191: Exploring Dental Market Shifts & Maximizing Practice Value

What's the market looking for? What really is judged as a great organization? How is the market changing as far as judging great organizations versus not really helps me as a business owner, even if right now I'm thinking, well, I'm going to hold this and build it forever. 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 challenging industries to navigate. On this show, we the 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 Growth Secrets. I'm your fearless host, Emmett Scott, and today I'm here with Brannon Moncrief, principal and CEO of McLaren and Associates. And we're going to talk about where the market's going. Brandon, great to have you on. Appreciate your time today. Give us a little bit of a feel of who McLaren and associates are and kind of what makes you qualified to talk about the marketplace.

Absolutely. Thanks for having me, Emmett. As Emmett said, I'm CEO, principal of McLaren and Associates. We provide sell side advisory to large practice owners nationwide who are curious about, you know, what's their ebitda, what's their practice worth, and if and when they're ready to go to market. We help them create a competitive environment, bring all the strategic and financial buyers to the table that would possibly be interested and leverage that process to create optionality and competition to find the right partner for your particular business and to maximize the economic outcome and deal structure. So we've got a team of 13. We serve clients nationwide in all different specialties. We're headquartered in Austin, which is where I'm sitting today. We also have an office in Atlanta and San Diego.

You know, one of the questions I often get from business owners is, well, Emmett, what should I do if I want to sell this versus what do I need to do if I just want to kind of keep it and hold it forever? And it's interesting because if you really follow the path, it's exactly the same, right? You want to build a great organization. If you're like, someday I just want to retire and be at home, but I still want to be the shareholder and run the company, but from a board position, well, you can't have that be a complete mess. Otherwise you're going to be in it every day and if you want the highest value, then you can't have it be a complete mess. So either way, you're just trying to build a great organization. So for me, really talking through what's the market looking for, you know, what really is judged as a great organization? How is the market changing as far as judging great organizations versus not really helps me as a business owner. Even if right now I'm thinking, well, I'm going to hold this and build it forever. Right. And I'm sure you see the same thing.

Absolutely. I love what you just said. I think it's good to understand what buyers are looking for on the back end and potentially look to reverse engineer your outcome. But it's got to start with sustainability, building a real company that is sustainable and scalable long term. And the marketplace has changed substantially over the past 18 months prior to that.

Yeah, let's talk about that because I mean, we knew Covid and blah, blah, blah, and then inflation hits, Right? And we always said dentistry was recession proof, we never said it was inflation proof. And so a lot of things have had to change and, and investors continue to get smarter and smarter over the last 15 years. They've really been evolving. But yeah, talk about the current stuff. What is it that is happening in the last 18 months?

Yeah, so let's look back previous to that. Right. Going into Covid dentistry, arguably the hottest vertical that private equity was Investing in, about 200 DSOs nationwide, buying practices at a pretty fast clip. And then Covid happens, everybody shut down for 30, 60, 90 days, depending on your geography. Dentistry opens back up and recovers as fast or faster than any other healthcare vertical. Right. So it proved to be pandemic proof. It had already proven multiple times to be recession proof, you know, over the past 50 years. So those DSOs that were already in the game started acquiring practices at an even faster clip. Those private equity firms that were on the sidelines, eyeing an investment in dentistry, pulled the trigger, bought a platform, started building a DSO. So the number of DSOs has doubled post Covid as a result of increase in demand and private equity still operating in an ideal macroeconomic environment. Loose capital markets, access to leverage was simple and interest rates were at an all time low. Valuations increased as a result. But the macroeconomic conditions have changed substantially over the past 18 months. Interest rates for private equity backed investments have doubled. So the carrying cost of leverage is significantly higher than it was previous to the past 18 months. And the capital markets have been very, very tight. So access to leverage, it's been harder to Get. And if you can get it, you can't borrow it at the same multiples that you could before these conditions changed. And then the buyers on the back end, the institutional buyers that are looking to buy these DSOs at recap, they don't have as much access to leverage, and they're being much more choosy about what they're buying. So this aggregate and flip game that a lot of DSOs were in, where they were aggregating a lot of EBITDA, they were buying a lot of practices, but they weren't really integrating and operating the practices. They weren't really building a sustainable company. You know, a lot of them, for lack of a better word, were a little bit lazy because they were operating in ideal macroeconomic conditions. But when the market changed, it's very difficult to move a 50, 100, 150 location DSO. It's very difficult to shift, you know, the entire culture, right, Very, very quickly. So when you're at that point and you're over your skis operationally and you haven't really been focused on operating the asset that you built, you've just been focused on acquiring ebitda. You get caught in a situation where the marketplace changes, you're carrying a lot of leverage, and the interest rates are now weighing on your cash flow substantially. It's more difficult to get access to leverage to fuel further growth and actually build that infrastructure that you should have built along the way. And then the buyers that you're courting to buy your organization or saying, hey, timeout, you've acquired a lot of ebitda, but what is your same store sales growth look like? Is this really a sustainable organization? Is your deal structure thoughtful? If we buy this asset, are we going to be able to continue to grow and operate it efficiently? And if the answer is no, you're stuck, right? You're on pause. You've got to retool your organization, you've got to build infrastructure, you've got to focus on same store sales growth. And that's the place that a lot of DSOs have found themselves over the past 18 months. They've had. They maybe went to recap, had a failed process, either couldn't find a suitor or couldn't find the multiple that they were looking for to generate the arbitrage that they were trying to create. And as a result, they've had to take a hard look in the mirror and say, okay, we've got to kind of retool the organization. Hit pause. From a business development and acquisition standpoint, and set ourselves up to actually be a class A asset when we go to recap, maybe secure a new line of credit once we've got all the pieces of the puzzle in place, continue to grow through acquisition a little bit more, and then go to recap once the macroeconomic conditions have softened a bit. So we've had a lot of DSOs that have been on the sidelines that grew very, very quickly post Covid. Maybe they were a little irresponsible about what they bought or what they paid for those assets. They weren't building the infrastructure, and therefore they're on pause from an acquisition standpoint at the moment.

The gap that kind of takes them out of the marketplace reduces some level of frothiness. Right. So you don't have as many strategics, if you will, that are just going after it. I think one interesting thing it opens up is oftentimes at our events, people will ask me, is the game over? Right? Like, have the big players already taken over? And there's, you know, now I'm just along for the ride. And the great thing about capitalism is there's always these resets. I mean, they're not fun for us, but it is great for what it does for the consumer, what it does for creating great organizations. And those resets allow for, let's say, new players who are trying to build quality organizations to be the next big player. Right? And so I think, yes, the industry will continue to consolidate because, frankly, we all want it. We all want the additional support, we all want the efficiency from it, from the consumer to the owner. We all want what consolidation does ultimately represent. But how it consolidates does evolve. And I think what's fun is if you're learning the right principles of building a great business, and if you're just moving along, the market tends to come to you, right? It tends to say, yeah, that's what we want. We want great organizations.

Yeah, absolutely. I. I think we have, you know, been at an inflection point over the past year, and there's been a little bit of a reckoning, you know, to some degree, where each DSO has been, their foundation has been tested. You know, you live in Texas, I live in Texas. I used to live on the coast. If you ever live on the coast in Texas, you're used to dealing with hurricanes, right? And when hurricanes come in to a coastal city, they tend to destroy, you know, those buildings that don't have a strong foundation, right. That maybe weren't built to code or what have you. And what's left is the Best of the best. And then those that, you know, got torn up in a hurricane have to rebuild. And that's a bit of what we're going through right now. All that's a, I think, a pertinent analogy. So I think long term for our industry, the test that we're currently going through is healthy. And I think most DSOs will survive and many will thrive coming out of this environment because they've been forced to change to some degree and retool their organization to make them more sustainable long term. And for that reason, I think we're all better for it. Although, like you said, it's a little painful. You know, in the interm. The good news is if you've built a class A asset, there's still been buyers out there, both strategic and financial, over the past 18 months. But if you built a class B or class C asset, you know, you're definitely in that lane where you've got to figure out what changes do I need to make to my organization to make me a class A asset? Because you said it, there's always demand for really, really great business.

Well, this is a plug. You join DEO and then we help you become class A. Right. And then you get with McLaren and you understand what the market really wants. Build your organization as such. Well, let's talk a little bit like we're hitting on the importance of a great organization. A couple things we have to say also happened was inflation really took hold, moved labor cost up dramatically. So let's say you were a pretty good organization. You also though, if you had, you know, insurance in place, it made you feel like a not great organization simply because inflation just squoes the heck out of your margins. Right. And I don't know that that's necessarily a reflection of a bad business owner. It might mean just the reality of sometimes the hurricane takes out the windows and you still have to like rethink your business model. Right. So are you seeing some of that too, where maybe more technology is getting layered in to reduce labor costs, or more outsourcing of certain capabilities are being done to reduce labor costs? Because I don't see the insurance companies going, you know what, guys, we realize we screwed you. We need to send more money. Your way are bad. And I don't see employees saying, we realize we're charging way too much for our work. We'd like to reduce our pay. Right, right. Because they have real bills to pay. So business owners are also having to retool for that. Are you seeing that as well?

Yeah, I think that's across the board. Right. Everybody, whether you have a fantastic organization or one that needs some work, that's a headwind that every single DSO is facing at the moment. And obviously the larger your organization, the broader the issue. So you've got to figure out how to operate more efficiently, what should you outsource? You've got to be more intentional about who you hire because you really need to have a rock star in every seat if you're going to pay the type of.

The rock star rates.

Yeah, exactly. That people expect. So being being very intentional about how you build your team, what you outsource and then taking a really hard look at your payer mix, you know, more so than ever we've seen a lot of people dropping, you know, a lot of insurance plans going out of network and if you've created that strong reputation of local community, really strong Google reviews, a lot of patient loyalty. You know, if you drop a few plans where your write offs are 30, 40% from your UCR, even if you lose a quarter of those patients, you're still ahead and now you're working smarter rather than harder. Maybe you need a smaller team. Right. So being more efficient and really leaning into the business in times like this will serve you well. Not just in the short term but, but long term. So again, the fact that we're dealing with inflation, the fact that macroeconomic conditions have changed and really challenged private equity to lean into their business, I think these are all good things in the long term, but rather inconvenient in the short term.

Can you tell us a little bit for us non, you know, finance listeners, how does debt changing, how does the interest rate changing affect the multiple rate? Because I think sometimes if you're, you're new to this, you're thinking a private equity firm just has a big pile of cash, they come in and then they just hand you some of that cash in exchange for your business. And we don't fully recognize that debt is, you know, as it's called leverage. It's a lever that allows for the private equity firm or for even a strategic to get a better return on the investments they're making. So as that lever can gets shortened and doesn't work quite as well, it changes kind of how pricing works.

Yeah, absolutely. That's a great point. So private equity's goal is to use leverage, use debt to accelerate arbitrage. Right. To juice the returns on the back end at recap. And most of them are carrying a significant amount of debt. So they may be carrying you know, out of the money that they've spent to build the platform and acquire that EBITDA, they may be carrying, you know, 70, 80% of that amount in debt. So that sits on their balance sheet. And those interest rates doubling because most of it is floating rate debt really eats in, you know, to the margin. So, you know, most ESOS were borrowing money at, you know, 6, 7, 8%. Now they're borrowing money at, you know, 9 to 15%. And if you're carrying, you know, hundreds of millions of dollars in debt, that is going to weigh on your P L substantially and it's going to, you know, impact how your lenders view your debt coverage, you know, service ratios. And it's really, really easy to trip covenants when interest rates, you know, escalate at a very rapid pace. And then that's going to impact, you know, how much you can potentially pay for practices or if you can pay for practices at all. What we've seen though is it's kind of a, a compounding impact. We've seen a big increase in interest rates, but we've also seen the capital markets tighten considerably. So not only is debt more expensive, it's harder to access. So where banks were lending money to DSOs at five to seven times EBITDA, now they're lending money at three to five times EBITDA. So if that private equity firm that backs that DSO is not really well capitalized and able to bring more capital to the table when they go to acquire a practice, there's going to be a gap that they can't fill. And that's why a lot of DSOs have been on the sidelines from a buying perspective because they don't have the capital to fill that gap or, and, or they're in a situation where they trip their loan covenants because the debt's weighing on their cash flow to a

point where it's not allowed to borrow anymore or buy anymore until they get that cleaned up. Yeah. So if that cash flow is coming out from the interest rate, ultimately that's cash flow they don't have for hiring. So they got to focus on that or it's not cash flow, they have to buy another location, et cetera. So all of those things start to limit the multiple you're getting. Now we've talked about what the challenges are. So, you know, a macro market is a game board to be played a little bit. Right. So as I'm an entrepreneur, I'm trying to build a quality organization for my patients, for my staff and team. I also need to be thinking through a little bit of timing and size and so forth. So where do you see some sweet spots developing right now in a market that isn't as frothy as it used to be?

Yeah, and I do want to make the point that the market has still been relatively stable. While there have been a lot of strategic buyers on the sidelines and financial buyers on the sidelines, a lot of, you know, people that are part of organizations like yours, DEO, you know, that have that two to 10 location practice, have recently taken on institutional capital and have recently formed banking relationships and have had plenty of gas in the tank to kind of fill this gap. Some of the legacy DSOs have left in the marketplace. So from a valuation and demand perspective, it's actually been relatively steady, even though, you know, a third of the marketplace is currently on pause.

The new players are coming, right?

That's right.

Players are coming.

Yeah, that's right. So let's talk to your question. I mean, the sweet spot that we see is ebitda in the 2 to 5 million dollars range. And that can be anywhere from one massive location all the way to, say, 10 locations. That's where we see the most demand. Because in that range, you're a fit for both strategic buyers, existing DSOs, and you're a fit for financial buyers, private equity making a platform investment and then building a DSO around you.

And that's really a big part of the difference there, right. Is are you too big? That a strategic buyer is like, okay, you're going to kind of, you're too big and you're going to mess up and we got to integrate you in. Whereas the PE firm would like, ooh, we like size because we can build a platform. Or are you too small? Where maybe a strategic says, oh, this works for us, we'll integrate you in. But a private equity firm's like, you don't have enough infrastructure to build something. So that sweet spot gets competitors on both sides going, we like you, we like you. You're pretty.

Exactly. If you're under 2 million in EBITDA, you're probably going to end up affiliating with a strategic buyer. Right. If you're over 5 million in EBITDA, highly likely that you're going to end up selling to a financial buyer, private equity and serving as a platform.

Got it.

When we talk about valuations, look, basic economics, supply and demand, right? The more buyers you have, the larger the buyer pool, you know, typically the better result you're going to see. So that's why, in that 2 to 5 million range, when you're a fit for both strategic buyers and financial buyers, you see the frothiest market and that's above that. 5 million plus is probably where we've seen 5 million plus in EBITDA, the most pullback in the marketplace, because private equity is smart. And while there's an ongoing situation where dentistry organizations are adjusting to the new norm, they're not necessarily going to look to pull the trigger on buying a platform. And they also have some capital restraints, right? They can't access as much leverage. Interest rates are, you know, much higher than they were. So they're kind of sitting on the sidelines for, you know, 18, 24 months to see how everything plays out before they decide, okay, dentistry survived this, it's healthy, you know, as we thought, and we're going to go ahead and make an investment. And hopefully by then interest rates have come down a bit, capital markets have opened back up. So we've seen the most compression on those bigger platforms. Not as much demand and decreased multiples that 2 to 5 million Eid a range haven't really seen a marked difference in those valuations, you know, over the past 18, 24 months. And then, you know, half a million in ebitda up to 2 million in EBITDA, still plenty of demand from strategic buyers. You know, in that window, anything under half a million in ebitda, a little bit harder to move. It takes just as much brain damage and, and capital to close a small deal as it does a big deal. So, you know, might be just selling

to another individual dentist or another small group, etc. Let's talk about a little bit of the exceptions because that could be helpful from a business strategy perspective. I see some of those with the larger EBITDA or those that are, you know, in high demand, some of the levers of the new market, they have some control over increasing their pricing. You know, maybe they're a specialist, maybe they've dropped some insurance plans, their marketing is a little stronger patient flow, maybe they're doing some treatments within a niche that other general dentists don't step into as much. And so there's a lot of demand there. They've got a very clear path for growth, maybe their acquisitions, they have a very clear formula on how they turn those around. Layer end services, would you say? Those are some of the qualities and I don't know if you'd add other things to it that allow you to get an exceptionally high or exceptionally more demand versus, let's say this other side of I do bread and butter dentistry. I'm pretty held hostage on my pricing. I haven't really even talked to the insurance companies. I'm having a hard time with staff right now. I don't know where that's going to come in at. And I haven't looked at my P. L's in a long time, you know.

Yeah.

So that, that one's going to be more challenging, right?

Yeah. I mean, once you have scale, right, you have more levers that you can pull more resources to bring to bear to grow your organization. And you have size. And size allows for economies of scale in negotiating better reimbursement rates from payers as well as better pricing from vendors, you know, to. To boost ebitda. So it's about moving the top line, but also, you know, moving the bottom line from leveraging your vendors for better pricing. Because, you know, in the DSO world, most of these vendors now have a DSO division that is cutting cost for DSOs and then passing that cost cut on to the private practice owner in the form of cost increases.

Yeah, yeah.

So definitely, once you get some size to your organization, you have more leverage. You can pull to continue to scale, grow and operate more efficiently. I think one of the things that you've got to think about as you scale your organization, you know, once you get to three to five locations, you're going to reach a point where you need probably some middle management. You can't be everywhere at once, especially if you're still working chairside and you're passionate about clinical dentistry. But you're also probably going to want to start to look at centralizing services. Right. You're going to centralize a call center, hr, marketing, insurance verification, whatever it may be. Those functions are going to operate more efficiently if they are centralized.

But eventually.

Eventually. But in order to do that, that's a heavy lift, Right. It's expensive. It takes a lot of time. You're going to take a step back from an EBITDA perspective temporarily. And you've got to grow to make up that EBITDA loss from investing in that infrastructure. So a lot of our clients are at that inflection point when they call us, they're like, all right, I'm at five locations. I've either got to hire a couple of middle management people, maybe build out a component of my C suite, centralize some infrastructure that's going to erode my ebitda. I'm going to have to grow my top line considerably, acquire some more practices in order just to get Back to even or should I look to affiliate? Should I look to, go ahead, partner with a DSO that's already got that infrastructure or partner with a financial buyer that has utilized the buy and build strategy across a lot of other platforms. It can help me do this, you know, not on my own.

Yeah. One of the things we teach our DEO members is you really want your practice profitability to be in that above 20% range, let's call it 23, 24% if you're really going to try to scale. And plus, you just want that for a good practice. But then when you get into scaling that middle management piece, that DSO corporate could easily eat up 5 to 8% and that'll bring you back down to a reasonable margin somewhere around 15% or so. But if you're doing that on scale, that can still be very meaningful. But if you're down at 10% at your practice, then you try to scale, you're going to find you have nothing left. And you're wondering what's going on here. In my book, I call it the dark tunnel. Right. And I had someone, I'm curious your thoughts on this. I don't know that I had the perfect answer, but they, it was a private equity firm, kind of new to the space, looking at a platform and the question was, okay, when I start scaling, EBITDA is going to drop, when does that come back? Like how, how big do you need to be? And you know, I threw out probably 30, 50 million of top line to start seeing some of that. I don't know. Do you think it's even bigger than that?

I don't. I mean, it depends on how rapidly you scale that C suite and that centralized infrastructure. Right. I mean, if you do it practically and, and you're really paying attention to what you're doing, I don't think you have to be that big in order to make that money back. I think you can make it back, you know, relatively quickly. But yeah, if you go all in, you know, and build out a 20,000 square foot corporate headquarters, hire a C suite and centralize everything. Yeah. You're going to have to get, you know, as big as you just said in order to make that money back.

Well, I think, I think you just nailed the key principle here is you need to understand your financials and you need to understand how each expense that you're adding in for your growth is going to get an roi. Right. And what is that ROI you're expecting to get from that? And not just like, I'll just Hire them, them and them. And that'll make me seem cool and feed my ego. You know, that's going to get really expensive.

It can get very expensive fast. So you need to evaluate roi and you need to understand that if you pull that trigger, if you pull that lever and you go there, you're in it. You're in it for probably the next two to three years at least, before you look to monetize the business. And all too often we're talking to people that they're at that inflection point. They're like, hey, I'm not ready. I want to do this on my own. And then halfway through it, they call me and they're like, you know what? This is too much. Right? I spent a ton of money. You know, I haven't been able to find the right operational talent to help me scale my organization. I'm ready to sell. And now we've got kind of a mess to clean up. Right? We've got to figure out, okay, how do we carve out that infrastructure and make you look as you were before you built it, but how do we tell that story? That's not a great narrative. So you've got to be really intentional and understand, you know, it's no different than somebody that is starting a practice from scratch. Right? So let's say you have, you know, a great business, five locations, $5 million in EBITDA, and now you're going to start a six location from scratch and you're going to invest a couple million dollars to do that. You want that business to reach some level of maturity before you pull the trigger to monetize your business or else. Now we're dragging along, you know, this startup that's EBITDA negative and it's weighing on the rest of the organization.

Yeah, we see that. Sometimes people get a little excited. Pretty soon they've built out 11 ops, but three aren't efficient yet. And then they're buying another location and we're like, yeah, slow the, slow the horses a little bit. You know, one of the things I'd say we have a really nice model in deo, which is before you go hire all these executives, how do you leverage your vendors? First, how do you look at consultants? Next, how do you use fractional? Next. Right, so you're stair stepping into this before you layer that in. Now approach, I'm pivoting here. How do you think about the strategic versus the financial investor and partner in this? And you know, what should our listeners be thinking about as they think of Those two groups and which one they might be most interested in.

Yeah, you know, it's interesting. A lot of our clients and a lot of your audience at deo, given that they have larger multi site practices, they're positioning that they eventually want to sell to a financial buyer, right? Sell directly to private equity and serve as the platform. And a lot of that's driven by the narrative that they're going to get a higher multiple if they sell to a financial buyer compared to a strategic buyer. The reality is that yes, the multiple might be higher with a financial buyer than a strategic buyer, but the valuations are going to be relatively congruent. Well, why is that? A strategic buyer already has all the infrastructure, right? So they're probably not going to need some of your infrastructure. Or if you haven't built infrastructure, they're not going to have to build infrastructure around you and burden your P and L, your balance sheet to do so. So they're probably going to bid a lower multiple on a higher EBITDA figure compared to a financial buyer that needs all of your infrastructure and probably more in order to scale the organization. And they're going to adjust your financials accordingly. They're going to bid a higher multiple on a lower EBITDA figure. So even though financial buyers typically bid a higher multiple from a valuation perspective, they're often congruent to what strategic buyers

are offering, which kind of leaves us open as owners to choose what's best path for us.

Which is why when you look to monetize your business, in my opinion, you should entertain both options. The other thing, you know, for better or worse, if you go with a strategic buyer, you kind of know what you're getting, right? They already own, you know, 50, 100, 200 practices. There's a deal structure in place. You can evaluate the assets that they own, their culture, you know, and what infrastructure they have to offer. So it's a known entity with a financial buyer. It's the wild west, you know, you have to evaluate have they built the dso and if so, were they successful? Did they exit it? What was the return? What's the reputation? Or do they have, you know, other health care businesses that they've utilized a buy and build strategy. But I will say that it's far more unpredictable regarding what you're getting. If you sell to a financial buyer as comparative to a strategic buyer, it can be phenomenal and go extremely well. It can be an absolute shit show. And we've seen that that happen for some clients that decided to go that route.

Yeah. So I think being really thoughtful about what you're looking for, having someone like McLaren to help navigate that. You know, there's a great saying, I can give a man anything he wants. The hard part is for him to figure out what he wants. And it's true for all of us is okay, the world's at your feet, you have all these options. What is it that you truly want? And doing some of that hard thinking of today, five years from now, etc, would you say there's a difference? And I don't know this. An amount of cash as an owner, you might get between a financial and a strategic is. Does the financial investor tend to want more of it to be growth capital for the future? And. And you tend to roll a little bit more than strategic or have they even out from a cash at close

perspective, they're relatively even. I would say financial may be even slightly higher than the. The strategic buyer want to own a

little more of the platform, correct?

Yeah, they want to own a little bit more of the platform. And your equity can be more meaningful because it's platform level equity at par value. Right. And they're probably going to look at you as the future driver of the organization. If you're a platform investment and you're sitting in the current CEO seat, you're likely going to occupy a major role in the investment moving forward.

They're really investing in you as much as the platform or more.

They. They are. And you know, to go back to what said previously, first question we always ask is the same question that most buyers ask is like what? What's your why? Right. What does your Runway look like? What are you trying to accomplish? What are your goals? What are you trying to solve for personally, professionally, from a business perspective? And then is there that option out there. Right. That can fulfill that? Why? And if not, we've got a right size something. Right. Or you just need to keep your head down and keep going.

Right, Right. You're building something unique for you. All right, crystal ball us for a little bit. We're here in 2024. Looking out over this year and maybe even into next. How's the market going to play out? How should I be thinking about it? What's going to be the levers that I need to be pulling? What's going to happen on the macro? I saw by the way today interest rates probably not moving down anytime soon. So it's a little more par for the course for a while.

Yeah, we'll see. I mean, look, we're in an environment where Everybody's having to adjust to the new norm and it's, it's an interesting standoff that's currently occurring with DSOs and the capital markets. So most of the DSOs that exist today were born in an environment of ideal macroeconomic conditions and their financial sponsors had very big expectations. From an arbitrage perspective, they were expecting to hit 5, 6, 7x returns on their invested capital during this recap cycle. But because banks are not lending and financial buyers are not buying, and because interest rates are inflated, those recap cycles have been prolonged and the multiples that you're going to sell for when you do sell are going to be lower than 13, 14, 15x. So private equity is in a place where they've got to readjust their expectations, but they're still kind of holding off thinking that things are going to improve before they recap.

It's like, which private equity is going to change the expectations? Right. The buyer who says, maybe we won't get as much return on this as we had told our limited partners or the current investing private equity that says we just, we got to get out of this and we're not going to get the same return we told our limited partners. Right.

So, yeah, so right now there's kind of a disconnect. Right. And, and we're trying to figure out who's going to blink first. Are the capital markets going to blink first or are the PE sponsors that are holding these DSOs going to blink first? I do think the capital markets are going to ease at, at some point.

They're going to say, hey, listen, we're going to have to come in at these higher multiples, still not quite the same, but high. And we just need to know we're not going to get the same arbitrage of the future.

Yeah, yeah, the arbitrage going to come down to some perspective because of the macro environment. So I think they're going to have to meet in the middle. The DSOs that are looking to recap are going to have to understand they're likely not going to recap at a 15x anytime soon. And the buyers, the institutional capital is going to probably have to come up and Pay, you know, 11, 12, 13x, not 9 or 10x to buy these DSOs. A lot of it though will depend on the macro environment. Hopefully interest rates have at least topped and are going to start to come down modestly. They're not going to drop back where they were. That's probably gone potentially forever. We may not see that again in our lifetime. That was a very unique set of circumstances that led to that. But there's a whole generation of dentists and people that have grown up in that environment. So it's very difficult for them to come to terms with, you know, where we're at today. So I think you are going to see the capital markets start to ease in Q4 of this year and really start to ease going into next year. The reality is that PE has to deploy capital to make money. Banks have to deploy capital and offer leverage to make money.

They can't sit on the sidelines forever.

Yeah, they can't. And some of these DSOs, because of whatever decisions they've made are going to have to recap because they're already four, five, six, seven years into a cycle. Right. And the sponsor is going to get impatient and want to step out and move on to the next thing. So I think you are going to see some recap start to occur in Q3. More likely, Q4 of this year, the capital markets are going to open back up and the market's going to kind of normalize, but look a little bit more like it was pre Covid rather than how frothy it was, you know, for the couple years coming out of

COVID And again, we're talking about the market as a whole. If you're a quality organization in that 2 to 5 million mark, it's already going, right?

It's already going. And you know, that's been relatively stable and I think it's going to stay stable. If you build a class A organization, there's always going to be demand and you're always going to fetch a premium compared to your peers.

Yeah, it's awesome. Brian, thank you so much. This has been super helpful. Continues to give us just an orientation of the market and how to build great organizations. If people want to reach out, just want to talk this through a little more with you, maybe they want their organization looked at, you know, do you all do things like that where you can say, hey, we can give you some kind of initial look and even talk through, like what, what it would really look like, you know, to engage with you?

Yeah, absolutely. We always start with just a casual discovery call to learn a little bit about you, you know, understand your why understand at a high level, 10,000 foot level what your organization looks like and see if it makes sense to do a deep dive, do an even analysis. Even if you're looking at, you know, monetizing the business three years down the road, five years down the road, seven years down the road start early, right? And build a relationship with somebody like us so that we can help you reverse engineer the outcome that you're looking to accomplish. People always say I'm crazy. I give away my cell phone number. You can call, text me. This is all I do all day long is talk to large practice owners. My number is 512-660-8505. You can reach me at Email Brannon B R A N N O N dentaltransitions.com and encourage you to check out our website dentaltransitions.com we're going to be at Summit. We're doing an M and a workshop prior to the start of the DO Summit in Orlando and would love to see people there. And we'll be at all the DO meetings this year. So look forward to seeing you and seeing your audience there.

Awesome. Yeah, excited. If you haven't gone to our website at DEO Dental Group, check out the summit coming up. It's going to be fabulous. And if you have more questions, reach out to Brandon directly. You can come over to our DEO Grow Secrets Facebook page. 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.