The Evolution of Deal Structures in the DSO Space - with Dean Gould

We have a very special guest today that I'm excited to introduce to you all. We have Dean Gold, senior attorney at Dykema, on the show. DICOMA is an industry leading law firm in a number of industries, but important for this show is their strength and expertise in the dental transaction space and more specifically in the dental service organization and dental partnership organization transaction space. As you may know them, they DSO and DPO for short. Dean focuses his time at Dykema on comprehensive corporate and M and A guidance to healthcare and dental service organizations, which is ultimately how we met. He was on the legal side of a fairly large transaction that one of my clients entered into with a prominent dso. And in that experience I was very impressed with Dean's professionalism and knowledge of the space. And we're excited to share some of his experiences with you all today and his background within the DSO transaction space. So without any further ado, help me welcome Mr. Dean Gold. Welcome, Dean.

Thanks, Drew. Thank you for having me on. Looking forward to the discussion. Everything you said is true. Yeah, my name is Dean. I work for Dykema. I exclusively work on M and A deals in the healthcare space, but do a lot of work within dental, representing both buyers and sellers. Had the great privilege of working with you with a common client on sell side deal, which was really exciting and excited to discuss today what the legal side of a transaction is, but more importantly, where things are headed in the DSO marketplace generally. Because as a lawyer we tend to do a lot of different deals, a lot of different clients, a lot of different sellers. And so we've been able to see this, this change over the last couple of years coming out of COVID into how the DSO marketplace is just a little bit different than it was prior to Covid.

I'm excited to get into all of that. Before we get started on the DSO space and all of your experience within that space. Let's start with just a quick background on how you got into legal and then maybe, you know, how you found yourself into this private equity dental service organization transaction space specifically.

Yeah, absolutely. I live in Dallas. I'm from Dallas. I ended up going to law school here in Dallas and I had no intention of going to law school to be a dental lawyer. I don't think that anybody does. I joined the great firm of Dykema and this was kind of where I was told I was going to be working. And it was a group that was headed up by our founder, Brian Caleo, who also says the same story, that he didn't go to dental law school to Become a dental lawyer. It's just kind of the way it happened. And when I joined, the firm is obviously a large firm with 400 plus lawyers and a multinational site firm. We do anything else that a large law firm does, but we do uniquely, we do dental work. And the group was starting to do more corporate work. And so we were doing a lot of sell side work representing dentists that we had represented for years, helping them build their DSOs on the regulatory side. And then these groups were starting to get offers from buyers and so we had a corporate group as well. And so we sort of naturally kind of became dental corporate lawyers over the last 10 so years. And so for me it just kind of happened naturally and it's been great because we've been able to take that and work on other healthcare deals as well because they're largely the same structure. But we were able to build off that basis of strong dental industry knowledge. We'll talk later. We host a conference every year that I'm sure that some listeners have heard about out in Denver where we bring the whole industry together. That's dentists, that's specialists, that's private equity, that's folks like you, Drew. You should be up there as well. We have an industry leading event to discuss the topics of today and to network and to meet folks in the industry. So yeah, it happened naturally and I love it. I love the opportunity to work on these deals. I love representing entrepreneurial dentists and oral surgeons and specialists, navigating them through these sales. I love working with entrepreneurial buyers who want to enter the space and learn about it. So yeah, it's been a great opportunity as a, starting off as a young lawyer to now to sort of see that progression of how you can take a small company, help them out and then they are able to realize the benefit of their good success and sell. So yeah, it's been great. I really enjoyed it.

Yeah. Such a common theme in the dental space to sort of fall into it. You know, you come from. We all come from our own respective worlds and in the dental space we kind of fall into it. But then we. I feel like the common theme is also that we really enjoy the clientele and the work that's involved in the space. So anyway, I'm glad that you, I'm glad you made it here because we could definitely use great professional services providers. I know our clients and I'm sure your private equity clients as well, when you're on the other side of the deals, get great satisfaction and benefit from dicmon. And y' all services that you provide. All right, so let's talk about the DSO deal space and some trends that you're seeing emerging. And you can take that any way that you want to just kind of give us an overview of how you feel. The DSO space is trending and changing. Whether it's bad or good, it's all good.

I don't think there's any secret out there to the listeners that the dental industry and the dental specialty industry is heavily consolidating and it's been that way for the last 10 to 15 years. The introduction of DSOs and private equity, which if you don't know is just the ability for non doctors and dentists to own the company that's going to receive the economic benefit of the dental practice. So corporate practice of dentistry restricts the ability for me and you, we're not dentists to own a dental practice, but we could start a management company, provide all the services it needs that are not clinical, and then be able to benefit from that revenue stream through a management agreement. And so that consolidation has happened and happened and we now have a lot of major players in the space. We've seen a consolidation of specialty only, so oral surgery platforms, endo platforms, perio platforms. And it's been this really quick move to consolidate. And then Covid hit right. And surprisingly dentistry did really well through Covid. It's an essential business and there was a lot of help from the government and so we were able to withstand that storm. It's another reason why dentistry is a recession proof, pandemic proof industry. But those companies were consolidating really in one way. We had this ability for private equity to come in. Doctors would sell for cash and some equity in the company. There would be a work back requirements and they were told that just wait and see and also told that you just have to work your five years and you get the benefit of this large consolidation. And there was less emphasis on organic growth of your actual practice or your actual region. And since Covid's happened, I think some of the doctors and some of the, some of the advisors have said there's another way of doing this right. We don't have to consolidate the entire venture into one single source that we're all then going to benefit from. That's one way of doing it. So what we're seeing post Covid is certainly this concept of joint ventures retained equity. Some folks call it site level equity. And what this is, is for the doctor is they get, they get the ability to retain their practice through a management company structure. So for an example, we could say the buyer, the private equity DSO is going to come in and buy 70% of the practice. And from their perspective, that's 70% of the economics of it. They're going to hold, they're going to own for control purposes, a lot of it, but for economically they're going to own 70. And then the doctor who sold gets to retain 30% and the doctor then is incentivized because he's got an employment agreement and now he's got the ability to take on 30% of site level or retained equity. So he's been, he or she has been growing this business for years, is going to sell this business and now encourage to continue to grow the business because they get to receive 30% of the benefit going forward. This is common even in groups that were originally only consolidating one way. We have some folks, some clients that have pivoted to say, well, the market said it this way. We can offer to some clients, some sellers, this option of just selling into a main holding company, one size fits all model, or we can be a little bit more flexible. And if the doctor's heard about this idea of site level or retained equity, we can offer that as an option as well. So sometimes it's called JV Joint venture site level retained equity. But it really is just the ability for the doctor to do what he does well, which is top line revenue growth. Right. The DSO is going to be really good at consolidating, getting those economies of scale and bringing down overall costs. Take a little bit of the burden off the doctor on the management side, but then let the doctor do what they do best, which is, which is see patients and do cases and grow the business. So that is certainly a big change that we've seen. Some of the biggest players in the space are definitely doing joint ventures now. Something that anybody out there is considering selling their business should consider when they're speaking with buyers or working with their advisors. Is this an option for me or is it only going to be the option of sell, work back and that's it.

I got a question just on that particular piece. So you mentioned sort of two different structures from in the consolidation of these private practices. One that I think more commonly, at least more recently at least, is this idea of retained equity, JV site level equity as you're mentioning, where they're actually retaining somewhere around 30% of the equity within their specific location. And then there's also the structure where they can Once they sell, they have this very fractional percentage ownership at the holding company level. And then in some cases there's a little bit of both. Yeah, you can and you can have both. So maybe just kind of give a little bit more context as to how those different structures play out when that doctor is ready to liquidate or exit their retained or site level equity.

That's a great question. So the holding company structure is a very standard private equity structure that is across all industries. It could be a manufacturing business, it could be a cookie dough business, it doesn't matter. Right. It's just used also in health care and dentistry. And what it is is you set a fractional ownership of a large company that is going to eventually sell to another buyer and you are going to be able to liquidate or even then it's even maybe roll into the next buyer your equity there. So let's say you have a hundred dollar business, you're going to sell your business for $100. Then you take 70% in cash, so you get $70. And then you take $30 of value and you invest it into the holding company at whatever the price per share per unit, whatever they use. And you get then a tangible equity as a piece of equity. So say it's a dollar a share, you have 30 shares now. And then in three or four years you're going to take those 30 shares. When that private equity company says we're going to sell this dso, that next buyer is going to come in and pay you for those 30 shares you own. And hopefully those shares now are worth three, four, five, six dollars a piece. Right. And then you're able to liquidate them. And usually it's a three to five year mandate from the buyer. Right. So you don't really know where you are in the life cycle. You can maybe guess based off of some, some news reports of when they took on their investment or maybe you can ask, but it's generally within a three to five year cycle. And then you take those 30 shares and you sell them. Depending on your age, depending on your ability to negotiate, you could sell that all for cash. But very likely the buyer is going to say let's pay you partially in cash, you can liquidate them, but also then you're going to roll those again to the next buyer. At some point you'll be able to liquidate them all because you're going to be 65 or 70 and they're not going to need you to work anymore. And you're going to be able to liquidate those. And so I think there were some sellers in the marketplace that saw that as the only option and were a little bit hesitant because you have less clarity. You're told this is a great opportunity. But you have nothing in the legal documents that give you any kind of guarantee that you're going to be able to liquidate, that the private equity company will always come back and say, we need flexibility. You got to trust us, we have investors and we want to make money like you. And that's true. But at the same time, you can understand that these doctors are thinking, well, how do I know that that $30 of value that I had is actually going to be realized? There are some that have sold and done well. There are some DSOs. It's an investment that haven't done as well. So to lev to mitigate that, what we have is this JV structure. And in the JV structure, you generally have an ability to liquidate that investment at a certain time horizon. So what you see is it asks close, today I'm going to be in this dso, this joint venture, for a five year employment agreement. And then at five years, not only is my employment over, but these buyers are allowing you to liquidate. You have the ability to tell the buyer, hey, buy my equity, right? I'm going to liquidate. I know it's going to be worth something. But it's usually capped at a certain purchase price. So back to the $30 example, the $1 a share. If you sold your company at a five times multiple and you invested in their company at five times multiple, if they go off and sell for 15, well, you made a huge return right on the option. They're going to limit your cap, your multiple inability to de risk the buyer's ability to provide that to you. So that's sort of the give and take, right? You're not able to take on the risk of being able to get that 10 times return, which is a big return, but at the same time you get some sure liquidity at the five year mark. Now, sellers have also been able to, in this competitive marketplace, successfully negotiate those options. Those put options. They say we're going to put it to the buyer to buy your equity in the holding company as well. So we'll say something like seven years, right? Because we have no assurances that you're going to sell this thing even in three to five years. So we'll say in seven years we'll put it to you for a certain price. So that way I can go to sleep at night knowing That I have this investment, but I can also then sell it back at 7 years if this private equity company isn't doing as well. Market trends can change, you know, you just never know. Right? It's, it's a, it's a, it's a risky investment. Every investment is risky. Right. And so, so you just never know. And so it gives you assurances that, hey, in seven years I may not get that ten times return, but I'm guaranteed to get, you know, that, that discounted return.

You made some really, really important distinctions between these different structures and how people can exit. And you know, I call this kind of, you know, more colloquially the secondary liquidation market. When we have, we own stocks or bonds and you know, within the equities market, we can buy and sell those shares freely because of how many people are in that market looking to buy and sell those shares. But we're on the private, or on the private side and we don't have access to this larger group of people that are interested in trading within the shares of this, of this company. That, it becomes a real piece that you have to focus on and understand what does that exit look like for me and how can I get that liquidation value in the future. And I think that what you're kind of alluding to, Dean, well, was how you're able to do that under these different structures, at least from maybe more common, more common terms. That is a couple of follow up questions for you on what you talked about right there. So for the, at the holding company, the holding company level model we'll call it for sake of comparison in the show, which is when you're actually taking what, whatever retained equity you have at the holding company level as opposed to equity at your individual practice level. Right. And when that private equity company is purchasing you on the private market, they're going to pay you some multiple. Right. Probably somewhere between four and six. If you're a single location shop with one doc. And those multiples obviously will, will grow incrementally as you have more locations, more doctors, more providers, more EBITDA as well. Correct. So whatever multiple that they are offering you for the sale of your practice, what then multiple are they offering you to buy in at the holding company level? Because at the holding company level, you know, at least they would probably love to say this, even though maybe they haven't experienced a recapitalization of it to prove that out yet. But we'll say their idea of what they're worth at the holding company level is like maybe a 12 times EBITDA multiple, and maybe they bought them for a six. Are they going to take that, the six multiple that they paid them and then require them to turn right back around and invest it at a 12.

Multiple in the next bite of the apple?

Exactly. Or when they are transferring whatever retained equity that they're ultimately wanting to keep at that holding company level from the.

Sales price, the next one, it may be at that 12. But I think that's the idea of what this organic growth is amongst your investment. Right. So we sold at a 12, we sold it at 6, we're going to flip it, and then we're going to be able to sell it at a 10 when the next bite of the apple happens. And then ultimately, as this industry continues to consolidate, it's going to be 15, 16, 17. I mean, that's probably too high, but that's the incremental growth. So I think what you're getting at is are you going to only get the next two turns? So from 12 to 14? That's right, right. Because that's just the nature of the business. You got paid out at 12x. And the idea is that at the next turn this thing is consolidated more. The next buyer is going to pay even bigger multiple.

Right. And to continue to get these returns, if we continue to roll over this equity, then we have to have this expectation, to your point, that the future EBITDA multiples that we're going to have, future recapitalization events will be higher. But I think even the numbers that you just gave, you don't really have to be super great at math to see that the percentage return at each of those different recapitalization events start to shrink over time. Yeah, well, maybe not, you know, maybe not material, depending on how you're. You're viewing that relative to your own.

And you've been liquidated. Right. So you've gotten a portion. Now they may say that $30 example, right. We've got $30 of value in and we're going to liquidate 70% again. So you're gonna have to roll $10, right. So you're getting paid out, and so the amount of your ass to invest gets less and less every time of that original transaction value of $100 you had. So my math's probably wrong.

No, no, you're absolutely right. And a prudent investor would take cash off the table at each stage to see risk while still being able to participate in the upside of the venture. But I think that's scary, right?

You don't know Right. And so you don't know these private equity folks are doing this every day. Right. So they understand it. And so it takes a really, really good private equity buyer and DSO to help explain how that is going to be beneficial without the ability to actually put it to the buyer. Right. And it takes trust. And this is a trust kind of business. It's a market economy. But what we're seeing is that trust only goes so far. And then sellers have had the ability and been successful at being able to convince the buyer to agree to a put option. Now it's less opportunity to make money because you don't get that 14x because you're going to, you're going to be able to put it at a less multiple. But at least you have those assurances. Right. It comes down to risk tolerance, honestly.

It really does. And one more piece that I think you're going to know this way better than me just given the number of transactions that you've done within the DSO space, specifically, which is how nuanced it gets when it, when it comes to like the terms around how you're able to exit or participate in recapitalization events. And I'll give this as an example so that you can have some an idea of the framework that I'm operating from right now. I was in a deal recently where at the end of the required 5 year work back period, if they decided to leave as they have the option to do, they would sort of worked in tandem with the DSO provider to find a replacement doctor that would come in and take over their responsibilities. What I found to be interesting, sort of buried in the terms was that if they decide to exercise that right of ending their work back agreement at the end of the term and get another doctor in there, when that DSO has a recapitalization event in the future, they're not able to liquidate their holdings. They have to, by automatic definition, they have to roll those holdings over. However, if for whatever reason it was like they, at the end of their work back period, they decided to work for a few more years and during those three more years they had a recapitalization event. Well, in that situation or that scenario, they are able to liquidate all of their holdings if they wanted to. It's just an example of how this general framework that you gave us, which is I think a very comprehensive framework for these different scenarios that exist out there, but even within that broader framework, how nuanced it can get and just how careful you have to review those, those items to understand the risk so that you understand how that relates to your risk tolerance and your other opportunities. Are there any other sort of nuances like that or anything that you can expand on that point in your experiences?

Yeah, I think that's really, really interesting. And I like to ask you a few more questions about that because your question to me about other more nuances. Yes, so many nuances. And one of the things that is key for the listeners to understand is that the reason that these are in place is for the buyer to mitigate its risk. The buyer is not buying a business that sells widgets. It's not buying intellectual property. It's buying human capital. And the human capital is you, the doctor listening, continuing to work, continuing to produce and continuing to collect. And so they need a way to incentivize you both of the carrot, the cash and the equity and a stick to stay and work. Right. And it's not like they're, it sounds, you know, pejorative and we're just going to force you to work. But they, that's the business they're in. Right. They're in a business of human capital. And so what you're getting at is sort of this idea of what does the buyer do if production goes down? What if doctor shows up to work drunk? What if, what if doctor gets their third, their example, $70 of cash, rolls the 30, but doesn't really care about the 30 and just quits. Right. What happens? And so the documents and the way the lawyers have worked this is to find ways to de risk the buyer's investment. And the way they do that is they take that $30 that you've rolled over, will be subject to some sort of forfeiture, some sort of repurchase if these bad things happen. So say day one, you quit. Most DSOs, if not 100% of them will have the ability to take back that equity for $0. We just get it back, Right. We're not going to let you hold that $30 while you're not working if.

You didn't fulfill their work back requirements. Absolutely.

Yeah. So day one, you leave, right? You were asked to work back five years and you just quit, right?

Yep.

And what we do on the legal side is we nibble at the edges there. Okay, so what if you fire us? Right? That's not our fault. So how do we protect the investment for you guys doing bad things? What if you stop paying us? What if you owe us an earn out and you haven't paid it? So we want to make sure that your equity is protected. When we're representing sellers, if I'm representing a buyer, I want to make sure that we have ways of ensuring that we continue to grow this business. Right? And so it was always these sticks of repurchase your equity, repurchase your equity. And I think that the marketplace has seen that those are standard. But at the same time, the buyers want to find ways to also incentivize. And so that's where that local equity is really, really important. Because you want to stay in the chair, because you get 30% of ongoing distributions, right? You get an employment agreement, which is, if you're in general dentistry or in non orthodontics, it's based off of a percentage of your collection. So $100 collection comes in, you get 30% of it. For example, $70 sits there, goes to the joint venture, and from there 70% is that $70 is split 70, 30 by way of example. So you are incentivized to continue to grow this thing. And it's not just these bad act provisions that are tying you to your equity. I mean, most of the doctors, in all the years I've done this, I've maybe seen one instance where they've had to actually go in and buy the equity, buy the equity back for a bad act. But what's really incentivizing these doctors now is the ability to continue to receive ongoing liquidity every quarter for continued growth of the business. And even more so, we're seeing that private equity companies and DSOs know the doctors the best at opening new locations. And so they're even offering these joint ventures to open up de novo locations. They're saying, we trust you. We're going to, we're going to take 70% because we're going to provide the capital, but we'll give you 30% and we'll open up a new location that you're going to help run. And so the doctor who's been entrepreneurial their whole career gets to take money off the table, gets to have retained equity, and then gets to continue to be entrepreneurial through these, these de novo locations. And so I think the idea of just saying to a Doctor, here's your $70, here's your $30 in equity, we're going to buy it back. If you do bad things and just work five years, I think that is more of the old way of thinking. And they're finding ways to make sure that we need to incentivize these doctors to want to work right. We want to keep this as a doctor centric business, because as I said, it's a human capital business. The private equity funds companies can't come in and own it. They can't come in and do procedures. And so we have to keep these doctors happy. And the DSOs that do that are the ones that are successful right now.

Absolutely. And I think that, you know, we talked a little bit offline, but one of the things that we mentioned, if we have a five year required workback period and we, you know, we're doing 30 or 40 deals a year or however many deals these larger DSOs are doing, some of them hundreds. Right, yeah, but. And then we have all of them on these three to five year work back agreements. And then if they were all just to leave suddenly after the three to five year workback agreements because we haven't properly incentivize them through limiting their liquidation opportunities, then we're just going to be sitting there with, with hundreds of empty locations or we're going to sit there with hundreds of locations with less prominent and less tenured doctors running a larger operation.

And I'll put it to you as well, how do we then go out and attract younger associates to come work for you? Right, so this equity and this incentive base is a title shift. Because the days of graduating from dental school and opening up a shop in downtown small town Main street, doing that for a career is just not the way right now. Right. But at the same time, the doctors that were able to do that have now sold. We have DSOs that manage them, but we have young, really, really good doctors coming out of dental school and they're looking at, am I just going to be an employee my whole life? I don't want that. That's not why I got into dental school. I want to do great patient work, but at the same time, this is an entrepreneurial type of venture. Right. And so these prominent and successful DSOs are not only taking care of their sellers with this retained equity and equity generally, but they're also taking care of their younger associates and incoming associates by offering these equity programs that are site level and also at the holding company level so that they can encourage doctors to want to work for years. And so it's not just taking care of your sellers. As you said, we have to keep the whole business, the whole DSO in incentivize to continue to work. Because yeah, if we have five year work backs, everybody's gone at five years. And the way they've drafted the documents doesn't allow for them to be able to liquidate. Then you're Right. They could effectively just leave. And then what do they have left? Not much of a business. Right. And so these DSOs have had. And they have been getting really creative and using the doctors as a resource to make sure that we focus on doctor attention. We're Dr. Centric and we continue to help grow revenue. Right. Because these private equity companies are really, really good, as I said, on consolidating out expenses, just because that's the nature of consolidation. But how do we continue to incentivize a human capital business? And so those DSOs have been very successful. And as the listener, if you're, if you're a doctor and you're out there in the marketplace, I think these are the questions you need to be asking is I have two associates that I want to make sure come along for the right. What do you offer for them? And I guarantee most of them these buyers will have full sheet of paper about what are our options for younger associates? Because it's just so important to make sure that they're taken care of.

Absolutely. That is their next generation as their lifeline. And given where we are in the consolidation trend, I think that there could be an argument to be made for leveraging the expertise and these larger entities to help accelerate your understanding of running a business and taking part of that entrepreneurial spirit. But I also think that there is, because we're still somewhat in the early period of the consolidation period, that there's still room for people that are interested in going the private practice route from the onset, creating maybe larger equity play for themselves through an eventual DSO consolidation in the future. You made another really good point that I kind of want to just mention really quickly. Is the organic revenue. Right. You mentioned consolidation and like how great private equity companies tend to be at reducing overhead, but maybe they don't necessarily have such a great stronghold on being able to increase organic revenue. And that's really what the doctor's been so great at. Why they want to partner with them because they've been able to build sometimes from scratch into, you know, 2, 4, 5, however many millions of dollars of revenue. But then once they get into the deal, right. And they're. And they've got this 70, 30 equity split and now they're being paid on production, in most cases, they're going to be paid as a W2 for that production pay. And then even coupled with that 30% of the profits of that business, with the W2 production of maybe 30 to 34%, there's going to be some income loss and some Tax efficiency loss because you've shifted income to a non corporation, you know, umbrella. And obviously if some of it's still going through a corporation, but it's more limited and you're paying more in FICA taxes and obviously Instead of making 40 to 50% operating income margins, you're being paid like 32% to 34% on production. But what I keep hearing more frequently and more recently is how these DSOs are prioritizing income replacement because they know this is happening, right? They're very well aware that, you know, the only way that for each of those parties to walk away whole from a deal is for them, you know, to structure it this way. But income replacement is a common term and a common theme that I'm experiencing. But the only way to really get that income replacement is to grow revenue. The programs that they're putting in place and the idea sharing, which I think is probably one of the cooler things between successful locations, what one's doing well over, you know, compared to another, and being able to help bring those into that location to help them increase organic revenue alongside the doctor so that even after this structure is consummated, they can make just as much money as they did pre DSO deal with all this great equity that they now have. Right. So anyway, I thought that was a really cool point. I just wanted to sort of highlight that a little bit more.

Yeah, it's interesting because I think that especially in the specialty play in the specialty, like in oral surgery and endo, the private equity groups were moving so quickly to acquire EBITDA through acquisition. And they did a great job at that. And they were able to turn their investment, right? And they built these businesses up and they consolidated. But what they realized is we didn't stop to think to grow these things, right? We built them, but we didn't have a plan in place for growth. And so some of them had to scale back their acquisitions and reallocate resources to, to what you said, organic growth, share ideas, figure out what do we need to do to help the top line. Because we bought a great business, but it's human capital business, it has to continue to grow or it has to at least maintain production, Right. It can't go down. And so what do we need to do to ensure that we keep that production growing or sustaining, right? So DSOs will acquire businesses. They're going to acquire probably somebody we're listening to right now. But the DSOs to live on are going to have to make a big, big change in how they look at actual Growth of the business post acquisition.

Completely agree. So we've talked a lot, a lot of key terms and common DSO deal structures, kind of just maybe expanding that a little bit further with maybe some other key terms and things that you can highlight in these structures that they may come across. Right. Like equity swaps as opposed to cash today a little bit more ideas around these workback agreements and some of the liquid liquidation policies that you're seeing and some of the differences there. Just kind of anything else that is common in the space that either that has a favorable or unfavorable impact to the buyer or seller.

Yeah, absolutely. So on the legal side, you know where we are involved is from start to finish. We will help you with your term sheet, with your letter of intent where we iron out all the key terms that are going to be put into the main agreements. Right. And the key agreements to be negotiated in the transaction will be your purchase agreement, will be your new employment agreement. Some new doctors that are later in your career probably have never even been a part of an employment agreement. So it'll be a first time for you and we'll go through that tends to be the most heavily negotiated agreement in these sales, more so than the purchase agreement. And then as you said, the equity documents, how do we structure or how do we document that retained equity and that rollover equity? And where doctors tend to really focus on and where we want to make sure we focus on is are those non compete provisions. Those tend to be a heavily negotiated aspect of the business because again we're selling our business but things aren't going to necessarily always be great. And what we need to make sure that we are protected as the seller, as the doctor in the event that we end this relationship after the sale and we want to be able to go and work and earn a living and not be burdened by an expansive non compete. And at the same time the buyer sudden side saying we just paid you a bunch of money like we need to be protected. And so there's this, there's this heavy negotiation around the non compete that can be handled on the term sheet or sometimes handled through the actual negotiation of the definitive agreements in your employment agreements. We certainly want to be able to negotiate the non compete. But also what's going to give rise to them terminating you? What do you have to do for you to be terminated? And that's sometimes called a cause event. Is being drunk with your friends outside of work, is that a cause event? Probably not. Would the buyer like it to be? Maybe because what Happens is if they're able to fire you with cause, then that generally will trigger some sort of repurchase. Right. Under those equity documents. So there's these ticking and tying of the agreements that, where we've done this so many times that we want to make sure it's. The first thing we go to is what are the trigger events for this equity? What's the purchase price related to that? And then go to the employment agreement and take a look at those. And our employment team knows what's an objective standard, what's a market standard? And. And we negotiate to make sure that you, as the doctor, are protected from the ability of the buyer to just come in one day and say, hey, you're fired for cause. Oh, you're fired for cost. Give us our equity back. So that, that's where the legal side really, really is important. Because if you just had to sign the documents that they presented to you, and this is what we would do if we were representing a buyer, is it's going to be pro buyer. It's just, it's just the way it is. Right? And good legal on the other side is going to push back and say, we've worked with this law firm before, we know what they're going to give and take on, and we work to reach a balance there. For doctors, I think those are the key items. Any legal process is going to involve diligence. That's going to be the fun part. You know, we're going to dive into your documents, we're going to dive into the benefits, we're going to dive into the leases, and we're going to tell the buyer about your business, good, good and bad. And they're going to then mitigate their risk by putting certain things in the purchase agreement based on what they find out about your business. Generally. Dentistry practices, dental practices are pretty clean. So I don't generally find things that causes a lot of consternation from the buyers. One other item that tends to be heavily negotiated is a lot of the. And you see this as well, Drew, is the doctors not only own the practice, they also own the real property. So they own the location. They've been paying themselves rent, right. For the first time now, they're going to sell their business to a dso. The DSO is now going to become their tenant. So for the first time, they have a true lease arrangement. Right? Working through the details of that lease, making sure it's put in a position that makes your property marketable. So putting in a good triple net lease, a good term so that you can take that, you've just sold your practice for a good chunk of change and now you have a very marketable piece of property. Because any buyer coming in to buy that property is going to see a nice 10 year lease with a really, really solid tenant in a quality dso. And so the negotiation of the lease, it's assuming that the doctor owns the property is an important consideration as well.

Definitely. And you know, speaking on the real estate side, I think it was actually you that kind of directed my attention to this. But there's a lot of DSOs, maybe more recently that are, that are trying to purchase the real estate too and sort of build their real estate holdings alongside their dental holdings. Because you know, the practice in theory could live longer than their ownership and you know, the equity of those practices while they still maintain the real estate assets that are being, you know, that to your point, these consistent 10 year leases that just look great. Maybe talk a little bit about that. What you're seeing on the real estate side.

Yeah, so what we're seeing is, it's just, it's just, it happens every deal, right. Well, we'll sell the practice, we'll enter into a new lease. Two or three months later, the seller client will come back and go, I have an offer for somebody to buy my real estate. Now surprisingly, as you said, it's the same private equity companies that have invested in MSOs and DSOs are now also creating real estate investment firms that are coming in and buying those, those properties because they're worth their valuable. Now we are mindful of that as we're negotiating the lease as well, because we want to make sure that the new buyer who's going to come in on the real estate side is going to come in and not make any changes to the lease. So. So yeah, it's certainly an interesting play that, you know, two, three, four months later they come back and say, yeah, our five properties that we owned and we entered these leases, we have a buyer now for them. And so we're able to help them with that. With a law firm like ours, we have a real estate team. And so we're able to provide a lot of support on the practice sale, but then we also provide support on the sale of the real estate as well. So that's certainly been a change. Is this play from just entering into a lease with a DSO and not ever thinking that you can monetize that lease into the sale of your real property?

Is it fair to say, Dean, that because you brought up so many great Topics and things to consider, both general framework ideas, but obviously we also went down to some more nuanced items as well. Kind of highlights the emphasis and the importance on working with someone like yourself that understands these deal terms and how they sort of consummate post close and how they impact you long term. What's some advice that you would give to someone coming in or at least entertaining the idea of selling to a DSO in terms of what team members they need around them and what areas of focus, at least in your opinion, are the most important to truly understand the economic substance of that deal?

Yeah, absolutely. On the legal side, even if you're not considering a sale, it's just good practices to start getting things organized and in order utilize your great office manager who's been with you for years and start putting in folders, your employment agreements, your benefit documents, your leases, all the contracts that you think are never going to matter. At some point when you sell this thing will matter. And so if they're sitting in a box and they haven't been scanning scanned them, start getting things organized because at some point somebody's going to ask for them. And the more ready you are, the less of a headache it is. You're ultimately going to find them. But it's just going to be a pain if you're trying to negotiate the sale and the purchase price and then also having to dig up your 401k plan documents that you haven't looked at in 10 years. So I would encourage them. It's difficult to, I mean, we all want to get organized, but I encourage those doctors to, to please get out there and start organizing and utilize the services of your office manager and other other staff. I think from your perspective, Drew, I think that you and I both would agree that if you're entertaining a sale, getting your books and accounting together before a sale is critical. Because what's going to happen, you can probably speak more to this is this is a cash basis of accounting business generally. And they're going to base your purchase price on a metric called ebitda. And everybody's definition of EBITDA is the same except for the actual application of it. And so having quality financial advisors, whether that be a broker, an investment banker, somebody like Drew to work with you to make sure that you can go to bat with a buyer who's going to have some young junior analyst who's just finished business school is going to tell you where your EBITDA is when you're negotiating that loi that you can then come back and say, no, this is an add back, no, this is, this shouldn't be counted. We know the marketplace is four and a half times ebitda. It's not four times EBITDA so that we can get into that LOI negotiation and get a good price agreed to on the front end. They're ultimately going to hire a third party to analyze your business. But even if that happens and the EBITDA comes in lower, if you have strong accounting, you have strong financial records, you're able to put yourself in a better position to be able to continue to position yourself for that price you want. If you show up and nothing's in order, you don't have the right advisors, the buyer is essentially going to tell you what you're going to get paid. You're not in a position to negotiate. That's less of what we can do on the legal side. But we work hand in hand with folks like you Drew on making sure that sellers don't want to get railroaded. Right. Buyers obviously are looking for the best price they can find. So it's important for good advisors to be working, especially on the financial side, but also on the legal side because we can speak that language, we can make sure the LOI is clear as to how these things are gonna work out in the actual agreements. So that would be my advice. Get organized, hire the right advisors, especially on the financial and legal side. Cause as you said too, one thing that I don't think that sellers necessarily think about is what happens post sale in a year when all of a sudden I'm getting more documents from the buyer, there's another liquidity event and all of a sudden they're saying sign stuff and I don't have the lawyer that I got can reach out to. We regularly get our former clients coming to us saying, hey, I just got this and we have a relationship with them and we're certainly going to look at it for them, make sure it's okay to sign. I'd hate to be that doctor in a position of a year after the sale, told by the buyer, hey, sign this, it's not a big deal and you have nowhere to go. So I think that's a great point you made that you know, hiring good legal counsel is not just about the deal, but it's posted all as well.

That's a, I mean that's a really, really great point and that's not always the case. So that's great that you mentioned that EBITDA that you know, and just kind of struck me is like we talked about nuances within the contract language itself. But what I've found on the financial due diligence side that I just want to highlight really quickly is, you know, how different EBITDA at its basic level is pretty much applied the same across the board. But then when we get into due diligence and we're actually formulating that final EBITDA number on the trailing twelve month activity, how. And these, they're called pro forma adjustments. Ultimately we are adjusting EBITDA for things that did or didn't happen or could have happened that ultimately we're trying to basically formulate an EBITDA number that's more representative of the future than it was necessarily of the past. And what I found that has been interesting is how different those pro forma EBITDA adjustments are depending on the DSO company. That's, that's actually making their, those differences could make one DSO more favorable from an economic substance perspective over the other. But, and this is going to, this is actually leading into my next question is how much information, Dean, do we actually know on the front end how much information? Because some of these things, it's like we don't really know how they operate from pro forma EBITDA adjustments until we're like midway through the transaction. And so I just want to take a step back and like pre loi you know, like we're just flirting. We're dating with the dso. We're trying to get to know them a bit more. How much is of the deal terms and how much of that evaluation and those comparable points can we get to before we started to go down this more laborious path of getting documents to them and you know, all the transactional steps that you just were alluding to.

That's a good question. It can be as simple as a buyer coming in saying, thank you for providing your last 12 months of P Ls, here's our offer and the seller saying, we're good, this is what we're going to take it versus a good financial advisor like yourself, a legal advisor, saying, we're going to give you these items. We're going to give you the last three years worth of financial statements. Come back with a number to us and tell us how you calculated it and then we can go to bat. We can argue over what's going to be counted, what's not going to be counted, and we can ultimately trade Lois back and forth based off a number that we think is appropriate and a multiple that we think is appropriate and legal terms that we think are fair and get all that ironed out on the LOI stage before we ever have any type of obligation to each other. Some sellers are game for that. The only thing is you have to use the advisors, you have to pay for those services and you don't have a deal on hand. Right. Some would say my company's worth 20 million, I'm okay with that number. I really don't care about my EBITDA is I don't care. My multiple is I just want this number and they're okay with it. And then we just deal with the deal documents. Right. So I think it comes down to how aggressively does the seller want to negotiate on the front end versus not right. You have the ability, if you hire the right advisors to be able to go to bat and handle all that through the LOI phase. Now they are going to, as I said, do a quality of earnings report. Somebody, some third party is going to independently review this and basically be a backstop for what was calculated by the team. Right. But I'll say if it's off by an immaterial amount, likely no change. If it's off by a material amount, deal's not over. But then we need to figure out how are we going to bridge this gap. Right. So if the valuation was $90 and we have an LOI for $100, then most buyers would provide some sort of ability to bridge that gap. And that can be through an earn out. Right. And the other thing we've touched on it and it's important is the earn out is just the buyer wants to make sure that they're buying that $100. And so they're going to give you the chance to earn that last $10 based off of productivity or EBITDA metrics. That's a post closing contingent payment that you will be paid if you hit those metrics. That gives the buyer comfort that they are paying for what they're getting.

The points that you made that I love is the earlier that you start with the right advisory teams, you can get a lot of clarity before you have to get in this more formal transaction and all the due diligence steps that come with that. And I think personally, I can't speak for everyone because I think that you made another good point, which is some people just want the price that they want and they don't really care about the terms that are subsequent to that. Right. But I think for the majority of people it's probably in their best interest to, to start that if they're really serious about selling just more generally to start that process before Lois are ever submitted. And so that, that transparency, that clarity can be formulated and you can go into that transaction with confidence. I think it's, that's, it's a really important piece, especially if you want to, you know, have. This is going to be your first, this may be your first and only transaction.

Right.

You know, you've done a lot more on the DSO side than I have. But point being is that when you have the advisory team that's seeing all of these deals across all of these different CSO businesses, then you're able to help and advise that client on how these deal terms relate to other deal terms that you potentially could get elsewhere. And I think that that confidence is important because when it's potentially your only transaction, you're just, you don't really know how this compares to another. And I think that, that that confidence is, goes a long way. So I want to talk a little bit about your thoughts on how you see the product. We've talked about the trends more recently, but I also want to hear what you think about the private equity space in dental long term and how it's going to be maybe changing over the next 10 to 20 years.

Yeah, I think we're just going to continue to see this consolidation. I don't think there's any slowing that down. There's people who pontificate that we're only at 30%, so maybe even only 20% consolidation. Right. So continuing that consolidation is certainly going to continue. The specialty play was originally this design of just consolidating the specialties into one dso. Right. Just we only do oral surgery, we only do endo, we only do perio. And I think that worked well in the beginning, but I think what happened is it didn't work as well as they expected long term. And so what you're seeing is the specialty platforms have to integrate other specialties as well and not just focus on one and also seeing General Dentistry DSOs partnering with specialty as well. So I don't think we're going to stop in the near term on the consolidation of the specialties, but I do think long term we're going to see some of the bigger DSOs start to integrate specialty as well. And I wouldn't be surprised if one of the larger specialty plays finds a way to combine with a more general play. And then overall too, I think the DSOs that are Dr. Centric, Dr. Focused and use these structures that we described here, that these JV site level Structures to their benefit to not only encourage sellers that have sold their business to remain, but also find ways to use those to encourage entrepreneurial doctors and young associates to be able to be involved. I think that that's going to be able to have these DSOs continue to grow, grow, grow versus just a growing through acquisition. Right. As you said, there's still a lot of Runway for folks to start up businesses on their own. They can utilize your services to help that and then to be acquired. But at some point this consolidation is going to reach a tipping point that if we don't have processes in place related to organic growth, then all we're doing is acquiring businesses that have no forward looking objectives. So that's what I see. Continued consolidation, continued consolidation of the specialties, consolidating with specialty plans involved and then also continuing to see these JV structures so that doctors can, as you said, continue to realize the same ongoing economic benefit that they've had for years. They get that lump sum payment but then they realize the take home money every year is a lot less. And so finding ways to continue to get doctors to get that take home money somewhere equivalent to where they have been for the last 10 to 15 years is going to be important for these DSOs to differentiate themselves from others.

Very well said. So consolidation basically at the location level with all specialty providers and I think it makes sense just more intuitively, you know, we have a larger structure, a larger physical location with more doctors and more providers under one roof. We're continuing to increase margin by having more revenue and less fixed costs associated with that revenue. I definitely see that as one of the big plays and probably one of the reasons why they are so keen on picking up their real estate along the way. So in the future they can take 3 or 4 shops in a 5 mile radius and move them into one under one roof. I like the Dr. Centric comment that you made too. I'm familiar with a couple of a little bit smaller DSOs, but they've got that framework in mind that you mentioned which is let's keep this sort of private practice boutique feel, but let's be a part of a larger structure so we can get some of those economies of scale, that knowledge share that ultimately leads to practice growth. So all good points. Well, before we, before we adjourn here, Dean, I want to give you the floor to talk about the event that you guys have in July. And I know it's a, it's a pretty large event with, but yeah, just take the floor and share us with the content and the agenda maybe and just kind of a general feel what that event's going to be like.

Yeah. So on July 19th to the 21st at the Gaylord in Denver, DiComo will be hosting its 10th annual definitive conference on DSOs. It started off as a humble conference of 20 folks and has grown to year year 10. We're expecting over 2,000 attendees.

Oh wow.

Attendees range from private equity, from DSOs are obviously their private practices. We have some great vendors both in the AI and general space. We have lenders, we have everybody in the industry you can think of. We'll be there for a one time event. We have, I think this year we have Andre Agassi as one of our guest speakers. The content is what drives people there. It's going to be up to date content. It's going to be related to how DSOS operate. It's going to be related to trends in the sell side. Similar to this talk trends on the buy side. There's a couple of workshops hosted as well on Wednesday if you're interested as well. For those that are interested, feel free to reach out to me Personally either on LinkedIn, you can email me. Drew will put that out. We'll provide a discount code for anybody who reaches out to me based on this podcast and we'd love to have you out there. It's a great opportunity. If you're a doctor looking to affiliate with the DSO, we can introduce you to DSOs. There's other advisors out there if you're just looking to just see what's out there, what this DSO thing is about. Just come out and check it out. It's a great event and would love to see you out there.

Awesome. Man, that sounds like a blast. And a room full of very knowledgeable and experienced people to learn and grow with. So that sounds like a really cool event. And I'm going to include all of Dean's contact information in the show notes. So feel free to use those hyperlinks to get connected to him even faster. Yeah. Any last things that you feel are important for our listeners here?

Yeah, I'll just leave it at that. You know, there's a lot of discussion of uncertainty just generally in the economy, in the marketplace. But I'll say that we're not seeing a slowdown when it comes to smaller, well run multi site practices being able to affiliate and monetize their businesses. So for those of you that think this is not the right time, this certainly is. And if you're looking to just start, you know, a business as well. It's a great time as well. Dentistry has proven to be recession proof and pandemic proof. And, and so I think that while there is uncertainty just generally in the marketplace, I think folks should be encouraged that things are good in dentistry and happy to discuss with any of the listeners individually. Feel free to reach out and we can continue this conversation.

Awesome. And I say that all the time we should welcome recessions in the dental business because our buying power just gets that much better. Well, so much great information, Dean. I know I learned a lot today, as I always seem to do, chatting with you. Thanks again for coming on the show and sharing your experiences. We appreciate you.

Thank you. Really appreciate it.