“Value-added partner” is a term that gets thrown around loosely in the world of M&A. Aside from being an effective marketing pitch, true value in the form of deep operational and industry expertise can provide material lift to business owners looking to sell their life’s work. Large Practice Sales, an M&A Advisory firm focused exclusively on advising dental practitioners (as well as a Top 50 Healthcare firm on the Axial network), is about as value-add of a partner as you can get.
We recently sat down with Maxwell Sellers, EVP at Large Practice Sales, to learn more about the trends driving M&A activity in the dental space, and why dentists don’t have to wait until retirement to secure their financial futures.
Q: Maxwell, thanks for sitting down with Middle Market Review. Tell us more about Large Practice Sales and your firm’s specific focus.
A: Large Practices Sales (“LPS”) advises general dentists and dental specialists on their pursuit of a partnership. We have helped 200 doctors since our inception choose the right partner for the next step of their career. We focus on a very specific type of doctor. One who is in the middle of their career, has hit some sort of growth plateau, and needs to leverage a partner to help unlock value out of their practice they couldn’t otherwise do themselves. The differentiating factor for our team is we have been in the shoes of these doctors as entrepreneurs ourselves. We have seen the same struggles our doctors face today as many of our team members have built businesses, operated them, acquired other companies, and have had successful exits. We see first-hand and understand the headwinds and tailwinds the dental industry faces both on a micro and macro level. Our team’s comprehensive understanding on the consolidation life cycle of businesses allows us to be educators on the different partnership models the dental industry has today and what will be offered in the future.
Q: What are some of the major trends shaping M&A in the dental industry today?
A: From our point of view, the major trend at the moment is the pursuit of platform multiple expansion which comes in many different forms.
First, domestic and international regional diversification has been top-of-mind for most groups looking to partner with our clients. You’re starting to see increased cross border M&A activity as new private equity sponsors enter into dental with already established groups that have real infrastructure and scale. There is also a new beginning of what some have deemed the “consolidation of consolidators” where strategics are acquiring one another. Our view is that this will be a continued theme throughout the life cycle of consolidation in the dental industry both on a domestic and international level.
Secondly, there has been a heightened focus on creating new lines of services for patients that is shifting towards a more value-based care model through referral patterns of in-network partners. The most notable model we believe that drives a premium platform valuation at exit is the pediatric dental, orthodontic, and oral surgery model. We think next year when these types of partnership models go to recapitalize their business, they will be the ones that the dental industry is most excited about due to the valuation they will receive. These types of value-based care models create two times the equity value through organic growth versus the singular focus on just acquiring one-off businesses. Something that has been interesting to us is you’re starting to see pure-play buyers contemplate bolt-on transactions of other specialties to mirror this type of value-based care model where the patient follows the value chain of the business.
Lastly, the trend that has probably been most talked about is how do these groups evolve capital structures to remain competitive in a market that is bearing new buyers on a monthly basis. We believe that these organizations will seek the public markets via an IPO or SPAC. Those contemplating public markets have a proven track record of growth and have gone through multiple recapitalization events where their doctor partners get to share in the success. We see this as a competitive advantage as the valuations for healthcare companies in the public markets is much richer than those in the private markets. Groups that are still scaling and are in the nascent stages of their growth, will be pursuing the re-financing of their legacy credit facilities with much more favorable debt covenants to help their continued path of growth as they work themselves into a new band of operating EBITDA.
These three trends signal to us that there will be continued increases in pricing of dental practices given their resiliency during COVID. We do believe at some point this will plateau given the shifts in monetary and fiscal policy.
Q: For the uninitiated, what is an IDSO?
A: An Invisible Dental Support Organization (“IDSO”) may own dozens or hundreds of practices regionally or across the country. Like a regular Dental Support Organization (DSO), they own interests in dental practices and support the doctors who operate the practices with administrative support, effective marketing, large purchasing efficiencies and strong payor leverage among many other services.
An IDSO believes that doctors should also be owners in the practices they operate and that the doctor’s local brand equity is more valuable than a common brand among all practices. An IDSOs portfolio of practices will vary. Some are GP only, some are single specialty, many offer multi-specialty and a few focus on concentrated multi-specialty. An IDSO’s primary goal is to invest in great practices by buying part of a practice with a doctor retaining ownership in the practice, the parent or a combination of both.
IDSOs do not micromanage practices and each of their partner’s will be unique, not homogenous. By retaining owner doctors, IDSOs are more profitable and productive than employee run offices of the branded chain DSOs.
Q: Tell us more about your “cash now, wealth later” strategy and why it works for so many dentists
A: Effectively any business selling itself is trading future cash flow for cash up front. In the case of IDSO transactions, dentists are getting cash up front for a percentage of their business as a part of the consideration. The other piece of the consideration is equity ownership in the acquiring entity. Over 30 years of IDSO consolidation, investors have proven for themselves and doctors that significant gains in the value of the equity is possible. The recent recapitalizations of DECA (Blackstone), US Oral Surgery Management (Oak Hill), and US Endo Management (Quad C) have proven that doctors can achieve MOIC on their retained equity of 3x to 7x in relatively short time frames.
Q: You’ve been very active in the under 45 demographic. Tell us more about that. Is this a new trend? If so, what’s driving that trend?
A: Historically DSO and IDSO transactions have been focused on doctors nearing the end of their careers with most DSOs completing 100% buyouts of doctors nearing retirement. The IDSO focus is on partnership with doctors which have five, ten and twenty-year time horizons. Younger doctors are grasping that IDSOs can provide operational benefits, but just as importantly, potentially massive upside gains in their retained equity. The younger doctors can participate in multiple recapitalization events when their time frames are longer than five years. We will complete over $50 million of transactions in December for doctors under 40 and have completed $500 million of transactions for doctors under 50 in the last 18 months.
Q: What’s next for the dental industry?
A: On a macro level, dental will mirror much of what the veterinary industry has seen – extremely competitive, rich valuations, and new creative partnership structures to differentiate themselves. On a micro level, we believe recruiting will be a challenge across the board. We think functions for clinical staff across all specialties will be expanded. With access to care still being a focus, this will result in more dentistry services needing to be completed over the next ten years than its historical average, especially after COVID. Lastly, the partnership models that deliver on their partner economics and support for their doctors will continue to be leaders among their peer groups regardless of their thesis.