Dental Consolidation: The 3 Big Financial Winners
The dental industry has proven to be a stable and profitable throughout the years, making it incredibly attractive to Private Equity Investors. As a result, billions of dollars are being poured into dentistry and new and exciting opportunities for building wealth are available because of dental consolidation.
As a dentist, you are uniquely qualified to build wealth in the industry you know and love by becoming a Healthcare Investor. The best part is that dentistry investment isn’t one size fits all.
You can participate in a way that fits your unique lifestyle and goals as a Finder, Founder, or Funder. Let’s explore each of these three roles and how they’re making money in the dental practice consolidation era.
Dental Consolidation Winner #1: The Finders
Whether we’re talking about Corporate or Autonomous DSOs, there are people who perform due diligence to source potential practices for these platforms. These people are the Finders. Finders use the criteria of the DSO platform to find the right practices to buy.
DSOs spend millions of dollars in advertising and millions more in paying their sales reps to find great practices to acquire. Having a full pipeline is one of the key pillars of a platform. Almost all DSOs have an end goal of reaching a recapitalization event.
This means, when they are searching for new practices, they are thinking about what is most attractive to potential investors. Essentially, they’re thinking of the investors who want practices that would be considered ready-made growth engines.
Established DSOs are interested in the following criteria:
- Minimum TTM collections of $2 million
- EBITDA of at least $500k
- A minimum of 6 operatories
- Two or more dentists
- Common dental software used such as Dentrix, Eaglesoft, Softdent, or Open Dental
- Robust data room with due diligence documents
- W2 Employees are strongly preferred rather than contractors
- Consideration of growth potential and available space for expansion at the location
- Practice is open 5 days per week
- Preference for owners aged 55 years or younger, or if the owner is older than 55, the presence of at least one younger associate and a detailed transition plan
- Clean and organized books/data
- Reliable accountant and use of QuickBooks Online (QBO)
- Overall responsiveness and communication
- Exclusion of practices reliant on Medicaid
- Evaluation of the owner’s personality, with a preference for avoiding individuals with negative attitudes
- Geographic considerations: In untouched regions, the presence of 5-6 offices within the market is preferred.
This means that over 50% of dental practices in the United States are going untouched, which is a shame. Many of these practices are diamonds in the rough.
Take for example an elderly implant dentist who has one associate in a practice that collects $2 million annually with 6 operatories that are open 3.5 days per week.
Taken at face value, there are a lot of positives in this situation: the revenue is sufficient, there is an associate poised to take the reins when the time comes, and there’s a highly desirable dental speciality offered. However, Established DSOs won’t touch a practice like this because the owner doctor would like to get out of the chair.
This is unfortunate because the solution in this situation is very simple:
- Hire an additional associate
- Operate 5 days a week, which will lead to an…
- Increase of annual collections by 40%
Established DSOs are unwilling to explore solutions like those because of their very narrow definition of what makes a practice attractive. But for Autonomous DSOs, there is the potential for more leeway for defining acceptable levels of profitability.
Having more flexible criteria for which practices can be purchased by an Autonomous DSO provides more opportunities to make a profit on these diamonds in the rough. Finders play an important role in helping match practices that would be traditionally overlooked with DSOs that see them as desirable additions to the platform.
Dentists are uniquely qualified to be Finders because of the first hand knowledge of what it takes to run a practice efficiently. If you’d like to work as a Finder in consolidating dental practices, you have the potential to earn good money in a deal.
Dental Consolidation Winner #2: The Founders
The founders are the dentists, the ones who poured their blood, sweat and tears into building the business that created their legacy. Make no mistake: dentists are still making TONS of money selling their practices to DSOs.
For dentists, their dental practice is the cornerstone of their retirement portfolio. If the practice meets the above criteria it’s going to be a great retirement nest egg for the doctor. They will enjoy a chunk of cash that in most cases is far greater.
The key advantage dentists have in this ecosystem is a dental license. Most use their dental license so they can perform chairside. But having that license allows any doctor to have a major equity stake in a dental practice in their state – the opportunity to have multiple cornerstones of a retirement portfolio is there.
As a dentist, you could be a valuable leadership team member, using your knowledge to shape the Autonomous DSO platform into an entity that keeps the needs and desires of its members front and center.
One of the greatest benefits of being a Founder is access to HoldCo stock. HoldCo stock ensures you will continue to make money for the lifecycle of the DSO, including recapitalization events and whenever dividends are paid.
On Demand Training: The 3 Secrets of Dental Practice Investing
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Dental Consolidation Winner #3: The Funders
Every DSO platform needs financing to get started. The Funders are the ones who provide that financing.
Let’s face it: dental practices aren’t cheap buys. Virtually all of dental consolidation is fueled by debt, and in most cases, that debt comes with equity strings attached. Private equity world has been pouring billions of dollars into the industry and they want more than the bank on a traditional loan.
DSOs accepting this kind of funding include their investors at the cap table, and their original investment is able to produce equity based dividends and potentially a home run hit with a recap event.
In Established DSOs, that seed money usually comes from Private Equity Investors who own 50-70% of the deal. Because these Funders own such a significant interest in the DSOs, they reap the greatest financial benefits. But in an Autonomous DSO platform, the structure exists to benefit the dentists.
How can dentists be Funders without the trillions of dollars in capital Private Equity Investors have? The answer is to cut Private Equity out of the DSO platform formation process in favor of financing through a dentist-owned fund.
Dentists can band together to create their own fund to finance the creation of an Autonomous DSO platform. By working in partnership with a DSO centric bank, dentist-owned funds can finance a DSO without giving up capital to non-dentists. The beauty of this is twofold:
- The dentist-owned fund only needs to contribute 25% of the capital needed to establish the Autonomous DSO. The DSO centric bank will contribute the rest.
- The DSO centric bank will contribute to financing the Autonomous DSO without taking any equity. All the bank wants is a return in the form of interest, not ownership of the platform. That leaves a greater portion of the DSO to be owned exclusively by dentists.
By participating in an Autonomous DSO as a Funder, you will be in a position to have significant equity in the deal. That means a greater slice of the pie for the lifetime of the deal.
How to Win in the Dental Consolidation Era
The dental consolidation wave is rapidly transforming dentistry as we know it, bringing new opportunities for building wealth. As a dentist, you deserve to benefit from these changing times by positioning yourself to be a Finder, a Founder, or a Funder. But which of these roles is your best path forward?
The answer depends on your goals as it concerns building transformational, multigenerational wealth. No matter which path you choose, you have the potential to earn big as long as you understand the ins and outs.
At Freedom Dental Partners, we’re committed to helping you achieve Total Dental Freedom for your finances, your career, and your lifestyle. If you’re interested in learning more about how to become a Finder, a Founder, or a Funder as a part of an Autonomous DSO, book a call with our transition specialist.
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