141: How-Tos for Partnering with Associate Doctors

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Hello everyone and welcome to another episode of DSO Secrets. I am Ken Kaufman, your host for today and I'm excited to welcome back now for the third time, J.D. stacey, Chief Growth Officer from Community Dental Partners. J.D. welcome.

Ken. It's always great to visit with you. Great to be back.

Well, we've got some work to do here today. We've set the table the last couple of episodes about this concept of partnering and how you do it well and how you do it not so well and with some obviously scars that you've displayed in terms of some places where as an organization we haven't done as well as we could have. So we've laid some groundwork now today. I think what the listeners would really get a lot of value from is first talk about why should they consider looking at associates and trying to figure out how to potentially help them have equity or to partner. And then we can jump into maybe some how tos of how does that all go? And I need to put a disclaimer out in front so everybody's super clear as DSO and JD and I as business people, we're not clinicians. We individually as well as you know, our business cannot own a dental practice. Dental practices have to be owned by licensed credentialed dentists. And so when we talk about ownership, it means ownership in the company that the DSO creates that provides services that are non clinical in nature to those practices. And those businesses have profitability and can be very successful and can grow and those sorts of things. And so allowing an associate to be able to partner and to have equity in those types in that part of an organization can be, it can be very, very effective. It can be lucrative depending on if it's a well run business and all the right principles are applied to build and grow business. So we need to have that as a disclaimer just to start. But jd why don't you jump in and if you have any other Disclaimer you want to throw out and then talk about the. Why are you. Why do we as an organization? And why do you see so many organizations trying to figure out how to help associates partner up in equity in the business, entities that aren't clinically related?

Yeah, I appreciate it, Ken. And just to add to your disclaimer, I'm used to talking to dentists and dentist owners about investing. And so sometimes I'm going to. I use a term, an investing term that might not quite sound like. So I'm glad Ken did that disclaimer. And Ken will always keep me honest if I say something that doesn't quite sound like, hey, here are. Because at the end of the day, it's all about compliance. We want to be compliant. And so when we say words like ownership and partnerships and things like that, at the end of the day, it's how do we support doctors and how do we support owner doctors on helping their associates find some of these avenues and paths? As Ken and I both said, most doctors, most dentists that we talk to, most, including the many that we work with and support at cdp, they want to have a path to ownership. Now, here's the fun part. So back to what Ken, you know, started us out as. There are so many different ways that a doctor can own and partner. And dentistry is just such a great industry to be in. And I have, personally, I've owned real estate in the past. I, you know, I've been a part of different companies and I've had ownership in different companies. I've, I've looked into restaurants. I've just looked at a lot. I work, I dabble in the stock market. But, man, I have never seen a better opportunity from an ownership standpoint than in dentistry. So what doctors, what you doctors have access to is amazing. That being said, getting it set up and it's probably. There's a few questions I get asked most frequently, and this is one of them. Getting the ownership structure set up with your associates is, is challenging and, but it's, but it's worth doing it right and figuring it out. So there's a couple just nuggets in there, Ken, that I just wanted to make sure that, that we put out right up front.

Yeah, really valuable. Another thing I'll layer on that I'm hearing more and more in the industry is that a DSO or a group practice does a great job building out a culture, building out, you know, a great opportunity to earn an income for an associate wants to show up and do dentistry and handle the clinical part and then have a support organization that takes on all these non clinical functions. And what we're hearing more and more is that even though you build a great culture and you do all these great things to create a great environment and a structure for an associate to come in and be successful, one of the most common reasons why they leave is because they want to go and start their own practice. And it's that dream of, I'm going to be an owner and I can, through my own sweat, blood and tears, I can create equity value for myself that becomes very valuable at some point in time and can be part of a retirement plan or those kinds of things. And all of that's real, right? All of that is true, that those opportunities exist. We've seen sometimes when associates do that, they sometimes end up coming back saying, wow, starting a practice is really hard and trying to grow to two or three practices is really hard. And yet there's still that, that energy for it. And so what we're seeing more and more from, you know, business organizations that are supporting dental practices is they're more and more trying to figure out how can we share ownership with an associate in the business entities, not the clinical entities, because they already would have it there, but in the business entities so that they can feel like they've got a meaningful growth opportunity from an equity perspective and sort of like that becomes the final, the cherry on top of a relationship with a doctor that says now they may never be motivated to leave because they can do their craft and be a great clinician and also participate in every, all of the economic benefits of, of being an owner not just of a dental practice, but of organizations that are supporting the dental practice with nonclinical services. What's your reaction to that? Are you seeing and hearing a lot of those same things in the marketplace?

Yeah, for sure. I mean, just from our own experience, we've had a couple doctors just in the last 18 months who have come back who went out on their own, who had worked, they'd worked in practices that we supported, they went out on their own. Now they've come back saying, this is not as easy as it felt and looked. It's actually very real, Ken. It's the. I think the dental forums do a little disservice to us, to be honest with you. I feel like they paint a picture that isn't always realistic. And yeah, of course there's success stories, but I just don't think they're as helpful in appreciating really what it's going to take to make this happen. So really, I mean getting really clear on what your what. I'm going to speak as if I'm one of you. I'm going to speak as if I'm an owner doctor and I'm trying to figure out should I or should I not partner with my associates why? And so I'm going to speak as in those terms. And the answer is it depends. I mean I would always say yes of course, but I would also say getting it set up. Right. We're going to talk about some of those here briefly today about some of the hows, whys and what to think about because there are more than one way, there's more than one way to think this through anyway. Yeah. So to answer your question Ken, absolutely. I think it's critical to think all these things through.

So if I were to set the table in just a, a raw framework and then we can get into a few details. There's really two places where ownership can be shared. The ownership can be shared with an associate doctor at a very specific practice level and it would include, you know, ownership of the clinical entities and where all the clinical activities happen. But it was also include ownership of the service company that's providing those non clinical services. And so ownership could be shared at that level and a non clinical entity or group or person can be an owner in the non clinical services entity. And so the ability to share in essence so that I'm a doctor and I am either working in the practice or I've been given an opportunity to be a part owner in this practice and it would give access to both clinical entity and the non clinical service entity that's providing the services. That's one place where it can happen and then the other place. And again JD I'm doing very simple overview here. It could be there or the other place could be at the very top level company of that business service company that's not doing clinical services but just all non clinical business type services. You know, revenue cycle and call center and recruiting and HR and accounting and those things. So you really, you kind of have these two options. Do you want to take a second JD and maybe talk about what, what are some like the key benefits or you know, pluses and minuses of owning at the having an associate that owns at that practice level conceptually and then at the overall company level.

Yeah, and I'll even throw a third one in there Ken, if we have time. And that's there's some real estate option opportunities too. So there's Great point. But right now we're talking through the clinical pieces specifically. So advantages and disadvantages. Yet when you're talking about at the practice level, again, I'm speaking as if I'm an owner dentist and I'm talking about one of my associates. Yeah, there is an opportunity to partner there and there's some advantages to that because if you're the, if you're the associate dentist, you're going to get some equity at the ground level. You are going to get actual percentage of that practice. Now it's not the bigger enterprise, but at that practice level, a lot of it. And it depends on the owner doctor, what they want to do and how they value that. So there's going to be a buy in option, meaning you're going to bring some cash to the table. The way that I know that a lot of our doctors have looked at it over the past, Dr. Evans, Dr. Copeland, is they look to partner at a 50, 50% level. So I'm just giving you an example. They like that, they like that each doctor has some skin in the game and it feels like some equal yoke. Now I'm telling you this, that this is probably one of the more challenging ways to do it, but it's also one of the best ways to engage a doctor because if they're, I mean, if they're going to work in the practice or if they're going to be supporting the practice with the putting an associate doctor in there. So that's one of the main advantages is you have some direct ownership right there at the practice level.

Yeah, there's a high care factor and also they feel like with their own hands, blood, sweat and tears that they're building that equity value because they're in working in that practice or supporting it in some way.

Now, now let's talk about some of the challenges to that because we all know how exciting ownership is. What, what I want us to appreciate is how risky ownership is. Okay, so now you're an owner, not now you're an equity owner at the practice level and you take on risks. So any audits or lawsuits, anything that happens at that PLLC level at that practice entity level, you now are part of that risk. You have to take on issues. You have to. I mean you're so again, it's, it's. I'm not saying you don't do it. I'm saying you have to appreciate the second risk is there's no such thing as a risk free investment. Right. Look at the stock market now, investing in a dental practice, in my opinion, is a way better, stronger risk investing at the stock market level. But that's just my own opinion. But just know that how a practice ramps up, if you know what kind of capital is it going to take, you may need to inject capital. It may take a year, may take two years, might take five years, it might take. So there are financial risks, there are legal risks, and just know that. So when you're owning and taking equity at the practice level, you are signing up for risk. So those are some of the main advantages, disadvantages at the practice level. Anything you'd add to that, Kenya?

No, that's. That's exact. That's exactly right. You're you now. Or maybe I should say this because going from the associate mindset, you're used to getting a paycheck in exchange for showing up and providing services to the patients and taking great care of patients and delivering the care based on, you know, the autonomy you have to diagnose and determine what treatment plan should be in place there and executed on. And so it's that nice stable paycheck. And there's a little bit of risk there if no patient, patients show up or, you know, if there are things like that. But for the most part, you've got that nice, steady paycheck coming in as an associate. And when you go to ownership, it's a little more volatile. There are some months that practice doesn't do quite so well, and it means there's not going to be a distribution maybe for a little while or maybe, or maybe even have to put some cash in if the practice struggles for a period of time. And there's definitely risk associated.

Absolutely. So again, there's advantages, disadvantages. And go back and listen to mine and Ken's first podcast where we talk about why we spend so much time training and developing on how to be a good owner. Because as Ken just pointed out, it is a different skill set. Being an owner requires different emotional, just emotional engagement, emotional skills than it does just to be an associate. So go back and re. Listen to that if you're curious, because we talked about a lot of good stuff. So I'll go to the second scenario now. And there are other dental support organizations, there are other smaller enterprises that allow doctors to buy in at what Ken referred to as kind of the management level. Now we're talking about, is there an option where doctors, if there's not an option at the ground level, is there an option to go buy? And it is more traditional. I'm Buying equity into a business and shares. And Ken can talk through this way better than I can. He knows all the wonderful terminology. But there's options to buy in now at that business level.

And to be clear, gd. Right. It's the group that is providing those support services to the dentists. In essence, whenever you have a business, you have to have customers who are willing to pay you as a business. Right. And so this is a legitimate business. It's called a dso, a group practice. There's some various structures around this, but it's a group that's put together that's specifically providing services to dentists based on the amount of support they want. Some dentists want to be independent. They don't want any support services from anybody outside of their practice. Others are very interested in having that support because it can often help them add ad locations and figure out how to grow. And so it's really the opportunity to own at the level that is providing all of these services where the dentists ultimately are the end customers. The dentists handle all the clinical services and then this partner can handle some portion of or up to all of the non clinical services that a dental practice needs to have access to.

Yeah, exactly. And, and, and so it's just, it's a wonderful opportunity if, if it's a, if it's a well run dso. So, and so there's caveats. So, meaning, so you get to buy shares that the other owners of that DSO have. So it's kind of exciting. Like you're in, you're in the game with them on the other side of this. Like I said, everything's advantage and disadvantage. You're at risk because again, it's a business and really you're investing in the management team, meaning you're investing in the leadership. Do you like what they do? Do they have a track record of growth? Do they have. So you're investing in an actual company. So like I said, you'll want to make sure that you're attaching yourself to a group because it is a business. At the end of the day, I love what we've done at CDP because we, I mean we, because they, the doctors started out as they just knew they. Dr. Evans Wanted, wanted his associate doctors to have ownership opportunities. So he set up those partnerships at the practice level early on. And that's been going on for a decade. And now that we're starting to offer this, you know, this enterprise level opportunity to buy shares at, it's just, it's just an exciting way to be able to have different paths towards ownership. Now, Ken, fact check me, make sure I didn't. Like I said, I get into my investing mode. So make sure I used all the correct terminology. Are we good?

Yeah, I think that's right. I will add just a couple of other pieces of terminology. So the way that you look at and capture the ownership of any type of an entity is called a capitalization table. Or in finance we call it a cap table. And people who are outside of finance look at us and say, what in the world does that mean? It's a capitalization table, meaning of the debt and equity that's come into the business, how is it capitalized, and then that contemplates if that business were to sell, what valuation would be received by all the parties. Debt equals always gets paid first. It's part of the capital stack in the business. And then there's the equity holders. And there can be different classes of shares and some may get paid ahead of others or have preferences and those sorts of things. But the capitalization table is ultimately what's being impacted. And when you're at the like a DSO level or some type of a holding company level of lots of business entities that are providing these business services to dental practices, you have to understand what that is and how that works. And when you're getting quote unquote shares or membership interests or partnership interests, because there's different kind of legal structures to that, you ultimately want to understand where you fit on the capital stack in that cap table or that capitalization table and understand how that's going to work and how that ultimately monetizes. And I just have to say this over and over, JD because we find in the process of partnering and having these conversations with clinicians and associates and clinician owners and associates and so on and so forth, sometimes they don't. Well, it's more about that they don't understand that debt actually has to get paid. So we hear these things like, oh, well, if the business has a million dollars of ebitda, then I can go and I can sell it for 10 times and that means I'm worth $10 million. Well, if you have $2 million of debt, that $10 million, that's what's called an enterprise value, then you have to subtract debt off to get to equity value, meaning what's left after debt is paid now gets distributed to the equity portion of the capitalization table. So it's really important understand, and it's not just at a Holdco or an overall DSO level that's also at a practice level if you have ownership with, in the services company that's providing the non clinical services into a practice and that entity or the practice entity itself has some debt that's been incurred for, you know, it's a new de novo and you borrowed money for it or whatever it is. You always have to know that debt has to get paid off and come off the table first and then the equity holders are in line based on how they fit in the cash capitalization.

Yeah, we could almost do an entire podcast, Ken, on valuing a practice or a group of practices just based on what you just said. Such, such good stuff. And I know our time is short and also I'll just tease the third area and there's real estate opportunity and it's something we're actually really excited about because as you own some land and some practices and, and traditionally it just depends on what each DSO does or each group of practices or doctor does. Sometimes they buy the building, sometimes they buy the land and building. And so really one thing that we've done, we're working on a CDP that I really love is a way for doctors if they want to be part of the real estate holdings we're creating. And when I say all these things, I mean when we're talking about ownership at the enterprise level, it's Ken and team are setting up. You've got to make sure you're working with the SEC and the IRS and I mean you really got to make sure your ducks are in a row because it's so easy to commit a foot foul. So just making sure that you have all your legal piece set up right accurately and compliantly is key. The real estate piece is no different. You just have to make sure there's some clear, I mean, separation between the different opportunities and so forth. Because at the end of the day it's just exciting, like I said, having three avenues for doctors to be able to go out and live what they initially got into this to do, to own, to partner, just to get into these types of investment opportunities. It's like I said, there's nothing like it out there. Nothing like it out there. So. So Ken, those are the three main areas. There's advantages, there's risks to both and, or to all three. There's some details that got to be worked out. But I mean there's some legal things and compliant things. Just we got to make sure that you're real clear on what you want your, your path to be. I, I couldn't recommend it more I think that's just something that I'm grateful for. Dr. Evans, he just said, saw that as a vision from the very beginning that we just, he, he wanted this for his doctors, the doctors that he works with. So anyway, Ken, I know that's, I appreciate it. It's been, it's, I love talking about this stuff. Like I said, we could do this for hours, but we'll spare more.

So I'm thinking, J.D. we'll do an episode in the future maybe where we now break down to the next level, which is really now let's talk about how do you structure that associate equity? And like, what are the options? There's buy in opportunity. There's a way to have them sort of to get equity from that point and upward so that those who paid the price to get the practice to where it is aren't diluted in any way, but then they can participate in the upside. There are some different ways to do that. And so maybe we'll earmark our next episode. We'll maybe jump into some of those topics. And then the other one that you mentioned as well, does that sound all right?

Sounds great. Thanks, Ken.

All right. Anything come as sort of parting advice as you think about our listeners, which are generally group practices, emerging DSOs, trying to figure out how to grow and scale. Anything come to mind is just parting advice around this, thinking about these three options for sharing equity.

Yeah. And just the, just the couple of summary pieces is just figure out your why, why, why do you want to do it and why do you want this to be? Don't just do it because you feel like you have to do it because you want to make good. Like the same reason why you do dentistry. At the end of the day, your patients should be at the core of why you should do right by your patient. And I say you should do right by your doctor. I know solving these things are not easy to solve. Like I said, we've been working on it for 12 years and we have a. I just love the doctor opportunities that they have. And then finally, just make sure that you've talked to the right people about setting this up compliantly and just getting all those ducks in a row. You'll love yourself for making sure that you took the time to make sure that you've got this set up right. It'll save you lawsuits and dollars down the road.

Great advice, JD can't thank you enough again for joining us today.

Thanks, Ken.

And many, many thanks to all of you for joining today. This is a wrap on some how to's on how to share equity with your associates. Happy Day.

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