The evolution of the dental industry is in full swing. Corporate DSOs are gobbling up private practices at breakneck speed. Unfortunately, these deals come at a steep cost. Dentists are giving up their autonomy and selling their practices at insultingly low rates because they don’t know their options.
It’s easy to understand why selling to a corporate DSO seems like it would be a no-brainer. These offers may look good on paper, but in reality, they’re a cleverly disguised win-lose prison that ensnares dentists who don’t understand what they’re getting into.
Consequences of selling to a corporate DSO
Some of the consequences of selling to a corporate DSO include:
- Relinquishing control of how you run your practice
- Putting your dream of retirement or exploring a new venture on hold
- Compromising your standards for patient care for the sake of compliance with the new rules
- Agreeing to sell with no input over the terms and no guarantee of a full payout
Corporate DSOs are experts when it comes to enticing dentists with deals that look good on the surface. But there is the potential for a whole lot of grief if you choose to give in to their ploys.
The good news is there’s a far better option: health-care entrepreneurship.
Hope for surviving today’s dental landscape
Having acquired many satellite practices—and either lectured, trained, joint-ventured, or partnered with many other dentists during the last 20 years—it is very clear to me where the greatest opportunities lie for surviving the shifts in today’s dental landscape.
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In fact, I would like to share what I call the “golden combination,” which is quite fitting as we may be experiencing the second golden age of dentistry. The goal of this combination is to build a self-sustaining group built on partnerships as opposed to associates. The exit strategy goal is to receive double-digit multiples of EBITDA on your terms, rather than single-digit multiples of EBITDA on their terms.
The basic strategy:
- Acquire value-added locations.
- Add value through both “natural” and “forced” appreciation.
- Enter a joint venture with specialists.
- Convert associates to partners to maximize everyone’s income and equity.
- Combine your group/practice with
others, creating the highest value.
- Recapitalize by partnering with a
private equity group.
- Reinvest in private practice dentistry as a private lender and real estate investor.
Here's a closer look at some of the pillars of this strategy.
Exploring health-care entrepreneurship
Investing is a key part of becoming a successful health-care entrepreneur. Learning how to assess and find “value-added” opportunities with significant upsides is one of the most important skills to find success in dentistry’s new landscape.
Whether you have a solo practice or multiple locations, there are some wonderful opportunities to team up with existing private practitioners and share in the very best financial outcomes in dentistry today.
One of those strategies is called the master DDSO.
The ins-and-outs of a master DDSO
As you have seen in the market, the larger the group, the stronger the valuation methodology and thus the higher the valuation or purchase price. Private practice dentists are banding together to create greater economies of scale, larger profits, and more fun in clinical practice.
The master DDSO concept is simple. Private solo practices and groups combine efforts to achieve much higher financial gains. Small solo practices (under $1.2M) are valued based on a percentage of their last year’s gross revenues. Large solo practices and multiple-location groups are valued based on a multiple of EBITDA. The greater the EBITDA, the greater the multiple used for the valuation.
For instance, a dental practice or small group with EBITDA between $500K and $2M might sell for six- to seven-times EBITDA, whereas a group structured as a master DDSO with $25M of EBITDA trades for between 12- and 15-times EBITDA. That means double the profits by teaming up with other private practitioners! And because the master DDSO often does not sell to a DSO, but rather, a large private equity group, the DDSO is able to structure much more favorable terms.
Now you have greater clarification for my earlier statement about the goal of a master DDSO: double-digit multiples of EBITDA on your terms, rather than single-digit multiples of EBITDA on their terms. Said another way, you can have your cake and eat it too.
In fact, my partner, Dr. Avi Weisfogel, and I have put this concept to the test with the launch of Freedom Dental Partners. We created a national dentist-owned DSO that is growing daily, and we invite any solo practice or private group practice to join us. Larger groups like ours often go through several sales, or recapitalizations, creating even greater wealth accumulation for the affiliated private practitioners. What a wonderful strategy to capitalize on the current DSO upward trend!
The role of real estate investment
Real estate investment is one of the best wealth-building revenue streams. That’s why it’s so important to the overall health-care entrepreneurship strategy. Most of the world’s wealth is created or held in real estate. It is also true that the most valuable real estate subclass is health-care commercial real estate. If you look at the history of almost all founders of groups and DSOs in the US, their profits always tend to migrate toward real estate.
Once you have reaped the financial rewards of today’s dental market through the sale of your practice, it is time to solidify your financial foundation with health-care real estate investments. Real estate enables you to enjoy an increase in equity, a passive income, and a hedge against inflation that helps you build wealth.
A benefit of belonging to a dentist-owned DSO is the opportunity to partner with other dentists to acquire health-care complexes throughout the nation. I am actively working on multiple health-care real estate projects throughout the US. Dentists are also using their retirement funds and investing in this lucrative asset class indirectly with their self-directed IRAs as private lenders.
The second golden age of dentistry
We are in the midst of the second golden age of dentistry. To reap the maximum benefit from this unique time, spread the word! Share this information with your colleagues to make sure as many dentists as possible are aware of the possibilities. Perhaps these strategies will spark some entrepreneurial ideas that cause you and those closest to you to act.
The bottom line is this: We do not have to go the route of corporatized medicine. As dentists, we have the power to maintain control as dentistry continues its conglomeration. Rather than fighting the trend, we can position ourselves to profit from it.
Editor’s note: Brady Frank is among Dental Economics’ financial supporters.
Author’s note: I invite you to explore more about how Freedom Dental Partners dentist-owned DSO has helped more than 275 dentists take control of their futures. Attend one of our upcoming events where we’ll take you on a deep dive into our strategy for putting dentists back in control of dentistry. Learn more and get dates for our upcoming events at [email protected].Editor's note: This article appeared in the December 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.