106: The 4 Types of DSO Location Growth: Innovators, Consolidators, Turnaround Masters, and Franchisers… Which Are You?

Welcome to DSO Secrets. I know what it's like to be an entrepreneur in the dental industry. I've had my ups and downs, just like you. There's so much opportunity to be excited about, but so few resources to get answers. From here on DSO Secrets, we get you those answers so you can change the lives you're meant to bless and achieve your personal success.

When I was working as an associate rat at a school, I never imagined I could own these many practices with this amount of support. So thank you.

You have helped build my marketing mind

to a whole new level. You have this natural talent, this unique ability. Well, hello everyone, and welcome to another episode of DSO Secrets. I'm your fearless host, Emmett Scott, and today I want to talk about the four types of growth that are happening in the marketplace. When you think about location growth, you know, so often we talk about DSOs as if it's just one big group and what they're doing with their growth is all the same a lot. How we might talk about attorneys or dentists or accountants, it's all being the same when really there's these different segments. Well, when you think about location growth, have you ever thought that you fall into one of four different categories? So I want to share with you what I believe are the four categories, and I'd be curious what your thoughts are as you're listening to this podcast or you can come over to our Facebook site. Now, for those who are in DSO Secrets Facebook site, you're seeing this live right now, so feel free to make any comments. But which category do you fall into? And do you think there's another category? Did I miss one? So let me give you category number one. And I'm going to do different parts of a spectrum here, but category number one, I'm going to call the innovators. Now, the innovators are those who are doing only de novos. And the reason I'm calling them the Innovators is because they figured out something around their patient avatar that they say, I know exactly what they need. I need to build the box this way. I need this many staff. We're going to do the marketing this way. And they drive everything around this patient experience that is very specific. These are individuals who are focused on a very unique but branded experience for the patients. Now, I'm going to give you a couple examples. I know, again, curious if you would put somebody else in this example. But let's take big groups like Aspen, where they have very specific experiences and they're very standardized around the patients that they're serving or you take someone like PDS that for the most part has very specific experience, right. They're going to want those CEREC machines for Aspen. They're going to want to have those labs right there in the facility. And so affiliations and acquisitions are going to be a little bit more difficult if they're trying to drive that innovative approach. Now, as I go through this, you're going to find no one is a purist or very few are. Most DSOs have some mixture, but for the most part, which category do you fall into? When I look at our brand around Smile Magix, we're giving gold coins, movie theater, play jam. Kids are called back as prince or princess. They get crowned at the end for their bravery. And dentistry, we have a very specific flow that goes forward. Our ability to support the clinicians to make their life as easy as possible. That I call the innovator brand. All right, so that's one end of the spectrum. Now the other end, I'm going to jump all the way to the other extreme. I'm going to call them the consolidators. Okay? Now, on the consolidator side, standardization isn't nearly as important. And by the way, I'm not saying that one is better than the other. Well, I might say that one is better than the other at the end here. But for now, all of them are happening. I don't think one is evil, let's say. I think all of them can bring value to the marketplace. But on the consolidator side, you're really starting to bundle up different practices. And they could be very disparate. You could have, in theory, all the way from pediatric Medicaid to geriatric high end. You could have cosmetic in there. You could have all these different types of practices. Or maybe you have, you know, a set with, with a little bit of boundary where you say, hey, the practice needs to be doing at least, you know, a million dollars a year, whatever it might be. And we're not going to do cosmetic, et cetera. Of course, the biggest player in affiliation support would be like a Heartland Dental. Now, some of these, or a quick one that's going very fast would be like an MB2. Again, just calling these out as different examples. You may or may not know if you have better examples. I'd love to hear them. But these are groups that have figured out and some of them might standardize some of the software, some of the procurement pieces, others are very hands off and very much open to whatever the practice or group that they've affiliated with wants to do. So I, I'm putting them over on the side of the consolidators. Now in between I see two different groups. One I'm going to call the turnaround masters. Now they're kind of like the innovators. They're de novo focused, but not they're affiliation focused with practices they know they're going to have to put quite a bit of effort into. And they have this wonderful formula to take it from a low performing practice to a high performing practice. It's a blend of yes, they acquired it. And typically what I see is these are practices maybe doing 300,000, 600,000, let's say max, and they're able to come in and move them past that million dollar mark, some of them all the way up to 2 million, etc. So these are the turnaround masters. Now they come in different flavors on are they branding them the same way or are they leaving on the brand there but providing a massive level of support? I think someone that I know that's doing this would be an AJ peak. I think spring dental started down this path. So it'd be interesting if you're interested in those talking to leaders like them. Who are those turnaround masters? Now another group, this is the fourth group I called the franchisors. The franchisors have this mix of wanting to do consolidation, but maybe they're a little more picky. So consolidators definitely are going to have a framework of what they or they could have a framework of what they will and won't do. But generally if you meet a couple criteria, you're in and they'll do the acquisition. But with the franchisors, they're looking for specific entrepreneurial type dentists and leaders that they can franchise. If you think about this in the restaurant world, it might look something like this where they've already created a McDonald's and now they notice that you're creating a Taco Bell and they want to help you expand that into more de novos. So you can see it's an affiliation model of already successful practices that they are now going to help you de novo. Now if you look across the spectrum of DSOs, I'm curious if you think that if DSOs fit in these four categories. These are the four categories I keep coming back to. And you might say, well, they're kind of on a spectrum here. But when it comes to location growth, I'm not talking about culture support at this point, I'm talking Much more broadly, I think it really boils down to are they innovators doing de novos? Are they on the other end where they're consolidators, gobbling up as big a net as they can? Are they turnaround masters really looking for specific practices that meet their criteria that they can take to the next level, or are they a franchise or where they're looking again for very specific practices that they can de novo out already successful practices that they can de novo out. Now, here's what I think is interesting is there's some standardization requirements for each of these. Of course, the most extreme being the innovators. They're on the same type of facility layout. I mean, they might be 2000 vs 3000 square feet or 4000 vs 5000, but for the most part their layouts are very similar. So you've got the facility standardization. They're of course on the same software platforms. And one of the benefits that the innovative de novo side has is that their entire team knows exactly who they are, how they're supposed to behave and what patient they're trying to take care of. And so yes, there's maybe some difference by regions and some compliance differences that are minor by state, but for the most part they really know who they are. On the consolidating side, the team has to really be able to be flexible for all the different types and they're going to focus in on certain things that are non negotiables, that are very standardized, but they have to have this flexibility to let the practice and the group really treat the patient avatar under their culture or their approach that they think is best. So the team has a different type of support that they're bringing. Again, I'm not saying which one's good or bad, but it's from a leadership perspective you have to build a team that that either really knows deeply around the patient and what support to bring and you get almost, let's call it like an apple effect, right, where they control the hardware software really help to centralize. I think one of the benefits on the de novo innovator side is you get to put a lot more into the clinical training of hey, here's the patient and here's the capabilities that you need. On the consolidator side, you can put a lot into clinical training, but you might have some who are really into implants. And if somebody over here is doing pediatric Medicaid, they're not as much. So it's a little bit more difficult, I think, to put the resources you want into supporting the clinicians though. I'm sure there's some groups that have figured that out. I'm just calling out that there's some complexity then on those in between groups. You know, it's some kind of in between those things. So if you're doing the turnaround master, you're probably a little bit like the innovators. Here's our formula, here's the patience, here's the things that, the capabilities that you need. We're going to provide CE credit, we're going to provide operations and staff and technology to help you get there. Probably standardized all the software there. And then on the franchisors, you know, I've seen a mix tier. There's some that like I look at an NADG who's doing a level of consolidation, but they're doing a lot of franchising with these JV partnerships as well. And they're standardizing the software to get more leverage to be able to support those clinicians. So each of these components, you know, are pros and cons of how you're going to have to build out your DSO to ultimately support the clinicians. And they each have their own complexity. One of the biggest challenges that the innovators have is around financing. I can tell you that investment bankers, banks might say, yep, on paper, a great innovator with a good de novo is actually doing an incredible job as far as return on investment. It costs a lot less money to build a location than to buy something that's already up and running. And so if you know how to build a location really well, then you know, you know how to get a good return off of that versus having to buy it from someone else. Here's the problem in those. In that first year, in that first amount of timing, you're going to have some level of losses. You're going to bring in, you're going to spend a bunch of money and you're not going to bring in any money. Of course, as that de novo ramps up and frankly what I've noticed is we've done de novos, we've done affiliations. On the de novo side, the bigger the opportunity, right? Like our practices that might cost us with working capital and everything, somewhere around $2 million also have amazing EBITDA of like a million dollars. Those ones take the longest to ramp up. So what's interesting is you'd say, well, those are no brainers, do those all day long. You know, that's a 2x debt to EBITDA ratio. But because of Timing, it's really hard to get financing there now. I'm going to swing the pendulum on the consolidation side. Even though as operators we might look and say, hey, that's really complex. They're on different softwares, different teams, you have to integrate them in, et cetera, because they have current revenue, because they have current ebitda. Financing is going to be so much easier over there for senior lenders, for even non traditional banks and for private equity. It's just one of those things where they can see the present versus over here. They have to wait. And they also, on the de novo side, banks have their own bosses, which aren't you, which are all the compliance, the federal compliance fees. And so that gets really in the way of them being able to lend over there. So consolidators are going to have more momentum. You're going to see them go faster as far as growing locations. You're going to see innovators. Again, I'm speaking to each extreme here. You're going to see innovators going slower but building very standardized product. I think of this a lot like Microsoft and Apple, because Apple was much more expensive, took a longer time, built out a complete stack of, hey, we want everything to work perfectly together. Microsoft, great company, went really fast, put their software on compact and hps and Dells and everything else. Much more flexible to get access out to the, to the marketplace, if you will, to have a computer. But early on you got a lot of those blue screens, et cetera. Right. So as you're thinking about who you want to be, when you're thinking about your location growth, these are different parts that you can take into consideration. So wanted to put that out there. I'm curious again your thoughts. Appreciate the comments. Laurie, you're an innovator. Awesome. Love the innovators. Actually, I love each of them. When they're really thoughtful, I get most concerned. Okay, so I said I wasn't going to say which one's bad, good or evil. Here's where I get most concerned. I do get the most concerned around consolidators who are chasing after the ease of the financial component and aren't as thoughtful. And I'm not calling out anyone here because I'm not deep enough in an organization to know with consolidators, but they're not being as thoughtful about the operational standardization and support that needs to happen. I think one of the advantages that innovators have is they have to have everything so centrally and focused on taking care of that patient, taking care of those doctors. And they're really standardized, but they move a lot slower in a lot of their pieces and approach. And I think that the turnaround masters and the franchisors each have a ability to have that focus to really standardize. At the end of the day, I love what many leaders in DSO have said is there has to be value creation there. If it's just financial engineering, we're going to have a problem. And where does value creation come from? An amazing patient experience and an amazing doctor experience and of course, amazing staff experience. So I think ultimately if we say but DSOs, what's your core responsibility is to take care of the doctors and everything else is a subset of that. So if the value creation is happening there, then I feel really positive about the approach of the dso. And if the value creation isn't there, I get really concerned. So, again, curious your thoughts? If you're listening to this on the podcast, come over to our Facebook page over on DSO Secrets. And until next time, keep smiling.

Thank you for listening to DSO Secrets. Join our community on Facebook at DSO Secrets and get answers and resources to some of your most challenging questions. If you want to get a copy of the seven secrets of any DSO, go to our website at DSO secrets.com and we will get that emailed to you. Remember, don't go at this alone. Let us be your team while you build your team.