Invisible DSO Partnerships and Organic Growth with Chip Fichtner, Co-Founder of Large Practice Sales

[00:00:04] Welcome to Think Oral, where we connect the unconnected between oral and physical health.

[00:00:10] I'm your host, Dr. Jonathan Levine, and I'm your host, Maria Filipova.

[00:00:15] Let's get at it.

[00:00:17] Hi, everyone, and welcome to the Think Oral Health Podcast.

[00:00:25] Jonathan, are we excited about today's guest or what?

[00:00:28] I am super excited. Chip Fickner is leading the charge on these acquisitions with this new category he calls,

[00:00:35] and he's been calling it for at least five, six, seven years, invisible BSOs.

[00:00:40] How many of our listeners have heard about the invisible BSO?

[00:00:44] It is what we call an invisible trend that's really gaining traction,

[00:00:49] and it's pretty massive in terms of the amounts of capital that are going down in that domain,

[00:00:55] in putting together an architecture of resources for all these dentists

[00:01:02] who could continue to practice independently from a clinical and business perspective,

[00:01:06] but get the power, the purchasing power of hundreds of dental offices

[00:01:11] when they go to buy supplies or office equipment or you name it.

[00:01:15] Yeah, the economy's in scale with new capital.

[00:01:18] But the other big thing is that the patients don't think you sold your practice.

[00:01:23] It's invisible in the back, and actually you haven't really sold your practice.

[00:01:27] You've just brought capital in.

[00:01:29] So you take some equity off the table, but you're partnering with these capital partners.

[00:01:34] It's a very smart acquisition business model for the dentists, literally at all ages,

[00:01:40] but Chip's going to give us all the insights.

[00:01:43] It's a way to grow the pie, right?

[00:01:45] A smaller slice of a bigger pie is still much better because 100% of a zero is a zero, right?

[00:01:51] So fantastic. Let's get into it. I'm really excited about this.

[00:01:56] Hello to all our listeners of the Think Oral Health podcast.

[00:02:00] I am Maria Filipova and I'm joined by my co-host and partner in crime, Dr. Jonathan Levy.

[00:02:06] We're very excited to talk to you today about the changes in the dental industry.

[00:02:13] We've had a couple of touch points on the conversation around industry consolidation,

[00:02:18] around exit paths and evolution of the dental practice over the years.

[00:02:23] And today is another touch point and a perspective, important perspective in that conversation.

[00:02:30] With that, Jonathan, who are we having a conversation with today?

[00:02:34] Yeah, I have the honor and the pleasure to bring to our podcast, Chip Bickner.

[00:02:40] He is the co-founder of Large Practice Sales, LPS.

[00:02:44] Anyone in the DSO industry, anybody thinking about potentially selling or partnering their practice,

[00:02:51] they know about LPS. They've completed over a billion dollars of practice transactions in 22 and 23 with 38 DSOs for clients in 31 states.

[00:03:02] They built, bought and sold multiple companies, both public and private, variety of industries.

[00:03:07] Chip has done that for over 40 years.

[00:03:09] He's brought this expertise to dentistry at a time when the business model has been changing from a fragmented industry to an organized one.

[00:03:18] He is leading the way with this. And I'm so excited to have Chip here.

[00:03:22] He has an amazing wife of 35 years that allows him to live on airplanes and flying all over the plane and all over the place.

[00:03:31] And while we're talking about airplanes, one very unknown thing about Chip is that he's a very avid sailor.

[00:03:40] And in fact, if he looks straight up in his office, he has chandeliers that are boats that he's created.

[00:03:49] Chip, tell us a little bit about this unknown secret about you.

[00:03:52] You've been busy, Chip, by the way. Congratulations and welcome to the podcast.

[00:03:56] Thank you for having me. Boataholism is a bad addiction.

[00:04:00] I don't recommend it for anybody, but yes, I do have boat chandeliers in my office.

[00:04:05] That is a 13-foot Boston Whaler and right above me is a 14-foot wooden rowboat.

[00:04:11] So, yeah, it's my addiction.

[00:04:14] It's so great. It's so great. We all need those kind of things.

[00:04:18] Let's start it off. This is so exciting to have Chip here.

[00:04:21] Chip, question number one I have for you, and it's the burning yearning question.

[00:04:25] You came up with the acronym of the IDSO, and it's a huge trend that has been developing.

[00:04:33] Tell our listeners what is the IDSO and where is the IDSO concept going into the future?

[00:04:40] Fantastic. In our view of the world, there are functionally two types of dental support organizations.

[00:04:47] The traditional DSO, which are groups such as Aspen, which will in many cases buy 100 percent of a practice.

[00:04:54] The doctor will use that as a retirement or exit strategy, work for the DSO for a year or two or three.

[00:05:02] And exit dentistry at that point. So typically, older doctors are selling 100 percent of their practices to a DSO.

[00:05:09] An invisible DSO is not a new concept. They've been around for 35 years and there are hundreds of them.

[00:05:16] In fact, we estimate there are about a thousand invisible DSOs and DSOs in the U.S. today.

[00:05:23] What makes an invisible DSO different from a DSO is, number one, the invisible DSO partners with doctors

[00:05:31] by buying 51 to 80 percent of their practice for cash up front. The doctors retain ownership in the balance

[00:05:38] and continue to lead their practice as owners with their brand, their team, their strategy,

[00:05:45] and most importantly, full autonomy and not just clinical autonomy, but business autonomy.

[00:05:50] So the invisible DSOs become the silent partner with a doctor who continues as an owner,

[00:05:56] but benefits from the resources of that larger partner. And those resources are becoming more and more important today.

[00:06:03] In particular, the invisible DSOs are enabling their silent partners to buy products and services

[00:06:10] and benefits at 25 percent less or more than independent dentists.

[00:06:15] And as margins are compressing, that's becoming more and more important.

[00:06:18] And secondly, some of the larger invisible DSOs are getting reimbursed at higher rates than independent dentists

[00:06:25] in the same community. And so they are able to bring relief from margin compression,

[00:06:30] lower costs, higher reimbursement rates from payers. That adds up to a more profitable practice.

[00:06:36] So an invisible DSO has become very attractive to doctors of all ages.

[00:06:42] Of our billion dollars of transactions in the last 24 months, 150 million of those were for doctors in their 30s,

[00:06:49] which many people find very surprising. But the younger doctors see this as an opportunity to A,

[00:06:54] monetize a part of their life's work, gain liquidity, diversify their portfolios,

[00:07:00] and most importantly, benefit from the resources of a larger partner to reduce administrative burdens,

[00:07:05] giving them more time with young families.

[00:07:08] Amazing. Amazing. Chip, when we think about the growth of these IDSOs and always the challenge

[00:07:16] of the nonprofessional management team working with the clinical or economist dentist,

[00:07:22] that kind of friction, that tension that has happened in DSOs in the past with the acquisitional model.

[00:07:28] How has the IDSOs developed that relationship where it's not in conflict,

[00:07:34] but it's more in the fact that they're in a similar vision, similar direction,

[00:07:39] and that the autonomous dentist that was always running their own show now had more accountability,

[00:07:45] had to change and develop certain skill sets. But how that invisible DSO seems to be working

[00:07:52] a lot better when it comes to that concept. I think a lot of it has to do with ownership.

[00:07:57] When a DSO purchases 100% of a practice, the DSO is going to impose certain rules, regulations,

[00:08:04] procedures, policies, etc. Whereas when an invisible DSO partners with a doctor,

[00:08:09] they're only going to partner with that doctor because that doctor has done something uniquely successful

[00:08:15] and they don't want to break what has worked for that doctor.

[00:08:18] So they're not going to come in and tell him who to hire, who to fire, what payers to accept or not accept,

[00:08:24] when to be open, when to take a vacation. They're basically making a bet that owner doctor,

[00:08:30] because he still has skin in the game, is going to continue to do the right thing

[00:08:34] to benefit both sides of the equation. So I think part of what drives it is the ownership incentive

[00:08:40] is different in an invisible DSO partnership versus a DSO acquisition.

[00:08:46] That makes so much sense. It makes so much sense because their vision is similar.

[00:08:50] They're aligned on where they want to go. They have more of that partnership. Absolutely.

[00:08:56] The topic around the consolidation in the industry, we know about 22% or 23% of practices are affiliated

[00:09:03] with DSOs in 2022. That number could go up to 40% by 2026, depending on which numbers you're looking at.

[00:09:11] And so this is a trend that accelerating in the industry.

[00:09:17] They could be different flavors of it, traditional, and you could have an invisible DSO.

[00:09:22] Chip, what do you think that trend, how do you think that trend is going to impact the practice of dentistry?

[00:09:28] We're talking about another trend in parallel with that, which is the empowered consumer,

[00:09:33] a patient going into the dentist, asking questions about their treatment plan or

[00:09:38] the medical dental integration where the dentist is now part of the overall care team for patients.

[00:09:44] Do you see that consolidation trend and the ability for dentists to now have a richer platform of resources?

[00:09:51] Do you see that helping or not even relevant to that trend of integration and patient empowerment?

[00:09:59] You know, interesting question, and it's something that independent dentists need to be aware of,

[00:10:04] is because you have an increasing impact of technology on dentistry.

[00:10:08] And it's not just technology as it pertains to clinical care, but it's technology as it pertains to patient engagement,

[00:10:14] patient contact, patient scheduling. And if you're not on, you don't have to be on the bleeding edge,

[00:10:20] but if you're not on the leading edge of the technology revolution in dentistry, you're going to have a problem.

[00:10:26] And frankly, the invisible DSOs and the DSOs are the first ones to implement the new technologies.

[00:10:33] They are the test platform. So as a good example, Heartland, which is the largest of the DSOs in the U.S.

[00:10:39] with 1,700 plus offices around the country, and I think they're approaching their 30th birthday.

[00:10:45] They are in the process of adopting AI in the diagnostic process across all 1,700 offices.

[00:10:53] And if you look into AI in diagnostics, and I am not a clinician nor a technician,

[00:10:59] but the research that I've read on it is pretty dramatic as to providing an improved path to case acceptance,

[00:11:06] because you can actually show a patient things that the dentist couldn't see, but AI can.

[00:11:11] And so that's driving up revenues, case acceptance and most importantly, patient care.

[00:11:16] So as the independent dentists are looking at technology, they need to understand it and they need to adopt it.

[00:11:22] And if they don't, they're going to have a bigger problem.

[00:11:25] I love the one there. And that example is a great example, because I just wrote an article on AI adoption in dentistry for Forbes.

[00:11:33] And the example you gave is exactly this example I was looking at as a success, right?

[00:11:38] How do we define successful adoption of AI in the dental practice?

[00:11:43] Increasing patient acceptance rates is one.

[00:11:45] However, if we only go back and say, OK, because we deployed AI, our production per chair hour is up 30%.

[00:11:53] In my view as a patient, that's not success.

[00:11:56] We need to be able to connect that production rate to pocket depths for periopatients or A1Cs.

[00:12:04] So if we don't connect that last step, then AI becomes just a revenue generator.

[00:12:10] And it's just a matter of time where patients are backing off and saying, what are we doing here?

[00:12:15] So I love that you brought up that example because the message that Jonathan and I have been using this platform to send is

[00:12:23] dentistry is part of an overall systemic health conversation.

[00:12:27] And your point is technology is accelerating that trend if you use it, right?

[00:12:33] Exactly right. We're all on the same page with this.

[00:12:35] It's really the integrated health care model and people go to the dentist more than they go to their doctors.

[00:12:40] And so there's such an opportunity to use new technology to connect the dots between medicine and dentistry,

[00:12:46] but also for people to understand more comprehensively their overall health.

[00:12:51] For example, Chip's point about AI, exactly right.

[00:12:54] I've been living that, advisor at work with a company called DentiAI and they got Pearl and they got Overjet

[00:13:00] and you got these AI companies that are validating what the dentist says,

[00:13:04] but to a heightened level and where the patient now has increased confidence because of the AI opportunity.

[00:13:13] CBCT, cone beams, which is CAT scans for the jaws, looking at upper airway with the dentist.

[00:13:18] One of the new waves in dentistry is airway awareness and sleep

[00:13:23] and the impact of literally having the ability to get into deep sleep, which is regenerative.

[00:13:29] That's a huge connect.

[00:13:30] Marie, you mentioned A1C detection, very easy to look at basic vitals on the medical side in a hygiene room for A1C.

[00:13:40] And now we have sensors that are looking at C-reactive protein, that's our inflammatory markers.

[00:13:46] And you can make that connection to their internist and primary care physician.

[00:13:50] We talk about this all the time, Chip, but are you seeing, you're bringing it out to us,

[00:13:55] are you seeing a growing trend as you're really at the crosshairs of what's happening now in the VSO acquisition, IDSO world?

[00:14:06] Are we seeing more of an integrative care?

[00:14:08] Is it part of the conversation as the new investors are coming into the space, this kind of technology driving growth?

[00:14:17] Tell us more about what you're observing and what you think is going to happen in the next three or five years.

[00:14:23] Not being a clinician, I'm not qualified to speak on how technology is going to drive clinical care.

[00:14:31] But I think when you look at, again, a heartland adopting AI across 1,700 offices, these are smart people and there must be a reason.

[00:14:40] And one of the interesting comments I get from dentists is, oh, if you go partner with one of the big groups,

[00:14:46] it's just corporate care and patient care is declining because of that.

[00:14:50] That is the opposite.

[00:14:51] The reality is these larger groups are investing in the technology and training their doctors on the technology

[00:14:58] so that they're on the leading edge of providing better patient care, not worse patient care.

[00:15:03] That's one of the myths in dentistry is that if you go to a corporate dental group, you're not going to get as good a care.

[00:15:10] And I just don't think that's true.

[00:15:12] Now, in the invisible DSO world, really what's driving the growth of consolidation is the capital sources.

[00:15:19] There have been a lot of investors and doctors who have made billions and billions of dollars in dental consolidation over the last 35 years.

[00:15:29] This is not new, but what's interesting is the capital that's coming into U.S. dental consolidation is changing.

[00:15:36] Traditionally, the perception of doctors was that the primary investors or backers of dental consolidation were private equity firms.

[00:15:43] And certainly they're very active in dental consolidation.

[00:15:47] However, it's important to note that it's not just private equity firms.

[00:15:51] If you look at the fact that BlackRock has now invested in two invisible DSOs just in the last 15 months, BlackRock is no amateur.

[00:16:00] They have $10 trillion under management.

[00:16:02] They are the largest investment manager in the world.

[00:16:05] So them getting into dental consolidation is significant.

[00:16:09] And in addition, you've had sovereign wealth funds invest in dental consolidation.

[00:16:14] Just recently, the country of Abu Dhabi's sovereign wealth fund, which is the third largest sovereign wealth fund in the world after China and Norway,

[00:16:23] they made a little billion dollar investment in an invisible DSO.

[00:16:28] And so far year to date, we estimate there's been over $4 billion of new capital injected into either new or existing invisible DSOs just in the last 90 days.

[00:16:40] So the capital is coming into this business because it's a profitable investment.

[00:16:45] And fortunately, if you structure a transaction, the doctor's ownership rides along with very smart capital.

[00:16:52] So you mentioned the largest traditional DSOs like Cortland Dental, Aspen, Pacific Dental.

[00:16:58] How large is the largest invisible DSO?

[00:17:01] How large do you see it even growing?

[00:17:04] And what's the exit path?

[00:17:06] You have a great invisible DSO.

[00:17:10] You've put some money in it.

[00:17:12] What are you growing it towards?

[00:17:14] So we'll give you a real world example.

[00:17:17] The largest invisible DSO today has just over 700 practices.

[00:17:22] And we partnered practice number 40 with that group six and a half years ago.

[00:17:28] And we have partnered dozens of our clients with that invisible DSO over the last six and a half years.

[00:17:34] And that invisible DSO is getting ready to recapitalize, meaning their existing investor is going to monetize their investment by selling their equity in the invisible DSO to a larger investor.

[00:17:46] And fortunately, all of the roughly 1,100 doctors that are members of that invisible DSO are going to see some pretty significant gains.

[00:17:55] And when I say significant, on average, they'll make about three times their money in three years.

[00:18:02] So had you done a transaction where you kept a million dollars in equity, it would be worth about three million dollars today had you done that three years ago.

[00:18:10] Our first practice that we partnered with them, he has seen his equity increase in value by about 800% in six and a half years.

[00:18:19] Wow.

[00:18:20] Percent in six and a half years.

[00:18:21] Correct.

[00:18:22] Yeah.

[00:18:24] So it's a great time to be a doctor because you have in our process, you'll have six or more qualified bidders to choose from.

[00:18:31] And some of those will be the larger invisible DSO.

[00:18:34] Some of them will be the smaller ones.

[00:18:36] The key to an invisible DSO partnership is not just having multiple bidders to drive up value, but to give you the opportunity to see who you want to get married to, to spend the balance of your career.

[00:18:48] Because it's ultimately a cultural vision and a values decision.

[00:18:52] It's not just a money decision.

[00:18:54] Chip, are you seeing in the recap market where you have some of these, let's say they started two, three, four or five years ago, and everybody was calling for consolidation in the DSO market.

[00:19:10] And there was pushback in the ability to recap, especially when the capital markets got tight about 12 to 18 months ago.

[00:19:18] Things are changing now.

[00:19:20] How are you seeing that recap market in general?

[00:19:23] I know you noted one specific one, which sounds like a huge success, but overall, how would you describe it?

[00:19:30] And then also if you could relate that to the, that you're seeing for the individual dental practices, how that has changed over time.

[00:19:38] It's interesting because while we've had a reduction in the number of bidders in theory due to interest rates, that those groups have been replaced by the groups with billions of dollars of new capital.

[00:19:50] So, Nat, we have more bidders today for great practices than we did two years ago.

[00:19:57] And we're achieving record values today, again, because of the new capital and eager bidders with non-interest rate impaired capital.

[00:20:05] So, the good news is values have actually gone up, not down.

[00:20:10] And in the recap market, there's really been a flight to quality.

[00:20:13] There were a number of invisible DSOs formed in, let's call it 16 to 20.

[00:20:19] And they had the theory that they, as long as they partnered with enough practices and grew their revenues, that they would ultimately be able to recapitalize at a high multiple.

[00:20:30] And the reality is that the investors today are very specific in looking for quality.

[00:20:36] And the number one thing they're looking at is did the invisible DSO provide the support and services that drove organic growth across their practices, both in the top line and the bottom line?

[00:20:47] And so, you had several recapitalizations that were pulled last year, meaning they started the process and didn't get the bids they wanted or the values they wanted.

[00:20:57] And that's because they had not done a good job of growing their partner practices or integrating them.

[00:21:04] And so, now those groups are going back to the drawing board with less capital and fixing their business model.

[00:21:11] In other words, their business model was let's aggregate revenues and not provide services.

[00:21:15] But those that have done it correctly are having no trouble in recapitalizations or getting financing right now.

[00:21:22] But you have to have organic growth.

[00:21:24] And with organic growth, what kind of growth are the capital providers looking for?

[00:21:30] Is it double digit year over year to metricize a little bit of what they can deem as a good investment?

[00:21:37] I think there are a lot of different ways to look at that.

[00:21:41] And I don't think any of the bigger invisible DSOs are seeing double digit growth.

[00:21:47] The particular one that I talked about with 700 offices managed to grow their average EBITDA of their 700 partner practices last year by over 5%,

[00:21:57] which is a big number given the inflationary pressures, the labor issues and everything else that was going on in 23.

[00:22:04] So it's not double digit, but it's consistent, reliable, organic growth across the platform.

[00:22:11] It's really so great to hear that because as we know, the history of DSOs rolling up these practices and just focusing on revenue is not going to provide both economic value and improved care for the patient.

[00:22:26] And I think we put it all together.

[00:22:28] We said all things being equal, if these organizations could take the doctor's pressure of being a business person, a technology expert, having the capital and the resources to do these new things, bringing on new associates,

[00:22:43] all the things that do drive organic growth. I personally deeply live in that world.

[00:22:48] There is such a great advantage of putting the focus on this ad value for the capital partner, bringing this to the industry.

[00:23:00] So with that in mind, as you're looking at and Chip, you've been at this now really since it started taking off.

[00:23:07] Where do you see it going as you have this new fresh capital that's not interest rate sensitive?

[00:23:14] Where are we seeing the next three to five years as it relates to the growth that Marie was talking about of the DSOs and the invisible DSOs within the industry, but also then the improvement of valuation, even for the solo docs or these multi-doc offices that are a good target for these new capital partners.

[00:23:34] Where are we going with it?

[00:23:36] The key elements today for value, and we're getting record values for practices.

[00:23:40] You asked about multiple ranges.

[00:23:42] I don't think we did more than one or two transactions last year at less than seven times EBITDA.

[00:23:49] And just this year, we've done multiple transactions at 10 times EBITDA so far in 2024.

[00:23:55] When we're closing one in about two weeks at 11 times EBITDA.

[00:23:59] So if you have a practice, which is growing key issue there, you have to be growing.

[00:24:05] Number one, you're relatively young and you have a vision and a plan.

[00:24:10] These groups are very interested again in organic growth.

[00:24:13] So they're most excited about partnering with practices where the doctor has a plan for growth himself that they can provide the capital and resources to go execute.

[00:24:22] As long as you tick those boxes and you don't have a six in front of your age.

[00:24:27] Now, you can have a six in front of your age if you have multiple younger associates.

[00:24:31] But single-doc practices with a six in front of their age with no associates, their value is going down every day.

[00:24:39] And I'm 64, so I get to pick on old people.

[00:24:42] But it's really...

[00:24:43] He's the new 40 chip.

[00:24:44] I don't know what you're talking about.

[00:24:46] Yeah, I turned 64 last week.

[00:24:48] I feel it.

[00:24:49] So it's the younger doctors functionally because there are doctors in their 30s and 40s eager to do these partnerships.

[00:24:56] If I'm an invisible DSO, I would rather partner with a doctor that has a 20-year practicing horizon than a doctor who's got a five-year practicing horizon.

[00:25:05] So functionally, you've had the interest from the younger doctors squeezing out the docs with the six in front of their age.

[00:25:12] Doesn't mean they're not a doable transaction.

[00:25:15] They are, but the values are different.

[00:25:17] It's interesting.

[00:25:18] I love that you're teasing out what makes an attractive practice for a transaction like this.

[00:25:24] We've talked a lot about how innovation could be factored into the valuation of a practice and how an innovative practice could demand a higher valuation because the quality of the revenue profitability is different.

[00:25:39] Because at the end of the day, innovation is about doing things more efficient, having a higher stickiness and better experience with the patient and being able to attract more new patients because they're coming to the office.

[00:25:51] And so I really appreciate you breaking down some of the criteria of what makes a good investable practice for partners or investors who are looking to be part of that invisible DSO opportunity.

[00:26:05] Because that organic growth that you're describing, yes, there is a huge shortage of dentists, but you still need to be able to differentiate.

[00:26:13] You still need to be able to provide a high quality service for all these patients and need to be able to use technology appropriately.

[00:26:19] So just putting a finer point on what you were describing there.

[00:26:23] Chip, in your experience, the practices that command 7 to 10X you've been down, do you see any differentiation between specialty, pay your mix, patient population, geographies, or do you truly believe it's much more about organic growth, having a plan and having a well-oiled machine and a team popping it together?

[00:26:47] That's a fairly complex question, but let's start with geography.

[00:26:52] One of the interesting effects of COVID is that the, we'll call it the flyover states, the Midwest have become more popular.

[00:26:59] There are groups from the coasts that have said, we need to diversify because of COVID indicated to us that being regional only is not necessarily a good thing.

[00:27:11] So our highest value deal as a multiple for a GP last year was actually done in Michigan, not Florida, not Texas, not Tennessee, not Arizona, Colorado, Utah, Idaho, which are along with South Carolina.

[00:27:24] Let's call them the hot states from a geographic perspective.

[00:27:28] We had clients in Florida last year where we had 12 and 15 qualified bidders for them.

[00:27:35] So oftentimes the states that have growing populations, less regulation, better politics are attracting more bidders.

[00:27:44] So for instance, Indiana is a very popular state and will command a value significantly higher than Illinois.

[00:27:52] And again, it's politics, it's taxes.

[00:27:55] And in Indiana, it's due to the expanded function dental assistant regulations they have there where the FDAS are able to do procedures in Indiana that they couldn't do in Illinois.

[00:28:06] So, so yes, geography matters.

[00:28:09] Growth matters, but it's not slowing down at all.

[00:28:13] A practice in Dallas will probably have more bidders and achieve a higher value than a practice in Shreveport.

[00:28:20] But as long as you're not rural is still tough.

[00:28:23] It's always been tough because the groups are worried about geography and recruiting.

[00:28:28] They're worried about the ability to recruit doctors to replace or add to their partner practices.

[00:28:34] The definition of rural in our world is that you are more than a one hour drive from a commercial airport.

[00:28:40] Oh, OK.

[00:28:42] So that very distinct definition doesn't mean you don't have a practice that's not incredibly profitable.

[00:28:48] And doesn't mean you're not going to have multiple bidders, but it's going to be different because of the recruiting issues.

[00:28:54] And recruiting issues are really what's driving a lot of doctors to invisible DSO partnerships at the moment.

[00:29:00] We're seeing it heavily in oral surgery.

[00:29:02] Oral surgery has a massive recruiting problem.

[00:29:05] There'll be maybe 250 graduates from residency programs this year.

[00:29:10] A hundred and fifty of those have already signed up with invisible DSOs.

[00:29:15] Wow. OK.

[00:29:16] Twenty five are going to public service, which means there are 75 residency graduates in oral surgery that are available to be recruited by the six thousand independent oral surgery practices across the U.S.

[00:29:30] So you see multiple independent oral surgery practices eager to join an invisible DSO if for no other reason than to solve their recruiting problem because you can't grow without more doctors.

[00:29:41] That's fascinating.

[00:29:42] Do you? I want to just double click on the specialties here, because on one hand, we talk about oral surgery.

[00:29:50] We talk about general dentistry.

[00:29:53] I'm going to connect us back to dentists talking to, as Jonathan said, talking to the patients about sleep, like sleep dentist and connecting with the sleep specialists on the medical side.

[00:30:06] UnitedHealthcare just came up with a new medical policy that says before a patient is requesting an approval to go get surgery for OSA, they need to fail oral appliance therapy.

[00:30:22] Now we have this additional demand from medical where patients who can't get a CPAP because of the all the issues with the supply chain that we're getting from Philips and the other manufacturers.

[00:30:34] Now all these patients need a solution and they're going to be coming into the dental office asking for oral appliance therapy.

[00:30:41] So tell us a little bit more about that differentiation between different specialties.

[00:30:45] And what do you see? That's going to be another shortage of sleep dentists, for example.

[00:30:51] It's interesting in that sleep dentistry, a lot of doctors have tried it and very few of them have been successful at it.

[00:30:58] For what reason? I don't know.

[00:31:00] I think part of it is many have attempted to deploy medical billing within a dental environment and that's been challenging for them.

[00:31:09] So we rarely see a successful sleep dentistry focused practice.

[00:31:16] There are many who have tried. We've seen very few succeed.

[00:31:20] But it's again, I think the invisible DSOs and the DSOs will ultimately master that.

[00:31:25] And therefore they'll be a big beneficiary of that change in when UnitedHealth is what? First or second largest coverage?

[00:31:33] The largest health plan in the US.

[00:31:37] That's going to be a boon for doctors because it's going to be interesting.

[00:31:42] So for purchase base, yes.

[00:31:45] That reimbursement. Let me switch gears a little bit, Maria, if I can.

[00:31:48] Chip, looking at the different specialties, you talked about oral surgery, but the multi-specialty dental practices, the pedo ortho practices,

[00:31:59] this kind of the white space of where a lot of the investment capital is going.

[00:32:04] Can you tell us a little bit about that? Where we are today and where do you think that's going to be going into the future?

[00:32:10] Is it going to continue to grow?

[00:32:12] Yeah, it's specialty is really interesting in that seven years ago or maybe now eight, there were few, if any, single specialty invisible DSOs.

[00:32:24] The first of the big single specialty and invisible DSOs started in ortho about eight years ago.

[00:32:30] Two doctors got together. That group now has 400 offices across the country.

[00:32:35] And there are now 14 ortho only invisible DSOs across the country competing for great ortho.

[00:32:42] You've also seen the invention of the single specialty oral surgery practices of which there are now 17 invisible DSOs that are oral surgery only.

[00:32:52] And then you've had oral surgery groups that became what we call surgical trifectas.

[00:32:57] And these are oral surgery, perio and endo invisible DSOs that focus in the same communities.

[00:33:04] And one of the biggest trends that we've seen is the creation of the dental trifecta invisible DSO.

[00:33:10] Now, these are groups that are focused only on pediatric orthodontic and oral surgery practices in the same community because as they add other practices to the family,

[00:33:21] they refer within the family. So you get that much vaunted organic growth.

[00:33:26] So if I have an ortho practice in Oklahoma City and I add a pediatric and an oral surgery practice to that,

[00:33:34] all of a sudden my ortho is growing organically because the pedo is referring to the ortho and both the pedo and the ortho are referring to the oral surgeon.

[00:33:43] Exactly.

[00:33:44] Four years ago, we helped start the first of the big dental trifectas.

[00:33:48] And in 35 months, we took them from my idea in the summer of 19 to 211 offices in 13 states in a recap at 20 times EBITDA.

[00:33:59] And the only reason they got that multiple, and that was the highest recap multiple in the history of DSOs.

[00:34:04] The previous record had been set by Blackstone for a multispecialty group in Dallas at about 17 times EBITDA.

[00:34:12] But that group got that high multiple because A, they had focused on younger doctors and they had double digit organic growth thanks to changes in referral pattern.

[00:34:21] So think about that in eight years, you've gone from zero specialty focused invisible DSOs to well over 50.

[00:34:29] There are six endo only invisible DSOs and there are five perio only invisible DSOs.

[00:34:35] And one of the big growth areas in the last two years has been the implant and all on X focused invisible DSOs.

[00:34:41] So a lot of changes in specialty.

[00:34:44] Chip, I have a personal feeling about a big future white space because I know what my practice has been able to do in the last three to five years with double digit growth over every year.

[00:34:57] And I've practiced that three decades old and it was the realization of putting all the special, some prosthodontists, but general dentists do this, putting all the specialists under one roof.

[00:35:07] Interdisciplinary diagnostics, so you have your orthodontist, you have your periodontist, you have a prosthodontist that's also implant surgically trained.

[00:35:16] You have your hygiene team, everybody's working collaboratively in the perfect world.

[00:35:21] Do you see that as a possible area where, because you have a hot, very high level of diagnostics and specialty care and it will drive very positive margins.

[00:35:32] Do you see that as a possible new direction for the smart capital partners coming into the space?

[00:35:39] We're seeing that in the fact that the GP focused invisible DSOs, of which there are obviously hundreds, are now adding specialty in house.

[00:35:50] And they're either doing that by partnering with specialists within the community.

[00:35:54] So there's one group that has 40 plus GP offices in a major Western city and they're eager to partner with specialists in that city that are within referral distance because they know they can drive volume into those specialty practices.

[00:36:09] So having it under one roof personally, I think is better, but you have to make the capital commitment to make that possible.

[00:36:17] But you're having many of the GP focus groups add specialty.

[00:36:21] Some are not, some are focusing only on GP and not worried about specialty.

[00:36:25] But yeah, it's definitely a coming trend to put them under one roof because it's better patient experience.

[00:36:30] And if you look at the young specialists coming out, whether they're orthodontists, periodontists, the notion of them opening up their own practice, putting the shingle out, expecting the referrals to come in.

[00:36:42] There's a trend, of course, for these specialists to be going to the restorative practices or the prosthodontic practices and partnering with them and working in multiple practices.

[00:36:53] I see this trend, especially in the larger cities like our New York City.

[00:36:58] Do you see this as a trend that's going to continue within dentistry?

[00:37:02] Yeah, I do.

[00:37:03] Recruiting is tough across the spectrum and the invisible DSOs are better recruiters than independent dentists.

[00:37:10] And the kids coming out of school today have a lot of debt.

[00:37:13] And so, for example, at the Amos show, the American Association or American Academy of Oral and Maxillofacial Surgery show a couple of months ago, you've got Aspen with their booth there.

[00:37:24] $750,000 first year guarantee to be an oral surgeon traveling around the Aspen offices.

[00:37:31] And that has become much, much more difficult because, again, the recruiting environment, the invisible DSOs are offering $500,000, $600,000 a year first year guarantee to these specialists.

[00:37:43] And so independent dentists are having a tough time recruiting those people because the kids coming out of school are like, I got a massive amount of debt.

[00:37:51] I need to make a guaranteed income.

[00:37:53] The I'm going to go hang out my shingle and start my own practice has gotten tougher because you're going to have to go into more debt to do that.

[00:38:00] That's right.

[00:38:01] With higher interest rates, that's challenging.

[00:38:03] It's difficult.

[00:38:04] It's challenging.

[00:38:05] Let me ask this one question as we're thinking about wrapping up.

[00:38:08] The dentist that goes into the DSO or the ideas and they want to have some level of equity.

[00:38:15] What are you seeing in the agreements and the contracts for these young dentists and for our listeners, for the young dentists?

[00:38:20] What can they hope for to have some equity to be able to share in the overall profitability of that practice?

[00:38:28] That's one of the great recruiting tools that the invisible DSOs have that the independent dentists do not.

[00:38:34] Is that they in a transaction are going to structure a path to partnership for the existing associates within a practice that partners with an invisible DSO.

[00:38:44] But probably more importantly, in the recruiting process, they're going to give those new recruited associates an opportunity to become owners in the parent company.

[00:38:54] And they're going to do that in a structure that does not require the dentist to go to the bank to borrow money to buy equity.

[00:39:02] They're going to create an earn in as you go, typically saying, hey, look, as long as you're here five years, here's $250,000 of equity at today's price.

[00:39:11] And so you're going to benefit from the growth and the value of that equity over the next five years.

[00:39:16] And as long as you're here at the end of five years, you will have the opportunity to cash that in.

[00:39:20] So it's potentially a very lucrative upside for young doctors.

[00:39:25] And it gives their partner practices an edge when recruiting the best doctors.

[00:39:29] And that's the competition within the idea.

[00:39:31] So it's the S.O.S. for a limited number of doctors that are coming out of programs in schools.

[00:39:37] It makes tremendous sense. Maria, you know how amazingly informative this is for our industry, for our listeners who are thinking of either partnering with their idea or thinking of expanding their practice.

[00:39:50] And how do I get expertise and capital to help me do that?

[00:39:54] So I need to partner and also on the other side of the coin, the S.O.S. for them to hear what Chip, who has been at this and at the forefront of really innovating, helping to innovate these transactions and just amazing conversation.

[00:40:09] Yeah. Thank you, Chip, for shedding the light on this invisible trend, if you will.

[00:40:15] True.

[00:40:16] Because there's a lot of activity and massive, you know, I mean, $4 billion of reinvestments and into that space.

[00:40:24] This year only, just in the last 90 days.

[00:40:27] Let's just acknowledge that it's a huge opportunity.

[00:40:31] And I'll just connect a couple of dots for those of us, for those of our listeners who are entrepreneurs building solutions in connecting dots between medical and dental or offering technology that allows dentists to be more efficient in their workflow or in their administration or in their diagnosis.

[00:40:50] Please consider the invisible DSO as a potential accelerator and path to market.

[00:40:56] And then for those investors who are looking for a high growth, high return, fast developing opportunity to play some intention and well thought out bets.

[00:41:05] It sounds like there's a great there's a pipeline of great opportunities in the invisible DSOs consolidations.

[00:41:11] Chip, what is a good way for our listeners to follow your work and to stay involved and keep following that trend?

[00:41:18] I urge every doctor to go to largepracticesales.com and you'll find information about this and you'll be able to contact me.

[00:41:27] And let's set up a call.

[00:41:29] I learn something from every dentist that I talk to every day.

[00:41:33] And so my goal really in my career is to educate every dentist on what is an invisible DSO and why it may or may not be a fit for every doctor.

[00:41:44] So let's learn something.

[00:41:46] Largepracticesales.com and you can set up a call with me.

[00:41:50] Thank you. We'll leave it there.

[00:41:51] Thank you. This was a great episode and thank you for coming to talk to us today.

[00:41:55] Thank you.

[00:41:56] Hope you have a wonderful week and thank you, doctors, for your time.

[00:41:59] Thank you, Chip.

[00:42:00] Thank you so much.

[00:42:01] Thank you, Maria.

[00:42:02] Awesome.

[00:42:03] Thanks for listening to the Think Oral podcast.

[00:42:13] For the show notes and resources from today's podcast.

[00:42:16] Visit us at www.outcomesrocket.health.com or start a conversation with us on social media.

[00:42:26] Until then, keep smiling and connecting care.