IDSO Performance in 2024

WEBVTT
00:00:02.384 --> 00:00:11.711
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.
00:00:11.711 --> 00:00:17.672
Welcome, doctors, to our latest episode of the Practice Partnership podcast.
00:00:17.672 --> 00:00:26.250
Today we're going to talk about the performance of invisible DSO partnerships that Large Practice Sales created in the first half of 2024.
00:00:26.250 --> 00:00:45.951
Contrary to popular belief, we have had an extraordinary number of bidders and we've set some new high record values for great growing practices and in part, that's thanks to the fact that there's been over $5 billion of new investment in capital provided to the invisible DSOs in the first six months of this year.
00:00:45.951 --> 00:01:00.482
You know, interestingly, the trends in 2024 have continued a lot of what happened in 23 and 22, with a few minor changes.
00:01:00.482 --> 00:01:18.072
As an example, in the pedo-ortho-oral surgery world, or what we call the dental trifectas, there are now more and more dental trifecta invisible DSOs eager to partner with great pedos, orthos and oral surgeons in the same communities.
00:01:18.072 --> 00:01:26.451
We also have seen the growth of a couple of pedo-ortho-only invisible DSOs which are also very eager bidders.
00:01:26.451 --> 00:01:52.652
And we've seen a shift in the GP world where more and more of the larger GP-focused invisible DSOs are adding specialists within the footprint of their GP practices and this is driving up the values of specialists and giving them more options, and when I say specialists, I mean in particular, endoperio, pedo, oral surgery and orthodontics.
00:01:52.652 --> 00:01:58.868
Now, each of those groups also today have their own options in partnerships.
00:01:58.868 --> 00:02:19.722
There are multiple pedo-only invisible DSOs, there are multiple perio-only invisible DSOs and there are multiple endo-only invisible DSOs and there are now 17 oral surgery invisible DSOs plus 14 ortho-only invisible DSOs.
00:02:19.722 --> 00:02:39.606
So the growth in specialty has continued into 24, but the number of new GP-focused invisible DSOs continue to increase and some of them are being started by investors that have experienced great success building invisible DSOs over the last 10 years.
00:02:40.429 --> 00:02:48.307
We did a transaction about 60 days ago for a great GP client of ours with three offices, a younger doctor I think he was 43.
00:02:48.307 --> 00:03:02.873
And in that transaction he became the platform practice for a new invisible DSO that's backed by a $10 billion fund which has created and monetized five other invisible DSOs.
00:03:02.873 --> 00:03:06.310
So you want to talk about a great opportunity for that doctor.
00:03:06.310 --> 00:03:19.493
He's young, he's in a growing community and he's now financed and backed and is an owner in an invisible DSO that has been financed by a group which has done it five times before.
00:03:19.493 --> 00:03:27.433
So a lot of doctors will look at joining a new invisible DSO as potentially risky and, frankly, in many cases it is.
00:03:27.433 --> 00:03:49.086
But when you can partner with a group that has created successful invisible DSOs and returned billions of dollars to their investors and doctors during the last 10 years, you've got a phenomenal opportunity to get in on the ground floor via your ownership stake that you retained in an invisible dso partnership, and there's a lot of value in that.
00:03:49.086 --> 00:04:18.872
The number of new invisible dsos in 24 has continued and fortunately, some of these groups are also backed by experienced capital, and that's one of the things that we look at in deciding whether an invisible DSO is qualified to bid on our clients, because, as you heard me before say, there are about a thousand DSOs and invisible DSOs in the US today and we consider less than a hundred of those to be qualified to bid on our clients.
00:04:18.872 --> 00:04:53.492
And fortunately, with that new $5 billion of capital, there are a lot of groups out there that are qualified to bid on our clients, even though they may be newer and younger, and the checkpoint there is to find out has the money that is financing these groups done healthcare consolidation before, specifically provider-based healthcare consolidation before, and, fortunately, provider-based healthcare consolidation before and, fortunately, some of the most successful financiers of invisible DSOs over the last decade have started new invisible DSOs.
00:04:53.492 --> 00:05:15.964
Two of them have used our clients as the platform practices, and so there are going to be opportunities for doctors to join these groups as they have fresh capital, they are not hindered by high interest rates and they have shrewd management and experienced backers, and that's how you create a big upside value in the equity for doctors.
00:05:16.927 --> 00:05:22.505
Another trend change in 24 that's kind of interesting is we're continuing to see successful recapitalizations.
00:05:22.505 --> 00:05:33.360
The largest invisible DSO in the country is currently in the process of a recapitalization, which will value that group at a number approaching $5 billion Now.
00:05:33.360 --> 00:05:41.144
This is a group that was relatively small six and a half years ago and today has grown to over 700 practices.
00:05:41.144 --> 00:06:03.024
The interesting thing about that recapitalization is some of the doctors that we partnered with that group and we've partnered probably 50 clients with them over the last six and a half years is some of them are going to see returns of seven, eight, nine times the initial value of their equity from this recapitalization, and it all depends on when they became partners with this group.
00:06:04.045 --> 00:06:09.173
The other interesting shift that you'll see from that is because this group has 700 offices.
00:06:09.173 --> 00:06:14.221
They will be making different promises to future doctors that join the group.
00:06:14.221 --> 00:06:18.964
In other words, it's tough to move the needle when you have 700 offices.
00:06:18.964 --> 00:06:30.865
You're not going to triple your number of offices in the next five years, but you can certainly achieve growth years.
00:06:30.865 --> 00:06:31.728
But you can certainly achieve growth.
00:06:31.728 --> 00:06:33.112
But it's not going to be an equity return.
00:06:33.112 --> 00:06:37.146
That's three to five times the initial equity value, which is what a lot of these groups promise to their doctor partners.
00:06:37.146 --> 00:06:52.220
Instead, this will be the gold-plated, safe choice invisible DSO for doctors who are not trying to hit it out of the park with their equity gain, but rather interested in a very safe, solid 20% per year kind of return on their equity.
00:06:52.220 --> 00:06:56.596
So a lot of changes going on and fortunately most of them are good.
00:07:05.966 --> 00:07:12.699
You know what I see happening in the back half of 24 is certainly a lot of drama surrounding our election.
00:07:12.699 --> 00:07:21.798
That's not going to change the committed capital to the invisible DSOs, but it is certainly going to add a little excitement to the market.
00:07:21.798 --> 00:08:02.716
By whichever candidate ends up being the new president, I'm not sure at this point that it's going to make a huge difference, except from a tax perspective, whether anybody wants to pay 44.6% or not in federal taxes, I don't know, but I think we would all agree that, given our current deficit spending rate, it's not sustainable and it's difficult to cut expenses, and therefore they will do what politicians do, which is increase the taxes on rich dentists, and so I expect that the tax rate that you will pay on the sale of all or part of your practice or your ordinary income are going to go up in the coming years.
00:08:02.716 --> 00:08:17.047
I think it's inevitable and hopefully I am wrong, but I think that's coming, and I think that's going to drive doctors to consider decisions for the back half of 24, because it takes about six months to complete a transaction.
00:08:17.047 --> 00:08:24.930
So today any doctor who's considering an invisible DSO partnership is going to be looking at gains that would be booked in 2025.
00:08:25.831 --> 00:08:34.878
So other things happening in the back half of the year is there's certainly a lot of euphoria at the moment in the belief that interest rates will be cut.
00:08:34.878 --> 00:08:42.255
The reality is, that's certainly possible, but it's not like they're going to cut interest rates from six to three.
00:08:42.255 --> 00:08:58.690
They're going to stair-step down those interest rates, which is not going to have a particularly huge impact on the invisible DSOs interest rate carry cost and unfortunately, again with the $5 billion of new financing and capital that came into the first half of the year.
00:08:58.690 --> 00:09:26.520
There's plenty of groups out there with lots of money that are not impacted by interest rates, but we have seen dozens of invisible DSOs that have been impacted by high interest rates and therefore many of them have stopped their new partnership activities, and that has certainly reduced the number of bidders from what we'll call the legacy IDSOs, but fortunately they have been replaced by the newly capitalized and growing invisible DSOs.
00:09:26.520 --> 00:09:29.727
Newly capitalized and growing invisible DSOs.
00:09:29.748 --> 00:09:35.038
You know, the other thing that I think we need to think about in the back half of the year is that we are in a very unique geopolitical situation.
00:09:35.038 --> 00:09:38.529
The reality is, we're in a very precarious time.
00:09:38.529 --> 00:09:50.317
We have wars between Israel and Iran that are brewing, we have the challenges of China and Taiwan and certainly the Ukraine.
00:09:50.317 --> 00:09:53.210
Issues are going to continue to be top of mind.
00:09:53.210 --> 00:10:17.318
Fortunately, the stock market has ignored any negative news and seems to hit new highs every week, and whether that'll continue or not I don't know, but certainly an investment in the equity markets in 2023 was more valuable than an investment in a dental practice, in that the S&P 500 returned somewhere north of 25% in 2023.
00:10:17.318 --> 00:10:27.778
And while I would love to tell you we get great values for our practice clients, we did not see an increase in the value of dental practices in 2023 of 25%.
00:10:27.778 --> 00:10:32.511
Yeah, in a couple of specialized cases yes, but as a general rule, no.
00:10:32.511 --> 00:10:47.955
Now, whether those returns in the equity markets will continue or not, I don't know, but at the moment we're getting exceptional values for practices that have younger doctors, that are growing and have a vision and a plan.
00:10:48.865 --> 00:10:55.331
One of the things that's most interesting in our business is when you have a doctor that has a growth plan.
00:10:55.331 --> 00:11:00.590
You are able to tell a story to the invisible DSOs that excites them.
00:11:00.590 --> 00:11:18.527
One of the things that has changed fairly significantly in the last two years is how the investors that recapitalize the invisible DSOs or buy out the previous investor is that they're very, very focused on organic growth within the practices.
00:11:18.527 --> 00:11:21.557
What they're looking for today versus three years ago.
00:11:21.557 --> 00:11:43.355
Three years ago, the investors were looking at the ability of an invisible DSO to attract new partners to their group, and the speed and the quality of the practices they could get and how they integrated them was an important metric in new investors recapitalizing invisible DSOs Today.
00:11:43.355 --> 00:11:45.678
While that's all still certainly important.
00:11:45.678 --> 00:11:54.451
The number one thing that they are looking at is did the invisible DSO provide the promise benefits to their new doctor partners?
00:11:54.451 --> 00:11:58.158
The promise benefits to their new doctor partners.
00:11:58.158 --> 00:12:00.201
And the promise benefits include did your revenues increase?
00:12:00.201 --> 00:12:01.124
Did your EBITDA increase?
00:12:01.124 --> 00:12:03.006
Did your costs go down?
00:12:03.006 --> 00:12:18.817
So what they're looking at very carefully is that the invisible DSO concept is great, but the investors are very curious to see did the invisible DSO provide the services and resources to help grow the practices that they partnered with?
00:12:18.817 --> 00:12:25.344
So it's not just about the number of new practices they can partner with, but what they can do to help those practices.
00:12:25.344 --> 00:12:57.687
And that's in part, why the dental trifecta groups have become so interesting to investors is because as you start with a nucleus of a pedo and ortho and an oral surgeon in a community and then add other pedos, orthos and oral surgeons into that nucleus, you create a locked-in referral pattern and as new doctors join that group, they shift their referrals to other practices within the invisible DSO family and that causes organic growth.
00:12:57.687 --> 00:13:04.763
And again, that's what's the number one valuable thing to investors today is are these groups creating organic growth?
00:13:04.763 --> 00:13:17.302
And so the pedo-ortho and the dental trifecta groups are able to create that organic growth just by adding other practices into their family, who shift their referral patterns to practices within the family.
00:13:17.302 --> 00:13:23.225
It's a valuable strategy and it's very timely today, given the focus on organic growth.
00:13:32.436 --> 00:13:39.538
One of the interesting things that's changed is the new money that has come into US dental consolidation.
00:13:39.538 --> 00:13:47.302
Historically and doctors have perceived this for a long time that the only investors in US dental consolidation are private equity groups.
00:13:47.302 --> 00:13:49.707
The reality is that's not true.
00:13:49.707 --> 00:14:09.836
Certainly, private equity has been a dominant funding source for the invisible DSOs, but in the last couple of years we've done hundreds of millions of dollars of partnerships with invisible DSOs that are backed by family offices, and today you have invisible DSOs that are also backed by traditional institutional capital.
00:14:09.836 --> 00:14:31.128
As an example, blackrock, which is the world's largest asset manager with today about $10.6 trillion under management, has partnered or bought two invisible DSOs in the last 18 months, both of them, interestingly, specialty and one of them, in particular, a dental trifecta group.
00:14:31.128 --> 00:14:42.788
And so when the world's largest investor is endorsing the dental trifecta concept and endorsing the invisible DSO concept in general, that attracts other investors Also.
00:14:42.847 --> 00:14:55.788
Last year, we had the sovereign wealth fund of Abu Dhabi dip their toe in the water and make a little $1 billion investment in a 30-year-old invisible DSO that has about 400 offices across the country.
00:14:55.788 --> 00:15:09.331
There are other sovereign wealth funds looking at the dental investment landscape and you also have other institutional managers interested in the invisible dso concept.
00:15:09.331 --> 00:15:11.054
So it's not just private equity.
00:15:11.054 --> 00:15:25.904
There's lots of very sophisticated money coming into this game, which is functionally, in my view, an endorsement of the invisible DSO concept, because you didn't hear me say that there was $5 billion invested in DSOs in general.
00:15:25.904 --> 00:15:32.900
You heard me say that there was $5 billion invested in invisible DSOs, and that's different.
00:15:32.900 --> 00:15:57.057
So, interesting change funding and, uh, we're excited to see that continue partnership.
00:15:57.076 --> 00:15:59.365
We urge them to understand the potential value of their practice in one of these transactions.
00:15:59.365 --> 00:16:04.587
Contact us, let's have a conversation, and we'll go through your numbers and give you an idea of what the value of your practice is today.
00:16:04.587 --> 00:16:11.144
And really, as an added benefit of that conversation, we can also give you an idea of what's possible.
00:16:11.144 --> 00:16:39.215
We look at well over a thousand sets of practice financials every year and we're dissecting them and have a pretty good idea of what constitutes a good practice and what constitutes a practice that could use some improvement, and so having a conversation with us can help you identify areas in which you may want to improve over time over time.
00:16:39.215 --> 00:16:49.543
In the back half of this year, I think doctors will begin to consider the Invisible DSO partnerships more than they have previously, because the practices that we take as clients are all growing and that is a number one metric that's required.
00:16:49.543 --> 00:16:53.941
The faster your practice grows, the more valuable it's going to be.
00:16:54.160 --> 00:16:58.263
If you have a shrinking practice, now may not be the time for you to do a deal.
00:16:58.263 --> 00:17:00.610
It may pay for you to wait.
00:17:00.610 --> 00:17:11.744
Fix your practice and make sure that you're growing, because one of the key elements that the invisible DSOs are looking at is the growth rate of the practice and the projected growth rate.
00:17:11.744 --> 00:17:17.280
What new elements have you adopted in your practice that may drive growth higher?
00:17:17.280 --> 00:17:19.104
Are you using CuraDot?
00:17:19.104 --> 00:17:22.929
Are you using AI in your diagnostic processes?
00:17:22.929 --> 00:17:29.853
You know thousands and thousands of invisible DSO and DSO offices have already adopted AI.
00:17:29.853 --> 00:17:31.778
It will become a new standard of care.
00:17:31.778 --> 00:17:38.842
If you haven't looked at it yet, I urge you to do it, because the smart money is doing it, and they're doing it for a reason.
00:17:38.842 --> 00:17:48.402
Certainly, it's going to provide better care for the patients, but I can assure you that it's going to provide more revenues to the practices Again, notwithstanding the elections.
00:17:49.085 --> 00:17:55.502
One thing that all doctors should be aware of is the coming cliff in the estate tax exemption amounts.
00:17:55.502 --> 00:18:05.729
Today, the estate tax exemption is about $13 million per person and that is scheduled to revert back to about $6 or $7 million.
00:18:05.729 --> 00:18:11.885
I think it's an inflation-adjusted number and that will not happen until the end of 2025.
00:18:11.885 --> 00:18:25.241
But if you are planning to do any estate planning, I urge you to do it sooner rather than later, because the estate planning attorneys which my son happens to be one are going to be very busy in the back half of 25.
00:18:25.241 --> 00:18:37.025
You should take a look at your estate plan and understand the exemption cliff that's coming, as you may want to do some planning now rather than waiting until later in 25.
00:18:39.297 --> 00:18:44.961
Thanks for listening to Practice Partnership Monetizing your Dental Practice, a podcast from Large Practice Sales.
00:18:44.961 --> 00:18:53.463
Large Practice Sales is the largest advisor to GPs and specialists of all kinds seeking to monetize all or part of their practice.
00:18:53.463 --> 00:19:00.326
The key for doctors to maximize your practice value is choosing the right advisor and the right IDSO partner.
00:19:00.326 --> 00:19:17.560
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 and, best of all, with the right IDSO partner, you can create generational wealth.
00:19:17.560 --> 00:19:30.919
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.
00:19:30.919 --> 00:19:38.810
Follow this podcast for more tips you won't find anywhere else on how to monetize your dental practice at the maximum value.
00:19:38.810 --> 00:19:45.568
Learn from LPS, which completed over $600 million in IDSO partnerships in 2022.