.614
So it's interesting in that geography has become less important and these groups have been more selective, targeting growing practices with doctors that had what I call a passion, a personality and a plan.
00:02:40.614 --> 00:02:47.073
So there's been no shortage of new clients eager to partner with Invisible DSOs.
00:02:47.073 --> 00:02:56.181
We will end up the year signing over $700 million of new clients this year, and that's a good thing for the industry.
00:02:56.181 --> 00:03:16.866
And we are very selective in the clients that we choose because our goal is to be able to bring a new client at least five or more qualified bidders to choose from and 2024 has been a good year for the growing practices, with doctors that have a plan, a personality and a passion for dentistry.
00:03:25.872 --> 00:03:32.078
The interesting thing about 2024 is that priorities have shifted for the invisible DSOs.
00:03:32.078 --> 00:03:54.008
Prior to 2023, the number one exit valuation application let's call it for an invisible DSO to be able to recapitalize meaning for their doctors and investors to sell to a larger investor has been the speed at which they have been able to attract new invisible DSO partners to their group.
00:03:54.008 --> 00:04:15.408
Starting in 23 and continuing into 2024, the value metric for an invisible DSO heading for recapitalization has been less focused on the number of new partners they've been able to bring in and more focused on what has the invisible DSO been able to do for their existing partners.
00:04:15.408 --> 00:04:25.353
Have they been able to create collections growth, have they been able to create EBITDA growth and have they been able to help the practices become more efficient?
00:04:25.353 --> 00:04:38.369
So in 2024, it's been different from 22, 21, 20, where the primary metric for valuing an invisible DSO upon a recapitalization was growth in new partners.
00:04:38.369 --> 00:04:42.285
Today it's more about what are you doing for your existing partners.
00:04:42.285 --> 00:04:52.281
Certainly, the ability to continue adding new partners is valuable, but the investors are more focused on what have you done for your existing partners.
00:05:01.452 --> 00:05:08.103
So inflation has been a problem for pretty much every practice in the US and that is causing margin compression.
00:05:08.103 --> 00:05:09.747
Costs have gone up.
00:05:09.747 --> 00:05:17.913
Certainly, the fee-for-service practices have tried to keep up with the growing costs of operating their practices, primarily labor cost increases.
00:05:17.913 --> 00:05:28.348
But they have not really kept up with their fee increases to maintain their existing profit margins or even broaden their profit margins.
00:05:28.348 --> 00:05:37.423
And this has been even worse in the insurance-driven practices, who have really no control over ultimately what they're getting reimbursed by the payers.
00:05:37.423 --> 00:05:46.269
So they've had increasing costs and no ability to increase their fee schedules or their net reimbursement rates.
00:05:46.269 --> 00:05:47.927
So that has been challenging.
00:05:47.927 --> 00:05:55.617
Margin compression thanks to inflation has been a problem not just in 24, but 23 and even 22.
00:05:55.617 --> 00:06:07.362
And that's continuing and, frankly, that's where the invisible DSOs have an edge over the independent practices have an edge over the independent practices.
00:06:07.362 --> 00:06:10.889
The invisible DSOs, due to their size, are paying about 30% less for supplies than an independent practice is.
00:06:10.889 --> 00:06:21.362
They're paying 10% less for team benefits and providing better benefits at a lower cost, and they're getting reimbursed at higher rates from payers.
00:06:21.362 --> 00:06:31.312
Their size has enabled them to leverage and renegotiate what their partner practices are getting reimbursed from major insurance companies.
00:06:31.312 --> 00:06:53.464
They don't talk much about that and the insurance companies don't really want it to be well known, but the reality is the insurance companies are getting their arms twisted by the invisible DSOs, saying if you would like your patient base to be covered by our 47 practices in Phoenix, you're going to need to reimburse us at higher rates or you're going to lose a whole lot of coverage.
00:06:53.464 --> 00:07:20.149
So they have leverage and that is a big change that's going on in the industry and doctors are beginning to realize that they're at a disadvantage by remaining independent, because when your competitors are getting paid more and paying less for supplies or 50% less for implants, for example, they've got a bigger margin compression problem than the invisible DSOs do, and so that's a driving consolidation.
00:07:20.149 --> 00:07:36.877
You know, one of the statistics I love to quote is that in our last billion dollars of these partnerships completed in the last 24 months, over $150 million of that have been for doctors in their 30s, which is a dramatic shift from what happened pre-COVID.
00:07:46.420 --> 00:07:47.845
Political or macroeconomic view of the world is kind of interesting.
00:07:47.845 --> 00:07:56.192
In May the 23rd, the Justice Department and the Federal Trade Commission jointly announced an investigation or an inquiry, I guess they called it into healthcare consolidation or what they called roll-ups.
00:07:56.192 --> 00:08:02.192
And functionally, an invisible DSO partnering with an independent dentist is a healthcare roll-up.
00:08:02.192 --> 00:08:15.908
And what Lena Kahn, the chairman of the Federal Trade Commission, and the US Justice Department embarked upon was an inquiry to find out whether they could set up a way to control the speed of health care consolidation.
00:08:15.908 --> 00:08:33.965
And they were functionally mirroring a law that passed the California legislature in the summer of 24, which basically would have given the state government the right to approve any acquisitions or partnerships, even down to practices as small as those with $3 million in collections.
00:08:33.965 --> 00:09:00.384
So all of a sudden, if you were an invisible DSO operating in California, you had to submit every partnership or deal that you did to the state government for their approval or denial, and the metrics for what they could approve or deny were very broad, so they could functionally arbitrarily decide that you cannot partner with a particular doctor in a particular area, and what the reasons for that were were pretty gray.
00:09:00.384 --> 00:09:20.037
Fortunately, on September 30th, governor Gavin Newsom vetoed that bill and so we didn't have that issue, and fortunately, the federal version of that attack on our industry will be nipped in the bud by President Trump becoming the president-elect in that.
00:09:20.037 --> 00:09:33.123
Trump announced yesterday that he is replacing Lena Kahn as the chairman of the Federal Trade Commission with one of the existing Republican Federal Trade Commission board members who is not quite as rabid.
00:09:33.123 --> 00:09:40.822
So we've had all good things on the geopolitical front in the US as it pertains to our business.
00:09:41.625 --> 00:09:50.606
What may be more interesting is the macroeconomic environment, in that the basic theory of investing is to buy low and sell high.
00:09:50.606 --> 00:10:02.783
Well, right now I'm not sure that we've seen anything higher, given the new highs that equities have been in for the last 90 days the S&P, the Dow, the NASDAQ.
00:10:02.783 --> 00:10:08.504
If this is not a rally that someone should be thinking about selling into, I don't know what is.
00:10:08.504 --> 00:10:35.556
Yeah, one of the best events in 2024 occurred on November the 8th, and on November the 8th, the largest invisible DSO in the country, with now about 750 partner practices, completed their third recapitalization in seven years, and this is a great story.
00:10:35.830 --> 00:10:44.024
So we had a small group that was doctor-owned and they completed their first recapitalization in October of 2017.
00:10:44.024 --> 00:11:03.323
And the investors in that were very sophisticated professional investors and they valued that group initially at $330 million and a month after that transaction was completed, we partnered our first client with that group and therefore his equity was valued at that $330 million.
00:11:03.323 --> 00:11:24.323
That group continued to grow and by January of 21, they did their second recapitalization and our client, who kept $2 million of equity in that invisible DSO, would have had the opportunity to exit that $2 million at a valuation of $6 million, so a 3x return in 38 months.
00:11:24.323 --> 00:11:37.572
He did not and that group continued to grow and they approached 700 partner practices and on November the 8th they completed their third recapitalization and that third recapitalization.
00:11:37.572 --> 00:12:05.822
At that point they had over 700 owner-doctors, including 50 LPS clients that we had partnered with at Invisible DSO over the last seven years, and their recapitalization value on November the 8th was over $3.8 billion, meaning they had increased the value of that Invisible DSO, and therefore the value of its investors' equity, by over 1,100% in less than seven years.
00:12:05.822 --> 00:12:29.152
Now, fortunately, that generated 50 very happy LPS clients, because, had one of our clients joined that Invisible DSO three years ago, they saw about a 300% increase in the value of their equity, and for our clients that joined that invisible DSO five years ago, they saw about a 500% increase in the value of that equity they retained as a part of an initial transaction.
00:12:29.152 --> 00:12:40.798
So that event has, let's call it, re-energized the belief that there is significant upside in the equity that doctors retain in an invisible DSO.
00:12:41.278 --> 00:12:43.422
Now, keep in mind, this is a unicorn story.
00:12:43.422 --> 00:12:44.565
This is an outlier.
00:12:44.565 --> 00:12:46.697
This is not going to happen to every group.
00:12:46.697 --> 00:12:49.357
This one has been particularly well managed.
00:12:49.357 --> 00:12:57.123
They've chosen their doctors wisely and that return is probably not something that's going to be repeated anytime soon.
00:12:57.123 --> 00:13:09.663
However, today there are over a thousand invisible DSOs across the US far more than most people think and we consider less than 100 of those qualified to bid on our clients.
00:13:09.663 --> 00:13:15.623
So that means we think 900 invisible DSOs are groups that you should not partner with.
00:13:15.870 --> 00:13:24.044
Now, the reasons for going on what we call the blacklist are groups which may not have the proper financing to grow.
00:13:24.044 --> 00:13:28.158
They may be bank finance rather than having proper investors behind them.
00:13:28.158 --> 00:13:41.499
They may be groups with management that does not have the resume let's call it to execute a rapid growth, highly profitable value creation strategy for their partner doctors.
00:13:41.499 --> 00:13:50.851
It may be that the practices have not been well integrated and it may be that the group has partnered with practices which were not of the highest qualities.
00:13:50.851 --> 00:13:52.375
Let's call it so.
00:13:52.436 --> 00:14:02.991
It's important when considering an invisible DSO partner is to fully understand who you're partnering with, because, in our view, there's 900 of them out there that you don't want to partner with.
00:14:02.991 --> 00:14:09.312
Another thing you have to look at is who is the financial sponsor of the invisible dso.
00:14:09.312 --> 00:14:20.076
Do they have experience in investing in healthcare consolidation and, more importantly, do they have any track record in investing previously in dental consolidation?
00:14:20.076 --> 00:14:27.023
There are some investors out there who have started, built and monetized multiple invisible DSOs.
00:14:27.023 --> 00:14:48.883
One of them has done nine, another one is on their sixth, and so when you find the right investor who has a track record either in healthcare consolidation or, preferably, in dental consolidation, you can actually find a partner where you can get in early, potentially replicate the returns that I just described on that big one that recapitalized in November.
00:14:48.883 --> 00:15:06.461
But you have to be careful, and so that's really one of the key values that LPS brings to our clients is the knowledge of which are the invisible DSOs that have the potential to generate that five, seven or ten times return on your equity, because there are a whole lot of them out there that won't do it.
00:15:15.650 --> 00:15:23.878
So, interestingly, there are some very distinct elements or attributes of a practice which will add value to the practice.
00:15:23.878 --> 00:15:27.817
Obviously, number one is EBITDA growth.
00:15:27.817 --> 00:15:31.971
So having profit growth is critical to value for a couple of reasons.
00:15:31.971 --> 00:15:38.094
Number one if you have a practice that's EBITDA is growing, you're going to have more initial bidders.
00:15:38.094 --> 00:15:52.982
Our process from becoming a client to putting money in your pocket is going to take about six months and as your practice continues to grow during that process, your ultimate value, the initial closing value, will actually increase during that six-month process.
00:15:52.982 --> 00:16:13.124
And then, because of what we call the COVID earn-out, a growing practice potentially adds millions of dollars on top of their initial value, because when you structure a transaction with, say, a two-year COVID earn-out, the doctor is going to get paid for their performance in the two years post-closing.
00:16:13.124 --> 00:16:22.976
So the doctor is going to get to benefit from their Invisible DSO partner's resources whether that's lower supplies costs or higher reimbursement rates, partners' resources whether that's lower supplies costs or higher reimbursement rates.
00:16:22.976 --> 00:16:35.695
They're going to get to benefit from those elements in the two years after closing and they're going to get paid for that future growth.
00:16:35.695 --> 00:16:44.392
And it's that deal structure, which really did not exist pre-COVID, which enables doctors today to lock in today's record multiples and have them applied to their growth in the two years post-closing.
00:16:44.392 --> 00:16:57.697
So any doctor who's considering this process in the next two years is better off to do it today rather than to wait, because you're going to get paid for future growth and the values today are setting records.
00:16:57.697 --> 00:17:01.451
They may not be next year or the year after that or the year after that.
00:17:01.451 --> 00:17:09.692
So it's really sort of a unique moment in time where a practice can capture and lock in today's values as applied to their future growth.
00:17:10.032 --> 00:17:15.653
One of the things that we see in practices is that they tend to overstaff as they plan for growth.
00:17:15.653 --> 00:17:27.003
So we see many practices that may have three, four or five offices who have decided that they need to add a corporate infrastructure to help manage those three, four or five officers.
00:17:27.003 --> 00:17:48.961
So we see practices that may have $10 million in collections and they have a chief marketing officer and a chief financial officer and a chief people officer and they have way too many chiefs relative to their revenue and so ultimately their EBITDA is degraded and they're not creating value by adding all of that management infrastructure in our process.
00:17:48.961 --> 00:18:06.516
So, because many of the invisible DSOs would replace all of those functions because they have it existing in the parent company and, yes, you can add that back sometimes, but it's a challenge to see practices build up too much overhead in preparation for growth.
00:18:06.516 --> 00:18:10.550
The invisible DSOs don't need the overhead that you're building.
00:18:10.550 --> 00:18:13.196
So that's one of the big issues we see.
00:18:13.217 --> 00:18:17.292
A second issue we see is doctors who are coasting.
00:18:17.292 --> 00:18:31.438
They're not keeping their foot on the gas, so to speak, and it's important that you have growing collections and a growing EBITDA as you enter this process, because you're going to be more attractive and you're going to have more bidders and you're going to achieve a higher value.
00:18:31.438 --> 00:18:35.760
So if your practice is flat right now, it's time to start growing it.
00:18:35.760 --> 00:18:45.964
Today, for example, orthodontic practices we saw in 22 an 8% decrease national average in case starts.
00:18:45.964 --> 00:18:56.561
That was followed by 23 with a 6% decrease in case starts nationally and in 24, it looks like we're going to end up at about a 5% drop in case starts.
00:18:56.561 --> 00:19:13.161
Now this is the first time in the history of the orthodontic business that we have had three consecutive years of case start drops, and nobody can really explain that, because for some people we have a booming economy and therefore ortho case start should be going up, not going down.
00:19:13.161 --> 00:19:15.653
But it's been an interesting phenomena.
00:19:15.713 --> 00:19:36.403
Therefore, if you have a growing ortho practice, it's exceptionally valuable today because the majority of the other ortho practices in the US are actually declining, and that decline in ortho case stars has impacted the 14 invisible DSOs that focus exclusively on orthodontic practices.
00:19:36.403 --> 00:19:48.164
And so, out of the 14 ortho-only invisible DSOs, we consider 10 of those to be on our blacklist, meaning we would not let them bid on our clients for a variety of reasons.
00:19:48.164 --> 00:19:50.974
But the decline in case starts has had an impact.
00:19:50.974 --> 00:19:54.675
It's also had an impact on some of the multi-specialty practices.
00:19:54.675 --> 00:20:03.007
The only groups that seem to have not been impacted by it are the trifecta groups, those which have partnered with pedo, ortho and oral surgery.
00:20:03.007 --> 00:20:07.917
That pedo referral to the ortho is filling that hole, so to speak.
00:20:08.664 --> 00:20:25.893
So there are a lot of different things happening in the industry and I'm happy to have a conversation with any doctor to talk about what's happening in their community, because dentistry is local and so what's happening in your community may be dramatically different from what's happening in another one.
00:20:25.893 --> 00:20:48.185
So I urge all listeners, give us a call, let's have a 20-minute conversation and I promise you're going to learn something you know.
00:20:48.185 --> 00:20:50.673
Doctors today really should become educated on the invisible DSO opportunity and understand its potential value.
00:20:50.673 --> 00:21:14.401
You know, in a typical doctor-to-doctor transaction today which is appropriate for practices with, say, under $2 million in collections if you're a GP, or under $1.5 million if you're a specialist, under a million five if you're a specialist, a doctor to doctor transaction today, depending on your practice and location, is going to yield a value of 70 to 100 percent of your trailing 12-month collections In our world.
00:21:14.401 --> 00:21:25.941
We've done transactions this year that have valued practices at over 300 percent of collections, or three to four times the value you might get in a doctor-to-doctor transaction.
00:21:26.065 --> 00:21:32.537
So we're in the education business and my goal is to talk to every doctor who's interested in learning about this option.
00:21:32.537 --> 00:21:45.497
Let's go through our valuation process, which costs nothing and obligates you to nothing, but we may be able to give you some ideas, after looking at your numbers, on ways that you can improve your practice in the future.
00:21:45.497 --> 00:21:49.469
We're signing clients today that I've been talking to for five years.
00:21:49.469 --> 00:22:04.959
Ultimately, it's about timing when it's right for you and when it's not but I urge every doctor to go through our evaluation process because they're going to learn something, I promise, and it'll give you a benchmark and it might give you some goals to shoot for in the coming years.
00:22:04.959 --> 00:22:08.508
So I urge every doctor to give us a call.
00:22:08.508 --> 00:22:13.530
Let's have a conversation, because there are different things that you can do to prepare for the future.
00:22:13.852 --> 00:22:16.521
Number one thing is start paying attention to expenses.
00:22:16.521 --> 00:22:39.670
Many doctors are not looking at their monthly financial statements every month and don't understand exactly where all the money's going, and that's something you want to understand, and we see a lot of doctors that I talked to, let's say, a year ago, and I point out hey, you're overstaffed by three people, or hey, you're paying too much for this, or hey, your margins over here are not what they could be.
00:22:39.670 --> 00:22:45.098
Why don't you go focus on that and let's get back together in six months and see what the results are?
00:22:45.098 --> 00:22:53.144
And those conversations often result in practices that become much more profitable only because the doctor is paying attention to the numbers.
00:22:53.144 --> 00:22:56.453
So I urge every doctor to understand your numbers.
00:22:56.453 --> 00:23:02.998
Give us a call and let us give you some ideas of how you might improve the value of your practice in the coming months or years.
00:23:02.998 --> 00:23:05.112
Again, it's all about education.
00:23:14.546 --> 00:23:23.538
The number one concern of doctors that I talk to about an invisible DSO partnership is their fear of losing autonomy.
00:23:23.538 --> 00:23:36.266
Now there are plenty of invisible DSOs out there that will promise you full clinical autonomy, and clinical autonomy means they want you to do the dentistry and they'll handle managing your people and your practice.
00:23:36.266 --> 00:23:49.915
In our world, we don't believe that's the correct model for our clients, and so our clients are going to receive, in any transaction that we're advising on full autonomy not just clinical autonomy, but full autonomy.
00:23:49.915 --> 00:24:01.751
Doctors are going to continue to make the decisions as to who they hire, who they fire, what they pay them, what procedures they perform, what labs they use, what supplies they use and how they set their schedule.
00:24:01.751 --> 00:24:11.992
The right invisible DSO partner wants to truly become your silent partner, enable you to access their resources, but they are not going to tell you what to do.
00:24:11.992 --> 00:24:20.066
You continue to be the leader of your practice with your brand, your team, your strategy and without interference from your partner.
00:24:20.066 --> 00:24:23.296
And that's an important element of choosing a partner.
00:24:23.296 --> 00:24:50.817
And in our process we make sure long before a doctor has picked a finalist in the bidding process, they're going to talk to other doctors that have joined the Invisible DSO that you are considering as a finalist and our clients are going to have a doc-to-doc conversation with multiple doctors that have partnered with the specific group that they're considering and they're going to learn on that phone call with nobody else on it, and ask the questions like what changed?
00:24:50.817 --> 00:24:51.838
What didn't change?
00:24:51.838 --> 00:24:53.028
Are you glad you did it?
00:24:53.028 --> 00:24:53.952
Would you do it again?
00:24:53.952 --> 00:24:57.976
And, most importantly, did your new partner do what they said they would do?
00:24:57.976 --> 00:25:07.548
And that's an important element in the process and part of the reason our hundreds of clients who have joined Invisible DSOs over the last eight years are all still happy.
00:25:07.548 --> 00:25:21.204
They knew exactly what to expect when they joined these groups and it's an important piece of the process to fully understand what partnership is going to look like and if you choose wisely, you're going to continue to have full autonomy.
00:25:21.204 --> 00:25:23.249
Going to look like and if you choose wisely, you're going to continue to have full autonomy.
00:25:23.249 --> 00:25:24.030
Thanks for listening to.
00:25:24.111 --> 00:25:32.567
Practice Partnership Monetizing your Dental Practice a podcast from Large Practice Sales.
00:25:32.567 --> 00:25:37.657
Large Practice Sales is the largest advisor to GPs and specialists of all kinds seeking to monetize all or part of their practice.
00:25:37.657 --> 00:25:44.490
The key for doctors to maximize your practice value is choosing the right advisor and the right IDSO partner.
00:25:44.490 --> 00:25:56.689
At LPS, we guide our clients towards partnerships with IDSOs that not only reduce administrative headaches but give you the resources to grow your practice bigger, better, faster and more profitably.
00:25:56.689 --> 00:26:01.737
And, best of all, with the right IDSO partner, you can create generational wealth.
00:26:01.737 --> 00:26:15.079
If you're interested in learning the potential value of your practice in an IDSO partnership, visit our website at largepracticesalescom or you can email us at podcast at largepracticesalescom.
00:26:15.079 --> 00:26:22.973
Follow this podcast for more tips you won't find anywhere else on how to monetize your dental practice at the maximum value.