187: Large Practice Sales and Partnerships

This is a really timely podcast because I think many of our members are looking at what different partnerships might look like, or they're looking at the future of. Okay, if I ever wanted to sell my practice, what do I need to be doing today to get the most value for that practice? Hi, I'm Emmett Scott, and just like you, I've had my ups and downs in the dental industry, but times are changing. The DEO has built a map of how to succeed in one of the most challeng industries to navigate. On this show, we talk to dental industry leaders, solve problems, and get you the answers you need to face these challenging times and thrive. Welcome to DEO's Growth Secrets podcast for dental organizations. Now let's get started. Hello everyone, and welcome to another episode of DEO Grow Secrets. I'm your fearless host, Emmett Scott, and today I'm here with Chip, who's principal of Large Pract Sales co founder as well. Completed over 600 million of practice transactions in 2022 with 31 IDSOs for clients in 29 states. Chip, so great to have you on. I'll also note you've been with your very tolerant wife as you have in your bio, for 32 years. So congratulations on that. That's. That's awesome. I think this is a really timely podcast because I think many of our members are looking at what different partnerships might look like or they're looking at the future of. Okay, if I ever wanted to sell my practice, what do I need to be doing today to get the most value for that practice? And I think sometimes as well, Chip, and I'd love your thoughts on this. As we get into this, there's some really cool ideas we have as entrepreneurs that technically doesn't bring any necessary value, but they're really good ideas, you know, like, oh, I want to do this and add this and grow this. But fundamentally, at the end of the day, it might not actually build the net worth of the practice. But anyway, with that, Chip, I'd love to just ask you what got you into the sales and acquisition side, the transaction side of dentistry? What, seven years ago or so so

about now, 12 years ago, a friend of mine who was a venture capitalist came to me and I was semi retired at the time and said, hey, I've invested in this dental deal and it's not selling as it should, its products. Would you take a look at it and help me figure out how to grow it? So I went and took a look at it, was very impressed with the product. The company was not as Impressive. And so I came back and said, no, I'm not going to help you, but I'll buy the company. So I bought the company and we built that and sold it. And in that process, one of my clients, an 18 office multi specialty practice, came to me and said, look, I'm tired of this. I'm ready to monetize what I've built. You're a sales guy, maybe you can help me. And I said, well, I don't know anything about selling practices, but I'll learn if you'll pay me enough. And so we ended up finding him a great partner at a value of about 45 million. And he paid me $3 million. And I was like, you know, this may be a business. And so that was how large practice sales got started seven years ago. And it has grown since. And we are fortunate in that early on we made the decision we're going to only get paid by doctors so that we have our interests aligned with theirs. Whereas everybody else in this business was getting paid by both the doctor and the, as we call them, the invisible dso. And so that enabled us to grow to be the biggest in the advisory business. We're bigger than the next five guys combined. And I think it's all driven by the fact that we're only paid by doctors.

I'm curious with the number of transactions you're doing in the last seven years, has has seen a lot of change. Obviously that would include, you know, pre and post Covid, that would include all the inflationary components that are happening, the labor force changes, hygiene, all of that stuff is included in this last seven years. As you think about how that lines up with transactions, if you went back in time seven years ago, six years ago, versus let's say last year and definitely going forward into this year, what is changing on the structure of transactions? And I guess I need to throw in there also interest rate changes have happened.

Yeah, it's interesting. The structures have been fairly consistent for seven years in that we specialize only in doing transactions where we are partnering doctors with what we call invisible DSOs. And invisible DSO in our vernacular is one which partners with a doctor by buying anywhere from 51 to 80% of a practice for cash. The doctors retain ownership in the balance and continue to lead the practice for years or decades. And the younger you are, the more valuable you are. It's interesting in that that has been a big shift post Covid. So five years ago we probably did one transaction a year for a doctor in his 30s, whereas in 22 we did 102 million of our 600 plus million of transactions for doctors in their 30s. So I think the biggest shift has not been so much in the transaction structure as it has been in the age of the doctors that are interested in entering into these relationships because they are truly partnerships. And honestly, the younger the doctor is, the more valuable they are. Because these groups are looking for partners that they can help build, that they can grow with. And that's a lot easier to contemplate with a 40 year old doctor than it is with a 60 year old doctor. And I'm 63, so I can pick on old people. But really the most dramatic shift that we have seen has been younger doctors interested in these transactions and older doctors becoming very out of favor with the invisible DSOs.

Yeah. So we could say then that the labor workforce is playing into the structure. So let's say in the previous days, let's take a heartland model and several of those where retiring doctors was actually a key component to their growth and you would bring in another associate, et cetera. Now, with associates being so scarce and so competitive to be able to get them, retaining the doctor and retaining the owner is actually a key part to the structure and even to the value is what I'm hearing.

Absolutely. And with the invisible DSOs, retaining the Dr. Owner to lead his practice, typically for at least five years, was a minimum requirement to get decent value Today, you know, the invisible DSOs have some tools that independent practices don't have that's helping them fight the recruiting challenge. So for instance, any transaction that we do today with, let's call it a single doctor doctor owner who has five associates or something, all of these groups are going to want to create a path to ownership for those associates because it puts golden handcuffs on them. When you become an owner in the invisible DSO as a part of a transaction, doctors are able to live up to their promise of enabling their associates to become owners. You know, the buy in model and what's happening is you're getting a much more stable workforce because you now have associates that have skin in the game. Now the challenge for a larger practice today is the old I'm going to sell it to a doctor and retire model is kind of gone for a big practice. Because if you've got a practice with 3 million in collections, an independent doctor can't finance that purchase anymore. And frankly, you're going to get a value of 70% of collections or something in that range. And Today the invisible DSOs, if you've got a practice that has Industry standard profitability. That practice is worth one and a half, maybe two times collections, not 70% of collections. So you can't allow an associate to buy in under the old doc buy in model of 70% of collections when your practice is worth double that or more. So we are talking to a lot of groups where we have owners who have promised their associates to buy in, but they've got the problem that they've made promises at 70% of collections when their practice is really worth 20, twice that. So the invisible DSO partnership model enables them to solve that challenge. They get a higher value and they still give their associates a path to ownership. One of the other interesting twists, and this is relatively new, let's call it the last 18 months, has been that some of the invisible DSOs are now enabling their partner doctors to make their key non doctor team members owners. So you have the opportunity to again put golden handcuffs on team members. Not just doctors, but team members. And an independent doctor can't do that under most state laws, whereas the invisible DSOs can't. So that is becoming a powerful not only recruiting tool, but retention tool.

Yeah. So I want to unpack a couple of things. One, if you're a member of DEO, just recently on January 10th, that'll be in our portal. We did a whole series on how to issue equity to your associates. And what I'm hearing from Chip is that's becoming more and more critical for retention. But that's not easy. You know, that is a legal transaction and doing that appropriately. And what it sounds like is in, and this is something we talked about in January was, I guess that was just a week or two ago, is that in these larger DSOs are starting to open that up more and more simply for retention. So one of the themes that I'm hearing is if you're a dentist, and I've been saying this for a while, you've been concerned that the DSO market would somehow downplay your role as a dentist. And what it's really done is created huge competition to be able to retain you. Right. You are the prettiest girl at the dance. You are the most important part of the revenue producing activity of this business model. You know, the golden rule Chip is the guy with the gold makes the rules. And I think sometimes early on we said, well this private equity firms and they have so much money, the person with the real gold is the one who's producing revenue every day. Right. Not the one who does the one time investment. And so I think as dentists, you know, we need to step into that power and realize, hey, we get to make a decision around our life and where we want to go and what is it that we want. But definitely people are clamoring to retain you as a clinician owner. Now, where the bad news in this might be is if you kind of waited too long, you're completely burned out and now you just want to sell and get out. That path seems a little more tricky, right. Versus if you're kind of thinking ahead here and you're doing some of these partnerships, maybe earlier on that might be the, the better path if you're looking to exit soon.

Yeah. No, it's interesting when, when you have what we call a builder doctor, a doctor who's built a great practice and is interested in continuing to expand their practice, the invisible DSO partnerships are really valuable, you know, so as a simple sample and structure, structure, you know, you might sell 51% of the value of your practice for cash up front, pay off all your debt, have cash in the bank liquidity to participate in what I think will be interesting opportunities in the coming years. But yet you retained a 49% ownership in either the practice or at the parent company level. And then you utilize your partner's capital and resources to go expand. Whether it's de novo or buying competitors, they're happy to put up the capital to help you expand. And you get to have a 49% ownership in whatever it is that you build with zero risk. You're not signing anything, you're not personally guaranteeing the debt, and you actually access real resources for expansion. So when you have a young builder doctor who's eager to grow, they're one of the most valuable types of practices in my world. Because what the invisible DSOs are looking for is internal organic growth. Anybody can go buy practices, but the groups that are going to be valuable at the time of a recapitalization when they sell to a bigger investor are the groups who have been able to demonstrate internal organic growth where their doctors practices have grown. And they may have grown by acquisitions or de novos that's getting a higher multiple in recap land than those who have just been able to acquire rapidly.

One of the things that I'm noticing in structure change is maybe previously we were up closer to that 75, 80%, maybe even 90% of acquisition. Now there's a bigger earn out that's happening. So part of the reason there's a push towards working with 30 or 40 year old dentists is then we can roll more of the Equity into the DSO or into the pr, you know, a sub dso, something like that. And have a lot of the bigger outcome be growing this together. A lot of that outcome is going to be structured and part of that coming, I think especially post Covid interest rates are up. Dentists still have expectations of having a high multiple, but the reality is being able to borrow money and being able to pay some of those multiples at that rate just doesn't exist. So kind of the way that that structure is maybe merging together, you want a high multiple. I can only borrow so much at certain interest rates that are higher. What if we roll that equity together and then you help build this up? Once it's built up, then we can have the private equity firm pay maybe a larger multiple and you could participate in that. Are you seeing more and more of that type of structure being built out?

Yeah, we are. And part of that is because of the age of the doctors. When we do a multi doc practice. Let's use oral surgery as a great example. There are a lot of oral surgery practices out there that have the new younger doctor who's 35 and the elder doctor who's call him 60. They have different desires as far as the components of a deal structure. So the elder doctor would like more cash, less equity because he's not going to be around to see the value of that equity grow over time. Whereas the 35 year old doctor has another 30 years of career and therefore they're interested in more equity, less cash because they're going to be around to see the value of that equity increase as their partner, if they choose correctly, has multiple recapitalization events. So yeah, we are seeing lower cash, higher equity components. I think part of that for us has been because of the age of our clients being on average under 50. However, in the last quarter, the fourth quarter of 2023, we completed transactions at 10 10x multiples for GP Perio, Pedo, Ortho, oral surgery. And the cash components varied from 51% cash to 80% cash. So the high cash component deals are not gone. Unfortunately, we've seen a record number of bidders in the last year. A lot of doctors are talking about how interest rates have impacted the ability of these groups to partner with new doctors. And the reality is that has happened to many of them. However, those groups have been replaced by groups that were recapitalized in 22 and 23 and by new groups. You know, there's been over $10 billion of new money invested in U.S. dental consolidation in the last 18 months. And this is not coming from amateur investors or your typical PE firms. This is money that's come from sovereign wealth funds. The world's largest Investor has bought two invisible DSOs in the last 13 months. And this is a group with $10 trillion under management. So, yes, there have been some groups that have been reducing their partnership acquisitions. However, they've been replaced by new groups and new capital that are eagerly bidding against each other. I mean, last year we had some transactions that had 18 bidders, 13 bidders, 12 bidders, and these are all qualified bidders. You know, there. There are a thousand invisible DSOs out there. We consider less than 100 of them to be qualified to bid on our clients. But there's. There's still a lot of money chasing this, and we're getting record multiples for practices, interestingly, and not what I'll call the hot states. The hot states are Florida, Tennessee, Texas, Arizona, Idaho, Idaho, Utah, Tennessee. Whereas we've done 10x deals for clients in Arkansas, Michigan, Connecticut, which is surprising to me. But again, that's driven by the new capital that's come into the game. And as long as you know where to find it, there are some exceptional values out there.

I want to give you a chance to explain this term you're using, invisible dso. I want to tell you my bias. I am not a fan of the marketing changes. Dmo, dpo. I believe I work so you can use this framework and then put the IDSO in it. There are just dental support organizations that are doing a good job supporting clinicians, and there's DSOs, dental support organizations that aren't supporting well, and those tend to fail. Right. So I kind of simplify it to those two buckets. However, I'm always game for some marketing play, but kind of talk me through how you would define an idso. Obviously, you'd put it in a bucket of they're doing a good job of supporting clinicians. But what would that mean?

Not all are. You know, there are invisible DSOs out there that will fail, I promise. But we define the difference between an invisible DSO and a dso. Pretty simple. Number one, an invisible dso, the doctor is going to have ownership. And that ownership may reside at the practice level or the parent level, but the doctor is going to have significant ownership. When you go to one of the branded DSOs, let's call them Aspen or Pacific Dental, or Monarch, their doctors are functionally salaried employees, and they're getting told what to do and how to do it and when to do it with an invisible dso, you have a doctor owner, and the invisible DSO management is counting on the doctor owner to make the critical decisions to make that practice or continue that practice's success. Second element of an invisible DSO is micromanagement. So most of the branded DSOs, or those that have employee doctors are going to tell their doctors what to do and how to do it. The invisible DSOs, on the other hand, are giving their doctors full autonomy. They are not going to tell you who to hire, who to fire, what to pay them, and they are not going to provide you with the three ring binder that's four inches thick that tells you how to run your practice. The invisible DSO's theory is that owner doctors will run better practices, and therefore they let their owner doctors run their practices. Now, an interesting statistic I was looking at yesterday is one of the largest invisible DSOs, with over 500 practice partners. If you count the number of support staff in their headquarters, it's very nominal they're providing support, but because their owner doctors are continuing to lead their practices and not being micromanaged, they don't have as many support people in their headquarters as, say, a Heartland or a Pacific or an Aspen, because they have management teams at the corporate level that are functionally trying to manage the local practices. The invisible DSOs don't operate that way. And that's the number one question I get from doctors in this process is, Chip, you told me I'm going to have full autonomy. Do I really believe that? So the way we fix that problem is once our clients get down to their final three bidders, we're going to put our clients on the phone with other doctors who have partnered with that invisible DSO so that they can hear exactly what changed, what didn't change. Did they do what they said they would do? Are they glad they did it? And so we jumped the do I really get full autonomy question by letting our clients, before they make a final decision, talk to other doctors who've partnered with these groups, and that makes a huge difference in doctors understanding what they're going to get.

All right, Chip, we're just going to leave this one a little bit of agree to disagree. How does that sound? Because fair enough. I think the only problem I do want to make the same. The only problem with maybe villainizing or saying that those groups over there aren't supporting their dentists would be saying that the dentists over there are being hoodwinked, that those are stupid dentists for working there, that they're being. Hold on one second. Let me finish. That they're being controlled, that they don't have autonomy, that they're not acting as clinicians, and that they don't have any equity. And I just don't believe. I believe Dennis are actually really smart, and I do believe that they're making the best decision for the support that they need. So I think I. And I think ultimately that's what you're doing is you're matching Dennis to the best partnership that works for them, for their structure. So some dentists do need a lot of support, and they want support and they want to retain some equity. And I think whatever DSO you choose, that's really what you should be using as your map. And I think that's what you're using as well, right?

Well, you know, I'm not saying that the branded DSOs don't provide support because they do. They provide more support because they're micromanaging the practice. The invisible DSOs are counting on their partner owner doctors to make those decisions within their practice that are right for their practice. They don't have a cookie cutter homogenized model. You know, in an invisible dso, all of the practices are different and they're operated differently. You know, sure, they have some consistent accounting policies and they have some consistent human resource policies, but it's shocking how different. If you were to look at any of the large invisible DSOs, it's shocking how different all the practice partners they have are, you know, from. From a. You're right. It's all about fit. And that's what we tell our doctors, is we're going to go through a bidding process and we're going to bring you at least six different qualified bidders to choose from. But ultimately, the doctors don't necessarily choose the high bid. They choose the group that they're most comfortable with. Because this is like a marriage. This is the balance of your career. You're not retiring, you're not getting a check and leaving tomorrow. You're. You've got to choose the invisible DSO that has the elements of partnership that are important to you. So I'll give you a great short story. We sold the president of the Florida Dental Association a couple of years ago. Now, this is an orthodontist who had 8,000 GPS vote him into that role, which means he's a heck of a politician. And in his case, the high bidder was about a million dollars over the next bidder, and he chose the under bidder. And they were both great groups. And I was like, why'd you go with the under bidder and leave a million bucks on the table. And he said, real simple. I'm 62. The average age of the doctors in that group is 44. They will keep me young and I will practice longer and I'll make back that million dollars and more. So ultimately it's about a cultural fit. And part of that will be tied to the support elements. We have a client that's doing 4 million in collections, 100% insurance based practice. His new partner is getting reimbursed from his payers at a 20% higher rate than he is. So his $4 million practice this year will drop an extra $800,000 to the bottom line because his new partner has negotiated with the payers for higher reimbursement rates. And that doesn't happen all the time, but it's one of the elements that you look at in figuring out who do I want to partner with. In oral surgery, we see doctors choose the groups that have the best recruiting departments because there were 247 graduates from residency in June and of those, 100 went to the invisible DSOs, 25 went into public service. Which means that left 100 oral surgeons to recruit for the 5,000 independent oral surgery practices out there that are desperate to recruit. So the oral surgery doctors that we have been doing transactions for them, We've done probably $300 million of oral surgery transactions in the last two years. Virtually all of them chose the partner who could deliver on. We're going to bring you more doctors. So each of these transactions is custom and it's about finding the partner that has the tools, support and deal structure that fits for you.

Let's talk a little bit about math because I know anyone doing a transactions, you know, thinking through the math piece and rule of thumb in the past was kind of using a percent of revenue. But if, if you dig underneath that, it's always some kind of multiple of ebitda because invisible dso, DSO whoever, that's what they're being held to, whether it's their bank covenants or their private equity firm, et cetera. So I've looked at practices that are doing 2 million top line, which you think that's a substantial practice. But you know, they said, hey, I've got 150,000 of net income, right? So let's say 8%, let's say 8% EBITDA. And they weren't paying the doctor owner. So once I paid the doctor owner, then I actually was like negative 100,000. Right. Those practices are in a pretty tough spot because they might say, hey, I heard that you could get one and a half times revenue. And you would probably say to them, yeah, those were ones that were actually profitable, you know, and so if, if someone was kind of looking at their practice and they wanted to maybe benchmark some margins that they need to be targeting towards. And we're going to say that this is the margin after you're paying yourself your actual associate level fee. Right. Where, where do dentists need to be thinking about trying to get to? So, you know, we can use the 2 million if, if having a hard number is kind of helpful, or you can just use a percentage if you will. But if I wanted to kind of back into the math, where do I need to be on my profitability from an EBITDA perspective to get a good multiple?

You know, the, that's an interesting question because a two million dollar practice is kind of teetering on the edge of being attractive to a high value transaction in an invisible dso.

Yeah. What would be a better number that we should probably be talking about?

Well, let's use three for easier numbers. But okay, back, back to that two million dollar practice. It's, you know, the sort of the benchmark of the invisible DSOs is that a well run GP practice should have 25% operating margin. So 500,000 on 2 million in collections. And some practices do that, particularly those that are heavy hygiene or heavy fee for service. But not all of them. When you get up to 3 million in collections, you know, you can see more and more practices that are getting to 25%. 20% is more common. Depends on where you are geographically because of the costs associated with that. But let's use 20% as a number on a $3 million practice, which means they've got $600,000 in EBITDA after compensating. The doctor, I can't tell you how many doctors say, well, my EBITDA is a million dollars. I'm like, who told you that? Well, my accountant. Did your accountant remember to pay you? No. I was like, okay, so if we pay you, Your EBITDA is 250. Oh, okay. So.

And Chip, just for those who are listening, who. That might be an aha to think about if you ever leave at some point, if you're 30, 40, you're still going to want to exit someday some associate's going to come in there and they're not going to work for free. So you have to kind of build in now as if you were an associate. What is the business itself kicking off that is really what your DSO is partnering with is what is that ongoing income stream stream and profitability. So go ahead.

Yeah, absolutely. So, you know, it's interesting. If you take a three million dollar in collections practice today, that's a very difficult practice to do a doctor transaction on. Now certainly it would probably get 70% of collections if you were to sell it to another doctor. Today, with interest rates being what they are, those transactions are getting tougher. But you've got a practice then that has a $2.1 million value, 70% of three main and collections. Now, if they have a industry standard 20% margin with 600,000 in EBITDA, depending on where you are in my world, you're going to get seven, eight and maybe more times ebitda. So we're going to use seven to be conservative. So all of a sudden Your practice with 3 million in collections is worth 7 times 600,000. It's worth $4.2 million. So it's worth double what it is in a doc to doc transaction. So it's, you know, for any doctor who's interested in, you know, potentially doing a transaction someday, focusing on EBITDA is critical. And we run into a lot of doctors that are, that are trying to build an infrastructure to support future growth. They have a C suite, as they tend to call it. And sometimes those are not the best investments because sometimes you may not grow and you have to be prepared to shed that C suite because it's killing your ebitda. I know you're investing for future growth, but it may not be something you want to expand right now.

So I mean, make that an example. $3 million practice has 600,000 of EBITDA, could sell for seven times. I go and hire someone for 200,000 for my future growth. Well, now I just, you know, basically got rid of 1.4 million of value because now I'm at 400,000 EBITDA. And so depending on the timing of the transaction, you need to be thought thoughtful. Now if you said, Emmett, I'm bringing on this $200,000 person and I'm, I've got three more locations I'm going to open and I'm very clear that they're each going to do 600,000. Well, that, you know, if that $200,000 person allows you to add, you know, another 1.2 million of EBITDA, that makes sense. So timing of some of these things. I love what you're calling out, Chip. Sometimes. This kind of goes back to the beginning of the podcast where I Said we can think something sounds really innovative and smart. We might, if our timing's off, actually be moving ourselves backwards now in that as you think about tiers that you're seeing, you know, one of the questions I get is is it worth Emmett to grow and if so, kind of where's the next rung on the ladder? So for example, one that you just called out, hey, 3 million's a little bit better than a 2 million. So yeah, if you need to kind of push up to get to 3 million, I would do that. Where do you think that next tier up is? Is it at 5 million? Is it all the way up at 10? And is obviously profitability was hopefully going up. But where does maybe EBITDA multiple start to change as well?

You know, that's an interesting question and there should be a logical answer to that. But I can tell you it is more nuanced because a lot of it has to do with growth rate. Growth rate is the number one driver. We did a deal at four 15 times EBITDA last quarter for a 39 year old doctor with a practice with 18 million in collections. But he was growing 25% a year. So 14 times EBITDA was actually a bargain for the buyer for him because of his growth rate. On the other hand, we've done.

Can we call that out real quick, Chip? Just so people know when someone's making an investment like this, no one really wants to pay over four times. Let's say that's what a mature market tends to trade at. So when someone pays you 14 times, what they're really thinking through is okay, if I go ahead and make this bigger investment today and you grow net net I'll be closer to a four to six times. Right. Especially a transaction. So they're doing this math to kind of back in. And that's why what Chip's saying is growth rates vary. If I've got a great practice and zero future growth, I'm going to get a different multiple than if I got even a slightly smaller group. But man, we're kind of, you know, adding locations, we're growing our same store growth, we're adding associates, etc, and we have a very clear strategy around that. That's going to get your double digit multiples.

Yeah, it is. And again, you know, it's interesting. We haven't done a deal under seven times EBITDA in probably three years. You know, our clients are all relatively young and they're growing so they're commanding higher multiples. But the, you know, the real Thing is finding the right partner at the right moment in time because these groups, demands and desires change on a regular basis. So we will have completed about $80 million in transactions in the last 12 months with a group that called me up in January and said, chip, I've got $500 million to spend. Where should I go? And I said, and this was a group that was strictly west of the Rockies at the time. Great group. I've known the PE firm for years and they basically said, let's put the pedal to the metal and go get great practices. And I said, you gotta come east. And so we've done $80 million of transactions for that group in the last 12 months, all of which touched the Atlantic Ocean. And these guys were not east of the Rockies a year ago. So sometimes it's about knowing who wants what, when, where and why is how you get the values. It's sort of like our GP practice in Michigan last quarter. I never thought we'd get them over 10 times EBITDA for a practice with $700,000 in EBITDA, but for some reason we had eight eager bidders interested in that particular city in Michigan. So, you know, double digit multiples are not for everybody. But if you have a rapidly growing practice, it's possible.

I was looking at a deal structure the other day and maybe just to temper some expectations or to create some sophistication, the good private equity firm, good group, and the way that it was outlined, the dentist was going to get 21 times. Okay, when I looked at the 21 times, the assumptions matter, right? So the assumption, the assumptions underlying the spreadsheet was that the dentist rolled obviously a certain amount of equity into the group and that there was a series of transactions that would happen over the next 10 years, you know, at five year increments that, you know, you could ask me, were they reasonable? I don't know because I don't know enough about the group and I don't know enough about the practice. But I think when, when any of these dentists are looking at this, I think they need to ask themselves, hey, we've been growing at 25% or we've been growing at 5% or whatever it is, will that continue? Because that's going to get built into the expectations of the future transaction. I think another piece is, and one of the things you're helping them vet, I'm sure, is is this a group that has a track record, right? So if someone says, hey Emmett, roll your equity into my group and we're going to triple in the next three months. We've just never done that before, you know.

Right.

That might be an underlying assumption of this. So as people are getting seven or 10 times, if you kind of broke down the structure just generally, and I know they're nuanced, what would you say was the multiple they're getting up front, let's say, on that first 50%. And then what would be the assumptions typically of the multiple on the future transactions?

You know, we're not looking at the multiple on the future transactions at all. That's, that's not factored into how we calculate value. We're talking about the initial value of the practice at closing. When I'm talking about 7-10x multiples. We're not factoring in the future promises of multiple returns on growth and equity and everything else like that. That's on top of the base closing multiple, let's call it. Certainly one of the things that doctors should consider right now is the code, what I call the COVID earnouts. Covid earnouts were invented in 2020 to induce doctors to do transactions in 2020 and 21 for doctors who are saying, no, I want to wait till I get back to my 2019 levels of performance before I do a deal. So the invisible dsos and their lawyers came up with a scheme called a Covid earnout which basically said, we're going to close on your pract at its value tied to the trailing 12 months, and then we're going to reprice the transaction 12 months after doing a deal, and again 24 months after doing a deal. And in the height of COVID we were getting earn outs that were three years after closing. So functionally a doctor, and today they're beginning to go away. We're going to do our first deal without a Covid earn out this quarter. It's a big deal. It's a $55 million deal and it does not have a Covid earnout. It's the first one we've done in three years, I guess. But the COVID earnouts are great for a doctor who says, I'm not ready. I'd really like to grow another six or 12 months because my business is booming. The nice thing about the COVID earnout is you can do a deal today, lock in what I consider to be peak multiple values. Today. I don't, I don't think our current levels are going to continue and you can lock in today's peak values and get paid for your growth in the next one and two years after Closing. And that's not going to be possible two years from now. I don't think, I don't think the earn outs will, will live that long. So if you're, if you're considering doing a deal in the next two years, now's the time to do it. If your horizon is three to five years, keep building and wait. This game's not going away. There's too much new capital that's come in. And, and it's interesting, the $10 billion in new capital went into the invisible DSOs, not the branded DSOs. The investors are realizing that having doctors with skin in the game, true ownership, creates better practices long term, creates more value for both the doctors and the investors. And you're 100% right on something you said earlier, which is you got to choose wisely. There's a lot of money chasing this industry right now, and a lot of it is incompetent money. They got plenty of money, but they don't have a lot of strategy. They don't have a lot of track record, you know, so one of the things we look at when allowing somebody to bid on our practices is what's your track record in dental and what's your track record in healthcare consolidation? And unfortunately, doctors have to be careful because there are a lot of groups out there singing a happy song of, hey, we're going to make three to five times our money in three to five years. But they've never done it before. So we kind of lean towards the group who have done it, the groups that have done it before, because there's plenty of them out there that have.

You got to be careful. I love that. Yeah, I even, even this, hey, Emmett, we've been very successful in the healthcare space. Awesome. What does that look like? Oh, this technology, that technology. It's like, no. Have you ever worked with providers? Do you understand the dental space? Oh, no, we don't understand that. So I love that, Chip, that you guys are vetting that for the dentist and for individuals. This is, this has been fabulous. Anything else chip is you kind of just think through 2024. I loved you're saying, like, if you're, if you're ready to go, now's a good time. If not, continue to build, you know, build towards that higher revenue, build towards that better margin. I think that's good. Whether you plan on. People will ask me, hey, Emmett, what, what should I do differently if I'm going to sell or if I want to hold this for the rest of my life? And here's Some good news. It's the exact same activity. Build a great organization. Right? Because if you want to just hang out and have a good lifestyle, you need a great organization that's not eating up all of your anxiety and energy and so forth. And if you want to sell someday, guess which practices get the highest value? The ones that don't eat up a lot of anxiety and energy and that are well run. So continuing to to just build great organizations. Anything else, Chip, you want to add? And I'd love for you to just give your contact info as well.

Yeah, you know what? What I urge every doctor to do is have a conversation with me. I promise you're going to learn something. And so we offer free conversation with me. And then if you're interested, we'll do evaluation of your practice and give you an idea of what its value is today in an invisible DSO partnership. And that is without obligation or cost. And you can reach us@largepracticesales.com and I love to talk to doctors because I learned something from every doctor I ever talked to. I think I have 16 scheduled doctor conversations today. And at the end of the day, I'm going to know a lot more than I know right now. Because you learn something every day. Because every practice is so unique, which is the funnest part of my business, is how different doctors do things.

That's awesome, Chip. Thank you so much for your time today. Thanks for everything you've been sharing with our listeners. For those who are interested in more information, reach out to Chip. Come over to our DEO website or Facebook page at DEO Secret Growth Secrets. And until next time, keep smiling. Thank you for listening to deo's Growth Secrets podcast for dental organizations. Continue the conversation on our Facebook group and meet other dental leaders. Get questions answered and the strategies you need to succeed. Plus, we have some free resources for you right there on the Facebook page. Remember, you're not alone. Let's do this together. Join DEO's Growth Secrets Group on Facebook. And until next time, keep smiling.