Who Owns Dentistry

Hey everybody, welcome back to another episode of the Dental Boardroom Podcast. It's Wes Read CPA, your host. Today I'm carrying on part 2 of my analysis of the ADA Health Policy Institute 2024 study on, uh, certain aspects of the dental industry. So I just got done doing a podcast episode on, is dentistry struggling? Talking about income levels, collection levels, overhead levels. Um, the differences between male and female dentists, hours worked, new grads, things like that. And, uh, the summary was there are definitely some headwinds. However, the takeaway for me was that if you're a good practice owner today, you can be equally as successful, if not more, than a dentist 30 years ago, where it was a time that being effective as a dental practice owner, so a business owner, was less critical than it is today. Now I'm gonna talk about the question of who owns dentistry. Let's talk about DSOs versus private practice. That's the nature of the day. Stay tuned at the end for my takeaways on what I think about the future of DSOs. All right, let's kick it off. So those of you watching on YouTube, uh, can see that I have a one-page, uh, image that I'm gonna be going through. For those not on YouTube, I will narrate this. So key takeaway from this study around— actually, let me just, uh, okay, thank you. There we go. I had to switch the screen here. Who owns dentistry? So key takeaway from this study is solo practice is fading for new dentists. Well, that may not be a surprise for anybody. We all know what's going on in the industry. Only 15% of early career dentists are solo. Versus 48% of those near retirement. So older doctors are not as affiliated with the DSOs by a long shot. DSO affiliation is highest among the youngest dentists at 26.5%. So the overall, here on the left-hand side, the overall percent of dentists that are affiliated with CF— with DSOs is 16.1%. Now, frankly, I thought it was a bit higher than that, but that's according to the ADA Health Policy Institute research in 2024. Now, DSO by gender. So of those 16.1% of dentists in our country that are affiliated, and by the way, my understanding is this, yeah, this is US dentists only. DSOs by gender, 17.6% of female dentists are associated with a DSO. And 14.8% of male dentists are associated with a DSO. Now let's look at practice size distribution. Practice size distribution. So the categories are a solo, one doctor, one office, one doctor, two plus— sorry, one doctor, one— sorry, one location, one doctor. That's first category. Second category is, is 1 location, multiple doctors. The third category is 2 to 9 locations. So that's obviously gonna be multiple doctors, 10 to 49 locations, 50 to 99 locations, and 100+ locations. And so let's go through these a little bit. Of all practices in the US, 33.6%, so almost exactly a third are solo practices, one doctor, one office, 33.6%. Now you get to still one location, but you have multiple doctors. That is 39.1%. So there's no, there's no DSO going on here. And between the two of those, what is that, 74%, 73%? Yeah, about 70 3% or so. So about 3/4 are still in that sort of boutique one location, um, context. Now you get to 2 to 9 locations. These typically, I find, tend to be dentists who are trying to go DSO. They have 2 to 9 locations. That is about 9.9%. So 10% of practices in the US, or practice owners, uh, are between 2 to 9 locations. The next category of 10 to 49 locations is significantly less. It's only 3.8%. And then from 50 to 99 locations is 2.7% of practices fall within an ownership structure where that ownership structure owns 50 to 99 locations. And lastly, 100+ locations is 10.8. Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales. In such a fragmented market, many dentists selling their practice feel discouraged. That's why I built PracticeOrbit.com. Practice Orbit is modernizing how dental practices are bought and sold. It's a platform technology. Y'all know them. Zillow, Airbnb, Uber, and OpenTable, just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second, once the match between buyer and seller is made, these technologies help them navigate the sale to a successful close. Here are a few of the features inside of Practice Orbit. Users can determine a reasonable sale price for a practice in just minutes. All they need is the most recent and business tax return. Practice owners can use the directory to find important service providers like practice brokers, attorneys, accountants, and bankers. Practice owners and their brokers can invite those service providers into the platform so all parties are coordinating the sale together. Practice owners will have a beautiful digital listing of their practice like a home on Redfin, and importantly, the listing will be anonymous and personal information like your address, name, and pictures are only released after an NDA is signed and approved by you or your broker. Practice buyers can create saved searches to be auto-notified when new listings come on the platform that fit their desired specialty and location. And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to Practice Orbit's large pool of buyers, all of whom have created profiles and saved searches to be auto-notified when new listings come for sale. You can use the platform to introduce your listings to a targeted set of buyers. Additionally, and optionally, you can use the platform tools such as a built-in NDA, a customizable LOI, and a workflow tool to navigate the sale from LOI to closing. In fact, you can manage all your listings on the system from listing the practice to NDA to LOI, and finally to closing the deal. Create your free account today at www.practiceorbit.com. That's going to be the Heartlands, the Pacific Dental Services, uh, as well. I— what I don't know in this study is companies like MB2, which is different than Heartland because MB2 doctors typically have kind of their name brand, their own name on the door of the practice. It's a little bit more of a, of a distributed type of ownership. But I believe that the 11% here of 100+ practices is essentially all of these styles of DSO, whether that's, whether it's a Heartland where it's sort of, it's usually one name brand, or whether that's more of a distributed name, but ultimately under one umbrella style. So general, general dental, that's another one in this, in this pretty big category over here. So let's talk about these a little bit. This for me was pretty heartening because I like the private practice. I love the private practice. I support the private practice. I believe that in the private practice, the doctor has the most tried and true pathway to wealth accumulation. And I'll explain here in a bit. Why I think the DSO pathway is significantly underperforming as a viable pathway toward wealth accumulation. Stay tuned on that. Now, the other thing I noticed in here is that the 2 to 9 location had 10%, and then the 10 to 49 location had 3.8%, and the 50 to 99 location at 2.7%, and then boom, it balloons out to 10.8%. Here's my belief that doctors typically underestimate the challenge that it is to platform their business into a multi-office, multi-doctor DSO structure where there's a central management entity that is handling all these quote unquote back office or administrative functions like payroll, like billing, like marketing, like practice management, like hiring and other HR, um, processes. It is extremely difficult to platform multiple businesses. And the most difficult side of that is all of the people, getting everybody from disparate offices, different, uh, associates and doctors, uh, especially if you have some specialists in there, that everyone is in harmony in the way these these offices are flowing together under or behind a centralized management entity. That is what a true DSO is, a dental service organization, which is that sort of hub. And then each practice is a spoke. Now, I have found so many times over the years that a doctor comes to me and says, hey Wes, I have 6 locations. My first one was amazing. I was doing $2.5 million. I was probably making almost $1 million a year. I was crushing it. And so I opened up a second office in order to grow more. And because I wanted to go bigger than me, that's kind of the big term. Wes, I want to go bigger than me. And I get the concept. It's kind of a romantic idea. I can go bigger than me and do something really impactful in my community or the world, et cetera, and make a lot of money along the way. And so they do it, and they have everybody telling them to do it. Hey, Doc, you need to open up a second office and get a second loan and buy more chairs and more— another cone beam and CAD/CAM. You need to, you need to buy more, more supplies, pay for more marketing, all this stuff. Everybody's telling you to go spend more money. And one way for you to go spend more money, trust me, is to open up a second and a third and a fourth location. Why? Because as I explained in my last podcast and in many other podcasts, most of your costs are fixed. Your rent is fixed. Your people tend to be fixed. Most of these— your phone bill is fixed. Your accounting costs tend to be fixed. These things generally are fixed. 70 to 90% of your costs tend to be fixed. So you open up a new location and suddenly you just bolted on a set of fixed costs without any guarantee of other income. Now you could buy another office that has a practicing dentist, and maybe that practicing dentist will stay there. But the big question is, Will that dentist put in the same love, the same heart and soul that they were doing as an owner now that they're just an employee? And truth is, generally speaking, they don't. A lot of times you just get a good soul who's gonna work hard no matter what. But the nature is most people are highly motivated by the way that they are compensated. And if you are no longer receiving the profits of your practice and you're simply paid as an employee, That can be incredibly disincentivizing for that selling doctor. And the selling doctor probably sold because they don't want to do the business side of it anymore, which means you have to do the business side of it as well. And there's only one of you and there's only a certain amount of hours in the day. So you gotta figure out how to allot your time across your practice and the second and third and fourth, et cetera, locations in an effec— in an effective way. And a lot of doctors underestimate just exactly what that is going to be like. So what I find is that these doctors who suddenly go from, uh, one office to multiple offices, and in this case, there's 10% of these 2 to 9 locations end up realizing that it's incredibly difficult. And a lot of them end up having to back out and cut their losses. They just try to sell that second office on the other side of town, find a buyer, sell the patient records, negotiate out of the lease. Just to cut those losses. Because just look at the stats, those who make it through from 2 to 9 and get to the next category of 10 to 14 is cut by, by almost 60, 70%. So it's down to 3.8% have successfully got to that point. I always say that once you go into 3 offices, you're getting into this place I call no man's land. And no man's land means you're too small to be big. And you're too big to be small. To elaborate on that, you're too small to be big. Too small to be big means you haven't established your processes effectively yet. Your operational processes, your marketing processes, your financial systems. All practices need to be on the same practice management software, the same payroll software, the same hiring process, the same HR policies, the same handbook. All of that needs to be managed as if they were operating as one. And it's difficult sometimes to do that, especially when you're acquiring another office that has a different tech stack, a different culture, a different mindset, and maybe even a different patient base. It's very difficult to align all of that together. And so they get to that third or fourth office. They're too small to have all of those processes in place. And that's what I mean by you're too small to be big. And yet you're, uh, you're, you're now too big to be small. You got 3 offices and that's gonna take up a lot of your time. There's only so much of you to go around and you get squeezed. Your energy gets squeezed, your bandwidth gets squeezed, your stress level goes up in that space of 3 to 4 offices. And that's when you have to decide, do I cut my losses or do I somehow level up to become an incredible business person? And if you can level up and become a credible business person, maybe you'll get out of that no man's land where you're too small to be big and you're too big to be small. So that's why then you get to the next one, 50 to 99%, only 2.7% get to that point. And then you got the 10.8%. So there are some people that have broken through no man's land and they figure out their systems and their policies and their HR and their financial systems. And maybe they got good banking relationships or maybe they got some equity capital to invest in from a, a, a private investor or a PE fund, and they're able to truly build out those systems. For example, PDS, Pacific Dental Services, I gotta give it to 'em. They've built out some incredible systems, and I know because I had a client for a while who was a PDS doctor, and we would log into his PDS intranet and see how they have developed these highly customized technologies and tools to measure productivity, create a competition across these doctors to produce. I mean, these doctors, they know how to sell and PDS encourages them how to sell. I, I gotta be careful there. I don't wanna say they encourage them. I don't know what they do, but I do know that every day, at least back then, the doctors could see across the company production levels, top to bottom, and they could see exactly where they stack up. And you know, we are comparing, comparing machines. Our brains like to compare how we're stacking up with other people in everything from our physical condition to our economic condition, to the success of our practice, to our relationship with our family or girlfriend or spouse. We just compare. It's terrible. We shouldn't be doing that. But one thing PDS knows, and a lot of businesses know, that when they create a competition board like that, it certainly does drive a lot of motivated behavior. And then of course compensation goes up when productivity goes up as well. But the thing that PDS has done well is they absolutely systematized virtually everything in their practice. And this is critical, this is extremely hard to do. They figure it out how to give, uh, doctors ownership at the local level, not necessarily at the parent level, but at the local level that the doctor's actually operating in. And to be able to buy and sell equity at the local level in a predetermined format. And it's almost like a marketplace for local practice equity for dentists to buy and sell. So it's almost like there's a hybrid element of ownership and, um, and being an employee. And that's worked out incredibly effectively for them. I gotta give it to Steve Thorne, who was, by the way, a former dental CPA, is my understanding. Credit to the dental CPAs out there, huh? All right, so that's 10.8%. I don't know much about the other ones, but they've broken through and it's because they've truly platformed their systems and their business effectively well. And then those companies end up being worth a lot of money. That is true. But I wouldn't say that is your highest probability of success to go that route. Most doctors who get lured into that siren song end up crashing on the shores unsuccessfully, and some of them ultimately file bankruptcy and have to essentially remain an employee for the rest of their career. Not that that's the end of the day to be an employee. I don't mean to say that, but I do believe that the highest sort of level of achievement and financial success comes through private ownership. All right. Uh, let's go on to some of these other statistics here. Early-stage dentists. So those viewing my screen on YouTube, early-stage dentists, I'm gonna compare solo practices by DSO by career stage. So I've got 3 stages, early career dentists, those are dentists under 10 years outta school, mid-career dentists, those are dentists between 11 and 25 years out of dental school, and late career dentists are dentists over 25 years out of dental school. Those early career dentists as of 2024, meaning that they graduated after 2014, of those dentists, 26.5% of them are in, uh, the large DSOs, the DSOs that are 100+ locations like Pacific Dental Services, for example, or Heartland, or, uh, those, those are our associates, um, under 10 years out of school, 26%. 14.9% are in private practices. That's a solo doctor or a doctor with one, uh, with, with one other dentist or maybe two other dentists in that single location. So one-location offices, 14.9%. The other roughly 60% are somewhere in those other categories between the small one-location office and the massive 100+ location office. Now you get to the mid-career dentists, those that have been outta school between 11 and 25 years. Now only 14% are in DSOs. So under 10-year dentists outta school, 27%. Between 11 and 25 years outta school, only 14% are associated with DSOs. So that's a good thing. That means that in time, more dentists are going private because private it goes from 14.9% in the early career dentist category to 35.1% in the mid-career category. So that is a significant increase by about 120, 125% or so. Do you ever feel lost in your practice finances? And how about your personal finances? 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You'll receive insightful financial reports each month, have regular financial review meetings, reduce taxes, grow your wealth, and feel more in charge of your numbers. Because we believe that in the competitive landscape of dental practice ownership today, you have to be an effective business owner, not just a capable clinician. Reach out to learn more at www.practicecfo.com. uh, from early career to mid-career, going from DSO to private practice, and, um, about a 40% drop, uh, 50% drop, uh, in DSO, um, employment. Now we get to the late career dentists. These are dentists who have been out of school for more than 25 years. So most of these doctors are going to be in their upper 50s and 60s and even 70s. Of those doctors, only 9.1% are working for DSOs. 47.6% are working in that one-location dental practice, and the other roughly 40% are somewhere in those middle, uh, categories with multiple locations. Now, some of these 9.1% of doctors in their late career may have sold to a DSO, and now they are working for a DSO. That may be where they come from. I imagine most doctors in their late 50s and 60s have not been working for DSOs their whole career, obviously, since generally speaking, DSOs really weren't around if you go back 25, 30 years. Uh, there were a couple emerging ones, but so that trend just means that as doctors get further and further away from graduation, they tend to move into private practice. However, those stats are changing every year, as more doctors are staying in the DSO environment and not moving to the private environment, and as DSOs have been buying up more private practices. All right, now let's move on to DSO affiliation by specialty. Which specialty do you believe has the highest affiliation with DSOs? Go ahead and think about it. If I list off some in no particular order, you got pediatric, GPs, endo, OMS, perio, prosthodontic, and orthodontic. So those are the 7 categories that I'm going to outline here from this study. So the number 1 specialty attached to DSOs these days is orthodontics, and orthodontics is 23%. Now, I don't know why exactly. I'd have to think about that. Maybe it's because orthodontics is the most leverageable in that once you get contract receivables, a lot of times it's the orthodontic assistants who are doing a lot of the work and the doctor shows up for a moment, does a couple things and says a few things. And maybe, so maybe it's, maybe it's a little bit more leverageable by, uh, non-dentists, i.e., private equity people to, to be able to scale that. I don't know, could be wrong about that, but they are number 1 on the list at 22.8%. Now, only 1% below that actually is OMS— oral and maxillofacial surgeons. I, I always struggle with that term, but oral surgeons, they're at 21.8%. And, uh, that is actually quite opposite from what I said about orthodontics. Oral surgery is— you need that oral surgeon doing those dental implants or doing that big— those big treatment, those big surgeries. So, but interestingly, it's that way. You know why I think that is? Because oral surgeons are at the top of the food chain when it comes to profitability. No offense to everybody else, y'all make some good money as well, and I have some unbelievably profitable GPs who make more than most oral surgeons. So it's not always the case, but on average, oral surgeons make the most of any, of any specialty out there. And therefore, it could be that private equity and DSOs have a bigger appetite for those types of practices because of the profitability of them. So the next one is endodontists. Endodontists are about 20.8%, so not that far behind. Endos are not far behind oral surgeons when it comes to profitability. Endodontists make incredibly, incredibly good money, especially well-run endodontic practice. So that's right behind. And then there's a bit of a drop by almost 6%. Down to 15% of pediatric dentists are owned by DSOs. Then right about the same level at 15.5% are GPs, uh, right there in the middle. So about 15% of general dentists as of the end of 2024 are owned by DSOs, which pretty closely correlates to the original overall DSO affiliation of 16.1%. Of all dental practices are affiliated with a DSO. All right, the next one down just below that is periodontists. They're at 14.3%. We just had a periodontic client sell to a large DSO called Specialty One, and I can explain why I was ultimately okay supporting that one. The cash down was just so outrageously large, it was hard to say no. Generally, that's not the case. But that's perios. And then the last one here are prosthodontists at about 11.1%. And I actually don't know why. I'd have to do a little research and think through why that one's the lowest, but, but it is. So on average, 16.1% of practices are affiliated with DSOs. That's a lineup: ortho, OMS, endo, pediatric dentistry, GPs, perios, and prosthodontists. All right, now let me talk a little bit about the DSOs in general and some of my, my thoughts before we, we, we, we end here. Um, let me talk about how it's affecting dental students. This, this may not be breakthrough, but I want to emphasize this. Average student debt right now of dentists coming out of dental school is about $300,000. And if they're coming from a private school, it's closer to $500,000. And certain private schools like USC, it's probably closer to $600,000 to $700,000 in some cases. Oral surgeons I've seen come out with over $1 million. Yep. I've seen an orthodontist too come out over $1 million. Typically from USC. That's what I find. Something about that school, huh? But it can be very high. And it's not that this necessarily limits the new dentist's income because of the government programs that are income-driven. So, IDRs, income-driven repayment programs, IDRs. And that's a general term for various types of income-based repayment programs. So IBR, income-based, is one. Um, there is PAYE, which is pay as you earn. There is revised pay as you earn known as REPAYE. And I've done some podcasts on, and on my associatesonfire.com website, I go over those. I generally tend to like, um, REPAYE. Uh, but it depends on the circumstance. It depends on who you're married to and whether or not they have income and student loans, where you are in your career. There's a number of factors that drive which one of those is better. I'm not going to get into that. But my main point is that it doesn't necessarily hinder their economic potential that much, given that you can limit how much is paid out, up to 10% of, of income going towards student loans. So it sort of curtails the economic bite of these student loans, especially in their first 10 years or so of the doctor's career. However, what it is affecting a lot is it's shaping the way these young doctors are thinking about their careers. And it's causing many of them to, um, simply prioritize a, a, uh, a fixed paycheck over career potential. They're trading autonomy for salary. And the reason why I say autonomy is as a practice owner, you have a lot more autonomy as a DSO employee. You have a very predictable salary. And so a lot of these young doctors tend to be risk-averse, partially because of the student loans that makes them feel like they don't have a choice. They simply have to have a predictable paycheck, even though if they sign up for the right repayment program with the government, that fluctuates and doesn't have to be an impediment to practice ownership. It doesn't, but it creates this perception that they need predictability and their appetite for risk. And buying a practice is more risky than being employed. Um, and so they prefer to trade that autonomy of practice ownership for a salary. That's the way they're viewing their career path right now. Now, let me though put into perspective the cost of that choice of trading practice ownership autonomy for a salary. Let me, let me quantify this for you. This is, this is really important. In the world of finance, whether you're investing in the stock market, for example, or you're investing in real estate or a private investment, risk and return are very, very related. And there is a direct correlation between risk and return. The more risk that you are willing to take on over time, the more return you should expect for that risk. So if you're going to invest in a, in a, in a micro stock that has very little track record, you, you're going to expect to get something a lot more than what you get in a 10-year US Treasury giving you 3.5% on that US Treasury. Why? Because that US Treasury has almost no risk, very, very little risk associated with that US Treasury bond. So why would you go invest in a micro cap stock that, that, that is very unpredictable, which may end up in the graveyard in a year or two. If you are only going to expect a 3.5% rate of return, you're not, you're going to expect a 15% rate of return on that. Or if you go and invest in an S&P 500 company, you might expect a 10 to 12% rate of return or an 8 to 10% rate of return. So the more risk you take on, the more a finance professional is expecting a return on that risk. Now, there are some risks that don't come with corresponding compensation. And I'm not going to get into that. That's an investment topic of how do you only take on compensated risk. I just want to focus on this concept of the relationship between risk and reward, risk and income. And it is true. You're taking on less risk by going and working for Heartland. Yeah, that's just less risk because they've got their marketing down, their operations down, their presence down. It's, they're very stable that way. Their balance sheet is probably very strong. And so they're probably gonna be around for a while. And so that's low risk. And if you go and own a practice, it's higher risk because so much is unknown for you. Are you gonna be able to do this? Are you gonna be able to market? Are you gonna be able to lead your team, manage a great culture, get patients in the door, get them to say yes to treatments? Are you gonna be able to do all that stuff? And that might feel a lot more risky. So let me, let me put some numbers behind this. In here it says In the research that private practice owning doctors are taking home somewhere around $228,000 a year. Now, a lot of our clients take home a lot more than that, 2, 3, 4, 5, 8 times that amount, because the wonderful thing in our capitalistic system is if you can run a phenomenal business, you can make phenomenal income. This isn't communism here. And so you are rewarded pro rata based on the effectiveness of of your business management skills, your leadership skills, your communication skills, all of those things, your grit, your hard work, all of those things. But here, an average doctor per this report is doing $228,000 take-home. A DSO doctor on average is doing $177,000 take-home. So that is a difference of, let me see, that is a difference. Uh, let me open up one of my spreadsheets. That I used, we have $228,000 less $77,000. So that's $51,000, $51,000 less every year. So let's say that you could take that 50— let's say you bought a practice, you took on the risk, and you earned that extra $51,000 every year over what you would receive if you were an employee of a DSO. So $51,000, and let's say you invest that and let's say you invest it in the S&P 500 every year. So you take about $4,000 plus per month from that extra income and you drop it in an S&P 500 index fund. And let's say that gets you 8%. And let's say you do that your whole career of 30 years. Let's say you graduate at like 32 and you retire at age 62, 30 years, what you would have accumulated. In that S&P 500 index fund is $5.77 million, $5.7. You're approaching $6 million there. Now, if you back that into today's value, because you know that with inflation every year, the value of a dollar goes down, meaning it will buy you less stuff every year because that dollar is deflating because of the effects of inflation. and if I put 2.5% inflation and take that $5.77 million at the end of 30 years, and I say, what would that be worth today? What would that $5.777 million buy you in today's dollars? It would buy you $2.75 million worth of stuff in today's dollars. So I'm trying to create an apples-to-apples comparison, factoring out inflation. So that you can sort of conceptualize what this means by being an employee of a DSO rather than owning a dental practice. Now there's other assumptions in here. I'm sifting out. I'm just keeping this simple. So you're leaving on the table $2.75 million over that 30-year period. When you retire, you're $2.75 million less in the bank because you were an employee. And not an owner. Now, if you're an owner, like a lot of our practices that we really work with to grow their collections, we, they typically are eager for coaching. They get practice management consulting. They become better at marketing, you know, and they're doing $1.5 to $2 million to $2.5 million. Their gap, as opposed to working as an employee, might be $200,000 a year. If you did that, they're leaving in today's dollars, $10.8 million. On the table by being an employee rather than owning their own dental practice. Now that's just accentuating those numbers. So you grasp the concept of how much money you're leaving on the table by taking the safe route and being an employee. Now we have a lot of doctors that retire and a lot of dentists don't retire with $2.7 million in the bank. They don't, they don't retire with that. And so then that's just the spread. If you're a practice owner and you're making that extra $51,000 and you're investing, you know, beyond that, you're gonna have a lot more than that. And I would say our average doctor or practice CFO is retiring with somewhere around $4 million plus or minus, some lower and some a lot higher. And on top of that, they generally have all their debt paid off. A lot of them own their building and a lot of times their building is paid off as well. They may own 1 or 2 rental properties. And so their net worth is probably running somewhere around $10 to $15 million. That's a good career. And then they live off that and they're able to retire at age 65, plus or minus, you know, 5 years and live out the rest of their life without having to worry too much about the economics of their life because they've been consistently disciplined in setting aside money in assets that will take care of them later on in life. All right, now let me tell you what my prediction is on the DSO. And I'm gonna, I'm gonna try to stick the landing with this, with, with this set of comments. Honestly, I should do a whole another episode on this. When DSOs buy a private practice, they will issue an offer letter, and that offer letter will say, here's how much we're gonna offer for the purchase of your practice. Or, and generally speaking, they will give, they will value your practice, and let's say they value it at $1.5 million. Then what they will do is they will say of that $1.5 million, we're going to stratify that in a few categories. You're going to get $750,000 down. You're going to roll over $400,000 into equity of the DSO. So now you become a small partner of that DSO and that $300,000 or $400,000 might buy you 0.2% equity of that DSO. So you're this tiny fraction holder. Almost like owning stock, you know, in a, in a public company, except if you own Apple, you probably own 0.0000001% of the stock, or you might own 0.2% of the DSO. But in concept, you're a small fractional owner of that DSO because you took some of the value of your practice when you sold to that DSO and you rolled it into, or you converted it, or what we sometimes say, you swapped it with the equity of that DSO. So you land $700,000 down, you, let's say you got $400,000 rollover, that's 1.1, and then you have $400,000 that is earned by maintaining your collections over a certain period of time. It's usually 2 to 3 years that if you maintain or grow your collections, the rest of that $400,000 of the $1.5 million valuation is paid out as you earn it. And so that's sort of an incentive element of it. Now let's say that practice, your practice would've sold for $1.2 million on the private market. So there's an extra $300,000 that you're getting. Now, normally what these DSOs require is that you stay on board for a minimum of 3 years and many times for 5 years. Sometimes they may have a contingency. If you can find, hire, and train an associate to replace you, then you could withdrawal or retire earlier than the 3 to 5 year mark. Now, the peak heyday of DSOs was around 2019 to 2023, wherever, you know, 2022, huge peak, peak for, for the DSO acquisition market. And some of these dental brokers that broker for DSOs, there's a handful of them out there, were just making a killing. At that time. I mean, you had brokers making $1.5 million to $2 million a year because they're selling these practices to DSOs. They had relationships with various DSOs, and I'm not trying to fault them for that. They're, they're out trying to make their money. However, I will say the group of people in this DSO space that is the most disadvantaged and who is losing out the most are the dentists themselves. And I'll explain why. In this, in, in this ecosystem, you've got the dentists, you've got brokers, typically you have, um, sometimes other ancillary people. You've got consultants out there that are trying to package up their clients and sell them off to a DSO. You've got a number of people just saying, hey, I have all these relationships with dentists, let me convince them all to group and cluster, and then we'll sell to a DSO, and everybody rides off into sunset, which ends up being complete and utter BS most of the time. And then you've got the, uh, the PE people themselves. And guess what? These PE people are out to make a lot of money. They're out to make a lot of money. They work hard. They went to a lot of school. They know how to crunch numbers. They know how to make 1 1 3, or at least present it that way and convince people of that. And at the end of the day, A dental practice produces a certain amount of economic value, and that economic value can only go around so far. And yes, they can come in and implement some systems and maybe save you, you know, a few percent on your supplies and a percent or two on labs, and maybe manage some of your processes around HR and hiring and get some economies of scale. But it's not like they're gonna go in there and cut your overhead by 50%. They might cut your overhead by 5, maybe 10% at best. But generally speaking, here's where the value is, and it's a house of cards. It's a pyramid scheme. It's a multi-level marketing program. Those doctors that are in early get most equity on the cap table of the DSO. Those doctors have the larger share of ownership. So early doctors might have 5 to 10% ownership. You got the DSO people— sorry, you got the private equity people who will always make sure that they have control. And that they have the majority of ownership. Why? Because they're not at this as a charity. They're out there to make some money and they're looking at dentistry and they're saying, wow, this is a remarkably profitable industry still, even in today's competitive environment. Why don't we use our PE skills, our gunpowder of money that we get from investors, and let's go start consolidating these companies, these dental offices. Let's roll 'em up, create platforms, economics of scale, and then let's, and then let's sell to a bigger PE company. And this is the nature of the game. A fish buys a dental office, a set of dental offices, and it sells to a bigger fish who does the same thing, packages them up, sells to a bigger fish, does the same thing, packages them, sells to a bigger fish. So the only time that I've seen doctors really crank some money on this is when they're the early doctors, the early doctors. And if a DSO gets to 500 doctors, I'd say the first 100 doctors probably gonna make some decent money on that. The other 400, probably not much money on it. If you're the first 10 doctors, 15 or 20 doctors in a group that gets to 100 to 200 to 300 offices, they're probably gonna make some good money on that. I had a doctor who, a client who sold to a, a D— a specialty DSO. I won't give the name of the doctor or the DSO. Uh, he was the, I think, 5th or 6th doctor. He eventually got to 150, uh, doctors and all said and done, his roughly $2 million valued, uh, practice, he ultimately walked away with somewhere around $8 to $10 million from that sale. But he was the 5th or 6th office in a DSO that eventually aggregated over 150 offices. That 149th doctor is most likely losing money. And let me share a couple reasons for this. These DSOs will come in and they'll say, hey, a normal buyer would offer you 4 times your EBITDA. EBITDA is simply your profit in the practice after paying the doctor as an employee. That's your EBITDA. It's like, it's like the, the return to the buyer. If I bought your dental practice after paying all your overhead and paying you the doctor as an employee, what's left for me? That's my EBITDA. Before my debt, before my amortization, before my interest, before my depreciation. That's what EBITDA is. Earnings before interest, taxes, depreciation, and amortization. But basically it's your cash flow profit. Just simplify it to think of it that way. Cash flow profit after paying the doctor. If I go in and I offer you 4.5, uh, times your EBITDA, so let's say your EBITDA is, I don't know, $200,000. I might go and offer you $900,000 for your practice if I were a private buyer. A DSO will come in and they'll say, I'm gonna offer you 6 times. So I'm going to offer you more. So that's 6 times. So that's $1.2 million. So instead of $900,000 in a private sale, you're getting an offer that's $1.2 million. Now that right there piques a lot of sellers' interest. Wow, $300,000 more. That's like a 33% increase from my $900,000 private offer. Why would I not do this? Okay, so you start to look at the offer letter from the DSO. And it says, okay, we're going to offer you $500,000 or $600,000 down, $200,000 you have to earn out by working for 3 years and collecting X amount. So you can't drop your collections. And in fact, doctor, you're not able to retire or slow down. This is not a slowdown strategy. We need you to lean in. We need you to work harder. And guess what? In the first year or two, there's gonna be a lot of bumps because we're going to be changing your payroll system and your, maybe your practice management software. And we're going to be doing all these things. It's going to feel bumpy. Now they don't tell you that, but that's often how it goes. Not always, but that's often. How it goes. And, um, and then the, then the remaining amount of, I don't know, a few hundred thousand of the practice sale gets rolled over into that DSO. And so you have to stay there for 3 to 5 years, and then after the 3 to 5 years, you're welcome to walk. And, uh, at that point, they will either buy out your rolled over equity into the DSO, or you can hold on to it, um, and eventually when there's a, what's called a cap event or capitalization event, that, that, that private equity company sells to another private equity company or invests more money or gets debt financing, then there may be money that you would receive from your equity rolled over. Now, what's happening is in these offer letters, there's a lot of smoke and mirror. When you really look at it, these DSOs are keeping your accounts receivable. Sometimes they're even keeping a certain amount of cash in the bank. As well, they do the math. These are not dumb people. They're very, very articulate with their numbers. And they know that if you collect what you are collecting for 5 years, and if they're paying you, let's say $250,000, where before you were taking home $450,000, they know that, that extra $200,000 over a 5-year period is $1 million, which allows them to offer you more, but guess what? You're essentially paying for it yourself because you are not getting the profits of your practice anymore. And that's going to somebody else who's then gonna use that later to pay you. And so you're, you're giving up all this income in the meantime. So what I always do is I do what's called a net present value analysis. And I say, if you don't sell your practice to the DSO and you keep 100% of your profits, and then you sell to a private buyer. Buyer in 5 years for let's say 70% of what the DSO is offering you. What is that at a 2.5%? I mean, at a discount rate of— the discount rate is just the rate of return that you would get on the money had you invested the difference. And this is a finance term. Don't get too, too far into it. But my main point there is if you present value back into today's dollars, what is the sum of all the earnings that you would have kept and then the sale to a private buyer after 5 years? You take that number and you compare it to the net present value of the money you get down on day 1 from the DSO and your employee income over the 5 years. And, and, and you leave out, you leave out the equity rollover as if it were zero. Every time the private sale is going to be way better. You are way better off keeping it private and selling it private. If that DSO rollover equity. Grows by around 40%, then there's a parity. Now you're about the same. If that DSO equity grows to the tune of 40 or 50%, if the DSO doesn't grow or it falls apart, or it only grows by 10%, you're still a lot better off to not sell to that DSO. So will the DSO grow at a clip, a very significant clip in order for for your rollover equity to mean something? I have found most of the time the answer is no. And I have also found that a lot of times doctors regret that decision. Now you may have doctors trying to sell you into MB2 or sell you into some other DSO. Just remember, a lot of these doctors are incentivized because they get an extra payout when they bring in doctors. So just vet people's authenticity when they're giving you a recommendation. Also, since they have rollover equity in the DSO, they want the DSO to grow because then their equity in that DSO grows. So they're incentivized to sell economically for them. And so there's a conflict of interest there sometimes when one doctor recommends a DSO to another doctor. Also, DSO brokers love the commissions from selling DSO to DSOs. They are big, fat, chunky, heavy commissions. And so they will also attempt to align with the DSOs to sell the value proposition of a DSO as well. A lot of the industry honestly is ganged up against the private practice these days. You got a lot of vendors, practice management consultants, brokers, bankers— you got a lot of people telling you that this is this great phenomenal thing. And so this is why dentists are so piqued when they hear about DSOs. They feel FOMO. Fear of missing out. Am I missing out? Should I be partnering or selling with the DSO? My friends are doing it. I heard about MB2. I heard about this doctor through the grapevine who made $10 million by growing a few practices and selling to a DSO. It's all this like cocktail party talk that makes people get interested. But the reality is, and I see at least a DSO offer every week, I have analyzed hundreds of these and I have a tool now I've created because I've done so many of these. And although there are some nuanced variation across these DSOs and their offers, generally speaking, they have the same components to them. And those components can be very difficult for a private doctor who hasn't had experience in these complicated calculations to understand what's happening. Now, why do I think a lot of practices from DSOs are gonna get unleashed into the market to sell, that a lot of DSOs are going to fail? Is because after 5 years, a lot of doctors are gonna now walk away. They're gonna say, I did my time, 5 years, I'm ready to retire. I committed that I lean in during that time. I'm gonna retire. And it is extremely difficult for a DSO to find an associate who will step in and care as much and produce as much as that former owner-seller doctor. It's very, very difficult. Dentistry is a difficult business to scale. It's not like software. Once you have the programming in place and a good marketing team, this thing can grow with no, with no limit because it's so leverageable. It's so just simply process and computer driven. And the more something is process-driven, assembly line-driven, robot-driven, manufacturer-driven, the more scalable it is. The more that it's dependent upon the skill set of a person, particularly the physical skill set, then it's, it's difficult to leverage. This is why I don't think AI is coming for the job of a dentist, and I don't think AI is coming for the job of a welder, or AI is coming for the job of a carpenter. Those types of jobs are very, very difficult to platform and scale. It doesn't mean that PE isn't going to try to do that, uh, because they will, but it's very difficult to do so. And what PE does is they go in and they want a short-term flip. Like flipping a house. Let's buy it, let's restore it, and let's flip it for 50% increase in the market value and walk away with a few hundred thousand bucks. That's the name of the game. Most of these PE companies are not intending to hold those dental practices for 10, 15, 20, 30 years called evergreen companies. Most of them, the vast majority of them are, they want a, they want a quick buck. They want the shortcut to wealth. And so they buy it and they buy it at an, at a, at an EBITDA multiple of let's say 5 or 6. And then they aggregate it. And a lot of times they don't even centralize the processes. They just get a bunch of practices and I call that assembling EBITDA. They're just assembling EBITDA and then they'll go and they'll sell it to a bigger PE firm at a higher multiple than they bought it for. So they bought it lower than what they're selling it for, but they didn't fundamentally go in and change the economics and the processes and the culture and the nature of those dental offices. So in reality, there is no true intrinsic economic value that's been created. It's just a game. It's a pyramid scheme. That's why pyramid schemes come and they go, because the first set of people are very incentivized for it to be successful because downstream is paying for upstream. And in time, the true economic— the economics are going to present themselves and the music will stop and people will be found without a chair. And that's going to happen. And a lot of DSOs, in my strong prediction, over the next few years are going to fail. There's already been a ton that have failed. And there's going to be a lot more that are going to fail. And so what I would do is as a private buyer, just wait and buy patient records down the street of some DSO that failed. That's a great way to grow your practice. One location, get a bunch of ops, buy patient records, get to $2-3 million, manage your overhead, good marketing, good operations, good financial systems. You're going to crush it and take home $1 million a year or more. You're going to be retired early. You're going to feel great. You're going to own your life. You're going to have autonomy. You're not going to work for PE. You're not going to work for the suits. All right. So where does a PE— I mean, where does a DSO possibly make sense? There are some practices that are just so remarkably profitable that a buyer cannot get a loan or step into ownership. It's too big. It's too much of a behemoth and it needs institutional money in order to get the or extract the full value out of your practice. That's one I just had that sold in January. A client of ours, been a long-time client. Sold, and, uh, and it was a practice that on the private market by private valuations probably would've been worth somewhere around $2.5 million. This DSO, who I think was a bit desperate, they hadn't had a single acquisition in over a year was my understanding, came in and offered $7.5 million for that practice. Very profitable specialty practice, bought it. $7.5 million with $5.1 million down on day one. They're never getting that back. That is in the doctor's pocket, period. If on day one you can get more cash than you can from a private sale, in this case 2x, twice as much, I don't know how to say no to that, to be honest. I don't know how to say no to that. Maybe if you want to say, I don't want my practice to get sort of fed into the system of private equity and institutional dentistry. Maybe if you're really passionate about kind of the private practice space and protecting it, as, as I am. But at the same time, if your practice truly is worth $5 million and there's only a certain type of buyer who can afford to pay $5 million, then I sort of get it. I don't know, I honestly, I don't know how to say no to that one. And the doctor also got a rollover of X amount into the DSO, which I always say may or may not become something. I wouldn't count on it. If it does, great, but I wouldn't count on it. Now, even then, here's the crazy part. In those insane numbers of that offer, when I did the 5-year net present value analysis, this doctor was better off not selling to the DSO. Why? Because this doctor was taking home $2.2 million a year after overhead. 2. No debt. I mean, no debt. This doctor was saving ridiculous amounts of money. Incredibly profitable practice. What a, what a phenomenal business owner she was. Credit to her. It's super rare to see that. Had she kept— now, and now she was going to be paid about $750,000 as an employee over the 5 years. So you're giving up, you're giving up, what is that? About $1.4 million, $1.3 million of profit every year for 5 years that if you kept and you invested it and you let that grow at, let's say, 7 to 8% per year, and then you sold to a private practice, even if significantly less, and a doctor came in and paid $2 million instead of the, the, the $5 million on day one. For even in that crazy analysis, the doctor would have been better off to have maintained the full profit of $2.1 million per year, sold after 5 years at a significantly lower amount, and financially it would have been better off. The only reason this doctor decided to do that is because the, the DSO said, hey, if you can find another doctor to come in and replace you over during the 3-year— during the 3 to 5— oh, and we only require 3 years in this case. So over the 3 to 5 years, you find another doctor to come in and replace you. You can then retire. So the doctor was thinking, okay, I can get the, I can get the $5.1 million down on day one. There's a rollover equity, which may turn into something. It may not, but it may. And I have the chance to back out over a 3-year period. If I find another associate to come in and I train them, then they can, uh, uh, get the, that financial sort of windfall of that deal while not having necessarily to commit to 5 years of the grind. And so the doctor ended up pulling the trigger on that. That is the exception. I would say very few dentists are gonna see that. But the key things to look at are this. If you're really intent on considering a DSO, contrary to my advice, is how much cash are you getting down? Because that's chips off the table, less risk. How many, how much money are you getting down? Is the earnout reasonable? And here's the next big thing. How early are you in that DSO? If that DSO has really good leadership, and my preference would be it's, it's a, it's a doctor-led DSO. The founders are doctors. The main people are doctors. There might be some PE people involved. There might be some business people involved. But at the head of that ship, leading the culture, leading the clinical autonomy, are doctors who truly believe that. So that there's still culturally an element of private practice, and there's a lot of cash down on day one, and the management seems very promising, very sophisticated, very competent, and you're early on in the, uh, early stages of that growth of that DSO. There might be some opportunities there, and I don't want to deny those opportunities. I'm just saying that 19 out of 20, I don't know, 49 out of 50, it's a very high percentage of those doctors are less off profitably speaking, wealth speaking, than keeping it private. So we'll see. We will see if my prediction pans out here over the next 3 to 5 years. That is my take. Practice CFO and I are huge believers in the private space. I love it when doctors can curate their practice grow their collections, come up with a wonderful culture, control their schedule, and really enjoy the experience of being a practice owner as well as a dentist and see their personal wealth grow by doing that effectively. That is the optimal state of a dental practice owner today, in my very strong opinion. I witness it every day here at Practice CFO. We are out here to support, love, and nurture the private practice in every way we can. We are white carpet boutique, highly caring set of team, uh, team here, professionals of CPAs and financial advisors. And, uh, we love what we do. We love working with you, all of you, Dennis. So thank you. If you're a client of ours, I just want to send my personal thank you for trusting us. We are constantly trying to get better where there's areas that feel uncomfortable. We are always getting feedback and trying to become the best that we can be here. Bad Practice CFO. All right, everybody, so that episode on who owns dentistry today and Wes's personal thoughts on DSOs. Hopefully, hopefully it was helpful. Until next time.