Practice Attributes for High Value IDSO Partnerships

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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.
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Thank you for joining us, doctors, today we're going to talk about the key attributes to achieving the highest values in 2025, and that will include some of the values in 2024 and how doctors achieved record values in hundreds of millions of dollars of transactions closed in 2024.
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We want to set you up for 2025 to achieve the highest value possible for your practice.
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Practice attributes for maximum value really can be measured by looking at the transactions that LPS has completed in the last 24 months.
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We've completed over a billion dollars of invisible DSO partnerships in the last 24 months, and of that, $150 million were for doctors in their 30s, which is very different from pre-COVID.
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In fact, in the third quarter of 2024, ending September 30th, we completed almost $200 million of transactions just in that quarter, and these were done, some of them at record multiples Over $55 million of transactions just in that quarter, and these were done, some of them, at record multiples.
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Over 55 million of that were done at 11 times EBITDA or better.
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Over 60 million was done at over nine times EBITDA or better.
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So the myth that practice values are declining due to interest rates, political nonsense, wars, et cetera, is just not true.
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If you have a great practice and you have an advisor who knows where to look for the right investors, the values have been extraordinary and there's been no shortage of bidders on our clients.
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Now the key to that has been, historically, a practice that's relatively large, with doctors that are relatively young, with, most importantly, a practice that is growing its top and bottom line.
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Growing your top line without growing your bottom line is okay, but it's not how you get maximum values.
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So the key is looking forward into 2025, what will be the key attributes to achieve maximum values in 2025 and beyond?
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Historically, a practice that was growing at a nominal rate of 1, 2, 3, 4 percent per year would be a very valuable practice Today because there are so many doctors eager to partner with the great invisible DSOs.
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A practice is going to get the most value if they're growing at double-digit rates.
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One of the transactions we completed in the third quarter was a $55 million transaction at 11 times EBITDA for a practice that had $5 million of EBITDA.
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But, most importantly, they grew in the first quarter of 24 at a 22% rate above the first quarter of 2023.
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And when I say they grew, it was not just top line, it was bottom line EBITDA growth.
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So number one thing to achieve maximum value today is a practice that has double-digit EBITDA growth over the prior 12-month period.
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A lot of doctors are concerned that if they go back two and three years and their performance is measured, that that will impact value, and certainly Invisible DSOs would like to look at the historical trends.
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But really what's most important today across all practice types, whether it's a GP or any of the specialists, is that you're achieving a double-digit growth in 2024 or 2025 versus the same period in the previous year.
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So practices that are growing are going to have more bidders and therefore achieve higher values.
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That's number one.
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Number two are practices in which the doctors are relatively young.
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So let's define relatively young.
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What's happened post-COVID is doctors my age and I am 64, are finding that they get fewer bidders today because if I'm an invisible DSO, I would much rather partner with a doctor in his 30s or 40s, because those doctors will have a time horizon of another 20 or, in some cases, 30 years with that invisible DSO partner.
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So what that has done has impacted the values of doctors who have a six in front of their age, and that's particularly acute if you are a single doctor practice.
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Now, a doctor with a six in front of his age can fix that problem by ensuring that they have at least one, and preferably two or more, associates that are under 60, under 50, or under 40.
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Having multiple associates that are younger than you are is key to getting value if you have a six in front of your age.
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Now, if you have a very large practice with 10 associates, your age is irrelevant and your production, frankly, is irrelevant as well.
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But if you're a doctor with a six in front of your age and you're producing the great majority of the collections in your practice, even if you have a younger associate, it's going to be more difficult to achieve the highest values when we look at a practice and for this example we're going to use a GP practice.
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We're looking for practices that are going to have profit margins of at least 20% EBITDA as measured against collections.
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So if you have a $3 million in collections practice, you should be operating at at least a 20% margin in generating $600,000 in EBITDA or more.
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And we have some clients that are running an EBITDA margin on practices that size of 30% and higher.
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So it is possible and certainly that has to do with the procedures that you're performing, it has to do with the payers that you are accepting and if you're fee-for-service, a lot of it has to do with have you raised your rates to account for the 25% inflation that we've had in the last four years.
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So the margins on a practice are something that are going to be looked at carefully and it's possible that with a keen focus on expenses, that you can take a practice that has multimillion dollar revenues and actually address the expenses and increase that EBITDA margin relatively quickly.
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And we've seen cases where we've gone through a valuation process with a prospective client and we've gone back to them and said, hey, doctor, your margins are only 10%, but if you do X, y and Z over the next six months, you can double your margins and functionally more than double the value of your practice in our process.
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So that's one of the benefits of going through our valuation process is we're going to give you some tips and tricks as to things you should be focusing on to improve the value of your practice.
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Now, another key driver of value for a GP practice is the percentage of their collections which are generated by hygiene.
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Hygiene in most practices, if run correctly, is a big add to the EBITDA margins, in part because the doctor's compensation is not being applied to hygiene revenues.
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So in a typical transaction, a GP doctor is going to have compensation on a go-forward basis of anywhere between 28 and 35 percent of collections, whereas if you have a high component of hygiene within your practice, you are not going to be getting paid on hygiene, which reduces the doctor's compensation cost and increases the EBITDA of the practice.
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Now I realize it's very tough to hire hygienists right now.
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That is not going to change and it's true across the country.
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I think we've seen hygienist compensation ranges and I always ask that question when I talk to doctors that today are ranging from about $30 on the low side per hour to, in some cases, $80 per hour, on the low side per hour to, in some cases, $80 per hour.
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So it's tough to find great hygienists and they are no longer inexpensive not that they necessarily ever were.
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But the other thing to look at is the procedures that you're doing and what are their margins on those procedures.
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Are you spending your time on the procedures which are going to generate the highest profits for your practice?
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And that's pretty easy to figure out, and it doesn't matter whether you are reimbursed by insurance or fee-for-service.
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You can look at the margins on every procedure you're doing and potentially focus you as the owner doctor on the higher margin procedures and, if you have an associate doctor, focus the associate doctor on the lower margin procedures.
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But it's a good time to examine all of the procedures that you're doing, how you're charging for them and what your margin is on each procedure that you do in your practice, that you understand the numbers of your practice, because ultimately the numbers of your practice will be what will drive the value of your practice in an invisible DSO partnership.
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So doctors should be looking at their financials at least on a monthly basis, preferably within 15 days of the end of the month so that they can identify areas in which costs may be out of control or areas in which they may be spending too much money on fixed expenses, in particular, payroll.
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One of the number one things we see with practices today and to some degree it's understandable is that they're overstaffed.
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They have more people than they need and in some cases they have done that because of the difficulty of hiring great staff.
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They're not eager to fire staff members because they want to have a backup in case they lose somebody else, which I understand, but one of the number one things we see is practices that are overstaffed.
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Another area that you can potentially get cost savings is when's the last time you haggled with your supplies vendor.
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The supplies vendors today are battling each other pretty hard and if you have not had a discussion with your current supplies vendor and if you have not gone out to their competitors to get competitive quotes, you're probably leaving a couple of percentage points of profitability on the table.
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This is a good time to be talking to your vendors to get them to acknowledge the fact that margins are going down in your business and you need their help to reduce costs, and my theory is it never hurts to ask.
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I think the number one thing that doctors need to be aware of as we head into 2025 is that if you are 55 or older, now is the time to have a plan.
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In most invisible DSO partnerships, they're eager to partner with doctors who will remain their partners for at least five years.
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So if you're 55 in an invisible DSO partnership today, they are going to want you to continue to work with them until you are 60.
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Now, if you're 60 and you're just starting this process, you're a little late.
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I urge every doctor who's 55 or older to give us a call and let's go through the process, because age is a big issue and the other thing that doctors should consider is keep a close eye on your expenses.
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They can tend to get out of control and if you're not paying attention on a monthly basis, this is going to be an ongoing issue.
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2025 is going to see an acceleration in the category and therefore we're going to have more capital and more bidders.
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However, all of the bidders are going to have more doctors who are beginning to understand that invisible DSO partnership is not selling out.
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It's gaining a silent partner that can help you grow your practice bigger, better, faster and more profitable.
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Thanks for listening to.
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Practice Partnership Monetizing your Dental Practice a podcast from Large Practice Sales.
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Large Practice Sales is the largest advisor to GPs and specialists of all kinds seeking to monetize all or part of their practice.
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The key for doctors to maximize your practice value is choosing the right advisor and the right IDSO partner.
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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.
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And, best of all, with the right IDSO partner, you can create generational wealth.
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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.
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Follow this podcast for more tips you won't find anywhere else on how to monetize your dental practice at the maximum value.