213: 2025 M&A Trends Every Dental Entrepreneur Must Know

We had a doctor who came to us with an 8x offer. Phenomenally charismatic doctor. And we ended up getting him 14 times EBITDA just because once we got him face to face with the right bidders, he did the selling.

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 talk to dental industry leaders, solve problems, and get you the answers you need to face these challenging and thrive. Welcome to DEO's Growth Secrets podcast for dental organizations. Now let's get started.

Welcome to another episode of deo's Growth Secrets podcast. I am Jake Poole, the CEO of the Dentist Entrepreneur organization. And we have a hot topic with us today. We're going to talk about M and A buying and selling locations and the state of the economy and the future state of the economy actually. So with me, I have Chip Fishner, principal of Large Practice Sales. I'm very excited. Chip, do you want to give yourself an introduction? Because I think a lot of people have seen your business name out there, but they don't always know exactly kind of what makes you all different and what you guys do. So I'd love to hear from your aspect how you explain large Practice sales.

Sure, absolutely. Thanks for having me, Jake. I appreciate it. Large Practice Sales specializes in what we call invisible dental support organization partnerships, or IDSO partnerships. And an invisible DSO is functionally a group that wants to become your silent partner by buying anywhere between 51 and 80% of your practice for cash upfront, with you retaining ownership in the balance. And that ownership may retain, may be retained at your practice level, at the parent company level, or a combination of both. But there are today over a thousand invisible DSOs across the US they've been around for 35 years. They are far larger than branded DSOs you may think of such as Aspen or Smile brand. And the invisible DSO's key feature to those that we partner our clients with is that they want the doctors to retain full autonomy, not just clinical autonomy, but they're going to invest in you because whatever you've done that's been uniquely successful, they want you to continue to do. They're not going to tell you who to hire, who to fire, how to pay them, when to be open, what procedures to perform, what products to use, or what payers to take. The invisible DSOs, excuse me, literally become your silent partner and you get to benefit from Their resources, their resources are going to vary based on the partner that you choose. But most of them are paying 25 to 30% less for supplies than you are. They're paying 10% less for team benefit, 50% less for implant. And most importantly today they're getting reimbursed at higher rates from the insurance payers than the independent dentists are. That's a very secret item today. But there are many of these invisible DSOs that are getting reimbursed at rates 10 and 20% higher than independent dentists.

Now, they will all deny it, but it's happening.

So any, I mean, are these like family offices? Are these like large PE, like a little bit more on the invisible DSOs and what to expect when you start talking to these folks?

Yeah, the invisible DSOs again have been around for 35 years. The largest of the invisible DSOs, a group called MB2, just recapitalized two weeks ago. MB2's recapitalization was their third recapitalization in seven years. And I had over 50 really happy clients in that recapitalization. And some of my clients who have been with them for six or seven years saw 500% plus gains on that retained ownership piece that they kept. But the invisible DSOs are typically financed by private equity family offices. Some are financed by sovereign wealth funds. And a very little known fact is that the world's largest Investor, which is BlackRock, which manages $10.8 trillion, has recently gotten into the game and they today own two invisible DSOs and they're looking for others. So in the first half of this year, over $5 billion of new capital was invested in invisible BSOs, which fortunately has given groups the capital to bid against each other for the balance of 2024.

But we've been able to get some extraordinary value for our clients.

So okay, I, I love it. And you know, we have come across a lot of the invisible DSOs and we've even looked at, you know, I've had members and, and people that worked with, look at the, the structure and the way they come in and yeah, we've heard a lot of, of things around, you know, leaving autonomy up to the, the groups, letting the groups kind of continue to operate the way they're operating and yeah, really providing, you know, financial support and really a little strategic support as well. So it's a whole different way of looking at it versus the opposite is where, you know, you're latching yourself onto a DSO and becoming part of the larger group and you're essentially assimilating into what they're already doing. So it's a whole other world that, that people have that option to, to go down. So given that you, you kind of are really working with, you know, a lot of the large funds, a lot of the large places of resource. What trends are you seeing right now? I mean, what's the, you know, they say smart money or, you know, the smartest people who have kind of large buckets of resources. What are the trends? What's going on, what's coming on the pipeline?

You know, it's interesting. I think the election was a good

thing for our business primarily because it will put the brakes on what the U.S. justice Department and Federal Trade Commission started trying to do in May, which was give the Fed the ability to approve what they call healthcare roll ups, which is functionally what an invisible DSO does, is it? It partners with smaller practices as a part of a bigger entity. So I think the election will put the brakes on all of that, and that's a good thing. In California, your governor Newsom on September 30th vetoed a bill that would have given them the right to approve or disapprove of any transaction, including buying a dental practice as small as 2 million in collections. So it passed the legislature, failed at Governor Isom's death, thank goodness, and the Feds were in essence, emulating that rule. And thanks to the election, I think that is gone. I think the threat of higher tax rates is now gone for the moment. I think ultimately we will have higher tax rates given our spending addiction. But certainly for 2025, I think we're in good shape. And so to me, given the amount of capital that's chasing great practices, and great practices are defined and we'll talk about what they are, is pretty extraordinary today. I mean, we completed almost $200 million of IDSO partnerships for our clients last quarter, which is probably the best quarter we've ever had. The other thing that's happening is younger dentists are exploring the invisible DSO partnership route, such that in the last 24 months, we've completed a billion dollars of these partnerships, over a billion dollars and $150 million of that were for dentists who were in their 30s. So these were not dentists who were looking for a retirement strategy. These were dentists who said, hey, maybe with an invisible DSO partner, I can go execute my growth strategy and I can buy other offices or add other offices de novo. But the invisible DSO partnerships can be really valuable for a growth oriented dentist

who wants to build something bigger.

Okay, so there's a few interesting points in there. Now, when you say that last quarter was the biggest quarter, is that because the overall net number of transactions do you think is trending upward or is it because transaction with IDSO is trending upward and people are trending towards that type of transaction?

We only do invisible DSO transactions, so

I can't really comment on other types of transactions. But the majority of dental consolidation is driven either by doc to doc transactions, typically practices with less than a million and a half dollars in collections, then a doc to doc transaction is really their only option. Whereas in my world, we're looking at practices that are going to have more than a million and a half dollars in collections and they're going to have the invisible DSO option, which is going to be at a far higher value

than a doc to doc transaction.

Okay, and I saw that, you know, on your website you guys are showing some multiples and this is what we've seen as well. You know, a lot of people are always wondering what the multiples are currently and what they're trending. They hold held pretty steady. I see all are, you know, seeing transactions eight to ten times. EBITDA trends on, on multiples for you and then where you're seeing that. And I go next year, 2025.

Well, first thing you got to do is is qualified. The practices that are achieving the kind of multiples that we're getting, they have to be a growing practice. 24 collections over 23 collections, they have to be a growing practice in EBITDA. 24 EBITDA over 23 EBITDA, they typically are more valuable if they have a younger doctor. It's getting very hard to complete transactions for doctors with a six in front of their age, which for a guy who's 64, that's a tough thing to say. But the reality is if you're a single doctor's practice who is 60 something, you should have called me last week, not next week. So young practices and then desirable geographies. And it's interesting how the definition of desirable geography changes on a regular basis. The last year, one of the highest value GP deals we did was in Michigan, whereas the hot states are typically perceived as Florida, Texas, Tennessee, Colorado, Arizona, Utah, Idaho. That's expanded. We've done some great deals for GP practices across the country. We did one in a small town in Kansas at nine times EBITDA last year. So the multiples, if you have the right practice, are actually up. So if you're growing, you're young, you're in a desirable geography, the multiples are up. So in our close to 200 million last quarter, over 110 billion of that was done at over nine times EBITDA. Now admittedly those were larger practices, practices which typically had 5 million or more in collections. But it's still a great time to be a practice if you have the

right attributes that are sought by investors today.

That's fascinating. So you know, it's almost like the IDSOs are just getting better at understanding where the best fits are, where they can add a lot of value or where they're going to continue that journey on with that, with that owner. And then I guess for those folks that are smaller, they're just going to transact with each other until that practice starts to grow and become viable. For the IDSO or like how does it work for the smaller practices? What are their, what are their options?

You know, the smaller practices have the same options that they have had for

decades, which is a doctor to doctor transaction. And using very rough numbers, a doctor to doctor transaction will trade at anywhere between 60 and 100% of collections. We don't do those. So I am not an expert on that topic. But once you get above a million and a half dollars in collections, it's time to have a conversation and understand whether you qualify for an invisible DSO partnership. Because in many cases the value that you will receive is going to be twice what you might get in a Dr. Doc transaction. Now the caveat to that is you're going to have to stick around for a while. Invisible BSOs are not interested in doctors who are ready to retire or ready to leave. They're trying to create long term relationships. So call it minimum stay for a one or two or three doc practices, three years. If you've got a larger practice, the elder doctors will often leave sooner. But if you have a young practice, they want you to stay until you die. They're eager, they're in essence paying a

premium because you're going to stick around and run the practice with their help.

That makes sense. Yeah. And so, okay, I'd love to go back to some of the legislation that has changed recently. So you know, you see that it's going to be obviously there were some headwinds coming potentially down the, down the road with the legislation that got overturned. I don't think a lot of people were aware that that was coming down the pipeline where, you know, these transactions were potentially going to have to be approved by, you know, some government entity or self government group. I think we're all happy that didn't happen. And then do you expect, you expect things to consider how they're going then? Yeah. You expect things to continue how they're going on the transaction side?

Yeah.

No.

I think the cloud of the Justice

Department and the Federal Trade Commission under the Biden administration will be lifted with our new president, which is a great thing. The fact that Gavin Newsom, the governor of California, vetoed that legislation is a good thing. There's similar legislation pending in six other states, but given the election and given Newsom's veto, I think we may have dodged some bullets there. So it's, it's pretty much a green light for doctors to achieve high values with some great partners. Because with that $5 billion in new capital, there are some great partners out there. You know, many of these investors have done this before. There are a couple of groups that we have helped start new invisible DFOs with, using our clients this year that are paying exceptional values with investors that have done this five times before where they've invested in a great practice, use it as a platform to build an invisible dso, and then monetize it. There's one of those investors that we started a new invisible DSO with in 23, late 23. They've already returned over three and a half billion dollars to their doctors and investors in the six deals that they've done in the last 10 years. So there are some experienced investors out

there that if your practice is big enough to become a platform, there are some opportunities.

What's your sense on. Because there's, you know, seven, eight years ago, there's a lot of, a lot of activity. And then there's been kind of, it seems like in the news, some of the DSOs that were really active back then, maybe on some financial hardships, now there's some going in bankruptcy, there's some that aren't going to make it. And then it's almost like around two, you know, and people are probably smarter. Smarter money coming in, smarter operators learning lessons in the past. What's your take on kind of this cycle that seems to have happened? If you've seen it, it's curious how you think about it.

You know, certainly transaction volumes for average

value practices last year or in 2024 were down. But the reality is our clients are all exceptional practices. And so we are able to achieve record values in a record volume. If you know where to look. There's still plenty of money chasing dental consolidation, and that will accelerate. In 23, we had our first sovereign wealth fund, invest in invisible DSOs, you've had BlackRock, the world's largest investor with 10.8 trillion under management. Enter the invisible DFO space with two acquisitions in the last year and a half. So there's plenty of smart money still chasing dental consolidation. You just have to know where to look for it. Other given the fact that there's a thousand of them out there. You know, in our world we consider 900 of that 1,000 on our blacklist, meaning we won't let them bid on our clients. And it's for a list of reasons ranging from management to money to they've partnered with some lousy practices. So you've got to be really careful in who you choose as your partner because ultimately these are partnerships. And so the amount of cash you get up front is certainly relevant, the initial value is relevant. But ultimately doctors are playing the long game and they want to get a partner where they can see equity value increases, you know, of 2, 3, 4, 5, 6, 700% over a 10 year career. So it pays to choose wisely because all of these guys are great salesmen

and you need to know to look under the hood to figure out what they're really all about.

Yeah, you know, when things were frothy in 2018, 2019, 2020, we would, we would just tell dentists like look, the biggest thing, the best thing you do right now is just build a great business. Right. I mean a great business will always be valuable and you'll never not have buyers if somebody can, you know, partner with you and you both together provide a return for each other. And you know, it's almost like I think in the industry we've gotten to that, we've matured to the point now where that is the case. Like the businesses have to be good to get that level of, of investment. And that's when you think about for patients, this is a good thing. Right. That means it's less poorly operated dental offices and more better operating dental offices.

Yeah, very true. There's a flight to quality.

A flight to quality. It's a great to put it so. And then would you say, you know, from our perspective, we deal with mid market folks at million really just above like you said that doctor to doctor transaction up to about you know, 30 to 50 million. And there was a lot of activity for our world in 2022, 2023. It actually did kind of seem to slow down a little bit amongst our, our kind of bubble. What is, what is your outlook for 2025? Do you see back to a lot of transactions happening, especially in that mid market, emerging market area.

Yes, absolutely. The, again, the key is going to be quality.

You know, the pr, the practices that are growing and have higher margins are going to continue to be extraordinarily valuable. I mean, in the last year we've had 18 qualified bidders for some of our larger practices. We've had a dozen qualified bidders. So it's. If you have a quality practice that's growing with the right systems and most importantly, a doctor with a passion, a personality and a plan, those, the three Ps, as we call it, make a big difference. We had a doctor who came to us with an 8x offer and phenomenally charismatic doctor, and we ended up getting him 14 times just because once we got him face to face with the right bidders, he did the selling, you know, so it's not all about numbers. You've got to have a passion for

dentistry and you've got to have a plan of how you're going to grow your practice or your group.

Yeah, it's a whole different way to think about it, you know, in this, in this type of transaction. Right. Like you said, you're looking for a partner. These are. If you're a dentist and you're looking for, you know, this is just the beginning of your journey and you see yourself, you know, putting effort in 10, 20, 30 years, this is a really good road for that. Right. You're not going to kind of just sell and wipe your hands clean and just ride off into the sunset.

No.

The reason we've had so many young doctors do these invisible DSO partnerships in

the last year is because they have a plan for growth. And with the right invisible BSO partner, they can execute that plan faster, better, and with no personal risk. Risk. Invisible BSO will put up the capital to drive growth and the doctor can retain a 49% ownership piece with no investment and no risk and benefit from the resources of that partner to help them grow their own empire and keep 49% ownership. So there's, there's a lot of different ways to structure deals. If you have a growing practice and you're a passionate doctor and you're in

the right geography, there are a lot of opportunities today that are better than remaining independent.

All right, last question is kind of looking into the future next, going into next year and, you know, the patient, how do you see kind of patient's ability to go to the dentist or just the, the patient demand and the political landscape next year sounds like things are opening up. You're Feeling good about the M and A landscape? How about the patient landscape?

You know, the good news about dentistry is if you look at a chart of revenues in dental practices over the last 20 years, it is steadily up and to the right. Certainly we had a bump during the shutdown of COVID but fortunately people are interested in taking care of themselves. And it's hard to believe because many people say, many independent dentists say, you know what, selling out to corporate, that's not a good thing, or doing an invisible DSO partnership is not good for patient care. Reality is, it's kind of the opposite. Any of the great invisible DSOs have already implemented AI in their diagnostic procedures, for example, and they're doing that because certainly it can be more profitable for them, but it's ultimately providing better patient care. So as consolidation accelerates, the independent dentists need to be aware of what their competitors in the community are offering to patients. And it's not just about the latest and greatest technology, but the world is changing and the payers are paying more to the invisible DSOs in reimbursements than they are to the independent dentists because the invisible DSOs have leverage. And costs from a supplies perspective, for example, are significantly lower when you're a partner with an invisible DSO that's paying 25 to 30% less than you are. And ultimately that's some serious competition. And so what I say to doctors is you will either join an invisible DSO or compete with many because they're now in all 50 states. The last state that didn't have a DSO or invisible DFO was Montana. And we fixed that with a client of ours in October of 19 who became the first Montana invisible DSO or DSO for that matter. So they're out there. And what I urge all doctors to do is take a look at our website largefracticesale.com and contact me and let's have a 20 minute conversation. And that's all I do all day, is talk to dentists. And the great thing about that is I learned something from every dentist I talk to every single day. And I like to think that's mutual. But it's worth having a conversation to understand what your practice is worth today and maybe get some tips on how

to make it more valuable over time. If now's not the right time for

you, one of the smartest things that dents can do is actually talk to somebody like you get, get the few things like, well, if you just change this, you'd increase, you know, the value of your, of your business a little bit and then go and do that. And you're happy to do that because it's just more valuable. Doesn't matter to you. Right? It makes it easier to sell.

Absolutely.

Yeah.

And so it's a great strategy every two to three years to go, to go talk to you and see, you know, where the gaps are. Well, Chip, we appreciate it so much. I personally am always fascinated, you know, the world that you're in. You're just, you have your finger on the pulse of, you know, where things are trending, especially, you know, when money is coming in dentistry. And it's something a lot of people are thinking about. A lot of people want to know their, their exit plan. They really, I mean, this is the end game, right? They want to have their lives be set up for the future and for their families. And this is how you do it. So. So we appreciate hearing your perspective. Excited to hear that. It's a bit of a green skies ahead, at least for now and economically.

Absolutely.

Legislatively. So. So good things coming. Excited for 2025 and reach out to Chip if you have any questions. And we hope to see you next year.

Chip, 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.