How Dentists Can Grow their Practice with an Invisible DSO

Art Wiederman, CPA: And hello, everyone, and welcome to another episode of The Art of Dental Finance and Management with Art Wiederman, CPA. Welcome to my podcast. I'm your host. I'm Art Wiederman. And for those of you that are new to the podcast, I am a dental division director at the CPA firm of Eide Bailly. I'm located in Southern California in the city of Tustin is where our offices. I live in South Orange County. It is a beautiful Thursday afternoon and we're recording this podcast today. And you know, folks, many of you been listening to me for and I can't believe it, it's two and a half years that I've been doing this. Two and a half years, December of twenty eighteen. We started this journey. It's just amazing to me.

And I have interviewed some of the icons in dentistry. I've interviewed the president and executive director of the American Dental Association. I've interviewed a lot of really cool consultants and financial people. And every time I meet, I meet new people in dentistry all the time. And I have met somebody whose company and concept fascinates me. And I wanted to share it with you today. And I'm going to be chatting with Chip Fichtner, who is the founder of a company called Large Practice Sales. And we talk on this program not you know, it's not 75 percent of the program, but we bring up and do episodes often on transitions because that's a big part of your career and your retirement and everything like that. And I'm a dental broker and I sell individual dental practices to individual doctors. But as many of you know, the DSO market is growing out there and good practices represent, from what I hear, twenty to twenty five percent and growing of dental practices.

Well, Chip and his company work with thing. Not things. It's not a thing. They work with entities called Invisible DSOs, which as I chatted with Chip about this, it just fascinated me. And what it does is it allows you to keep a lot of the control of what you're doing in your practice and leverage some of the equity and grow your practice and hopefully have something down the road. So we're going to chat with Chip about what an invisible DSO is, how it works, who is a candidate for it.

And my objective in this, doctors, because I again, I get nothing from having anybody come on my podcast. Nobody has ever paid me a dime to do this. But my goal is to educate you, OK? And the goal is to make sure that you have lots of really good information. So we'll get to Chip Fichtner in a minute.

I do want you to go to our wonderful partner, Decisions in Dentistry magazine, go to their website at www.DecisionsinDentistry.com, and they have amazing clinical content. One hundred and forty continuing education courses that you can access for a very low monthly fee. And they've got a lot of really exciting stuff coming down the road in the next year, which I'm not at liberty to share with you. But they are just growing their educational platform for dentists both on their in their magazine and on their website. So go to their website.

And if you want a complimentary consultation with any member of the Academy of Dental CPAs, please go ahead and call. Go to our website, which is www.ADCA.org. And we are twenty four members, twenty four dental CPA firms that represent over ten thousand dentists. I'm one of the founding members of the group which we founded twenty years ago in a couple of months. So with that said, I got a couple of things I want to share with you. Number one, we are recording this podcast on July 8th twenty twenty one. I've been stamping them ever since the pandemic started and this podcast will air on July twenty first. So in about two weeks, this one will come up on the Internet.

So at this point, I want to remind all of you who have not filed for your PPP round one loan forgiveness. We are working very closely with a lot dozens and dozens of doctors and helping them file for their forgiveness and obtain the Employee Retention Tax Credit. So if you have not filed for your forgiveness, most of you are going to have to file by pretty much sometime between the end of July and the end of August. It's twenty four weeks after the day you got your loan and then ten months after that, if you file one day later, you're going to have to start making payments. Probably over two years, so it's a big payment if you had a greater than 50 percent reduction in your gross receipts in the second quarter of twenty twenty, which is the quarter that everybody was shut down. Give me a call at six five seven two seven nine three to four three or email me at awiederman@EideBailly.com.

We're getting we I just looked at my spreadsheet. We are over two million dollars of credits that we have gotten for our clients from the Employee Retention Tax Credit. The other thing I want to share with you is that we're going to be airing on August the 4th, a wonderful podcast with Tyler and Ashley two partners at our CPA firm Eide Bailly. And we're going to be talking about the HHS Provider Relief Fund. I also want to remind you, if any of you, any of you in any dentists who are listening, received more than ten thousand dollars from the Provider Relief Fund before June 30th, and that would be anybody probably who was doing Medicare or Medicare Dentical in California, you would have gotten those checks. If they're over ten thousand dollars, you must report to the HHS Department of Health and Human Services by September 30th. But we're going to have a whole episode on that.

For most of you who got your money in August, the two percent payment, you're not going to have to report until January of twenty, twenty two. But we're going to go through all of that with you. So with that, I'd like to introduce my guest. Chip Fichtner is the founder of Large Practice Sales. Large Practice Sales is a company based out of Dallas, Texas. They have about 15 employees working with them and they work with doctors who want to transition their practices into not the traditional DSO, but an invisible DSO. And we're going to talk all about that, if that's right, for you, if it's not right for you. But today is a call to action like every one of my podcasts or is. We want you to be educated. So, Chip Fichtner, welcome to the Art of Dental Finance and Management.

Chip Fichtner: Thank you. I appreciate it. I'm looking forward to talking with you as well.

Art Wiederman, CPA: I'm looking forward to talking to you, too. So is it 120 degrees in Dallas today?

Chip Fichtner: You know, actually, I am in Maryland on the rural eastern shore of Maryland today enjoying a beautiful day.

Art Wiederman, CPA: Nice, nice. I like that, but it's really nice here in California, too. So, Chip, before we get into I mean, the topic, give us a little bit of your professional background and what you do, what you've done, and how did you end up starting the company and a little bit of that.

Chip Fichtner: Well, I am an ex Bear Stearns guy from 1980, 1981, so I have an investment banking background to some degree, and I left that industry and started buying, selling and building and starting companies from my own account and have built and sold probably two dozen companies at this point across a variety of industries. About 10 years ago, I bought a company in the dental industry and I knew nothing about dental then. And frankly, I still don't know a lot about it. But we bought that company it was located in Utah and we decided to move it someplace that was centrally located.

And being a boat guy, we moved it to Fort Lauderdale, Florida, and built it and sold it. And in that process, one of my clients who had a 18 office multi specialty practice came to me and said, hey, you're an ex investment banker, can you help me sell my practice? And I said, you know, I don't know a whole lot about selling practices, but if you pay me enough, I'll learn. And so we did. And we got him a great value for his practice. And that was over five years ago. And so we learned about helping larger practices monetize a part of their practices. Our model is based on the theory that doctors don't need to sell all of their practice and doctors we've done transactions for doctors as young as 32. So we're all about helping doctors find partners to help them grow.

Art Wiederman, CPA: So that's interesting. You bring up a 32 year old that you that you helped sell their practice Chip. So, yeah. I mean, you're living in this landscape every single day. You see how practices are sold. I mean, we have individual doctors selling to individual doctors. You know, some of the doctors are selling their practices well before retirement for lots of reasons. I mean, when you talk to doctors that are in their 30s and 40s and even their 50s, what are the reasons they're giving to you that they want to maybe enter into this realm?

Chip Fichtner: Well, it's not about selling your practice, it's not about transitioning, it's not about retirement, it's about realizing the fact that the dental industry is consolidating rapidly. To put it in perspective, many people believe that the dental support organizations or DSOs are backed solely by private equity. The reality is that the dental support organizations are backed by private equity, family offices, SBICs and other types of investors. Right. And the dental consolidation thing is growing rapidly. Private equity alone put 10 billion into dental consolidation in 2016. In 2019 they put 40 billion into it. This year we expect they'll cross 100 billion.

And then you add the family offices and SBICs and the consolidation of dental is growing really fast. And that's an opportunity for doctors to partner with these groups and not sell all of their practice. And this is not a retirement strategy. This is an opportunity to partner with a group that can provide resources to the doctor to help their practice grow bigger, better, faster and more profitably. And the doctors retain an ownership interest such that they benefit from those resources and the value of their practice and that retained equity can grow exponentially.

Art Wiederman, CPA: OK, so let's take an example. We have a doctor out there who's listening, who's got a practice doing, you know, a million and a half, two million dollars. And they you know, they have a reason. They maybe they want to get a little bit out of management. Maybe they stay in management. How would this work? OK. They would come to a company like you guys and they would say, I would like to find a suitor. And there are, you know, invisible DSOs, maybe start out with what is an invisible DSO? What. Define it for me.

Chip Fichtner: Great question. So there are and there have been for over 30 years dental support organizations who started out traditionally acquiring 100 percent of a GP practice and the doctor would work for several years for them and that DSO or dental support organization would take over the management. They would potentially rebrand them to create a national brand, whether that's Monarch or Bright Smiles or Aspen or whoever. And the doctor would sell 100 percent of his practice and work for the group and then he would retire.

Well, that model over the years has changed such that the majority of the transactions today are being done by what we call invisible DSOs. And invisible DSO is a group that you've probably never heard of. And they may own dozens or hundreds of practices across the country. And there are well over 100 of them today just in GP. And then there are another 50 or more in specialty. And these groups may own dozens or hundreds of practices. But you never heard of them because their models a little different.

What they'll do is come into a practice to a doctor. And the youngest doctor transaction we've done was the 32 year old doctor, and he sold fifty one percent of his practice for cash up front, which fortunately today, the majority of which will be taxed at long term capital gains tax rates. And he about forty nine. Yep, we will. Important topic, but he retained a forty nine percent ownership interest in his practice and therefore he now benefits from being a part of a bigger family.

And they're not telling him what to do and when to be open and what color to paint his lobby. And they're not changing his name and they're not telling him who to hire and who to fire and what to do and what insurances to take. They're investing in him because he's built a successful practice. And their model is based on the theory that they want owner doctors in practices because practices with an owner doctor are better run and more profitable than an employee run practice. And that's been proven over and over again. And that's why the majority of the groups that are making acquisitions today are utilizing the invisible DSO model to grow their business. And there are groups out there that are making 100 hundred acquisitions a year.

Art Wiederman, CPA: Wow. So you said, Chip, in some of your comments that the invisible DSO doesn't make him change the paint or the name, your name or branding. I know I've seen some of these large DSOs like the ones you mentioned where they have a list. I've seen the list. You will use the recommended lab, the recommended dental supply company, the recommended down to the paperclips because it's all about making profit. So are you saying that these groups basically come in, they're investing money and they just kind of step back and watch what happens. I mean, do they give any kind of management assistance to the doctor?

Chip Fichtner: You know, it depends. Each one has a different operating philosophy. But as an example, you know, gloves are a very personal thing for doctors. And when you have a DSO that acquires 100 percent of a practice, they're going to go, here's our formulary. This is what you're going to do. With the invisible DSOs they don't do that. They go, you know what, you're happy using the brands of supplies that you've been using for years or decades. Just keep using those it works for you. But if you don't mind, would you buy them under our purchasing contract because we're paying 25 to 30 percent less than what you are for the same product?

They are they are not asking the doctors to change what they do. They don't want to try and fix what's not broken because these groups are only investing in great practices. They're not buying marginal practices. They're only buying great practices. And they want the doctor to continue to do what he has successfully done in the past. And yeah, you may save a few bucks by commanding the doctor to use a specific lab, but that's not their model. Their model is to invest in great practices and don't break what they just spent millions of dollars buying. So they are very hands off.

On the flip side, they'll take over some of the administrative functions. Virtually all of them will take over banking payroll, benefits and benefits administration. But after that, they're all a little bit different in how they execute their plan. But as a general rule, they are incredibly hands on.

Art Wiederman, CPA: And so who are these? Did you say they are private equity? They're big companies. I mean, who are the buyers? And, you know, obviously we're not going to mention any names, but who are these invisible DSOs?

Chip Fichtner: You know, there are literally over 200 invisible DSOs out there today. Some are small. They may only own five practices and some are large. They may own 500 practices. So they're each a little bit different. They are generally financed by some sort of institutional capital, meaning a private equity group, a family office and SBIC, which stands for Small Business Investment Corporation. But there's always a doctor leading the organization and making we'll call it the parent level clinical decisions. The doctor, of course, is always making their own local level clinical decisions. But these are doctor led organizations that are backed by deep pockets, without exception. The types of the pockets differ, but as a general rule, they are doctor led organizations.

Art Wiederman, CPA: So you talked about Chip, you talked about the fact that they only want to buy great practices. So what would be a model of a practice that one of these groups would be interested in?

Chip Fichtner: You know, as a general rule, they were only achieving the kind of values that we achieve with practices that are doing call it a million and a half and above in collections. And that would be true for GP and pretty much all specialties. There's been an acceleration of interest in the specialties in that there have been at least 40 DSOs formed in the last two years that are focused on specialty only. And there have been far more than that formed that are focusing on GP. It is a rapidly growing business at the moment, but generally speaking, a million and a half in collections and up are going to be able to achieve the kind of values that we get from invisible DSOs for our clients.

Art Wiederman, CPA: And what kind of profit margin do we need to be looking at? I mean, I have some doctors whose profit margins are 40 plus percent and I've got others who are not really that great.

Chip Fichtner: Well, you know, it's interesting in this business, there are some definitions of things because profit margins, does profit margins include compensation to the doctor or does it not include compensation to the doctor? Right, right. I mean, you've got to look at the map, you know, a typical invisible DSO who owns a GP practice that's doing two million in collections is going to expect that practice to generate about a twenty five percent profit margin, EBITDA margin after doctor compensation. And in the specialty practices, it can be higher.

Art Wiederman, CPA: OK, so let's talk about valuation, because that's what a lot of folks who are interested in and you talked about EBITDA and EBITDA is a term that we CPAs know pretty well. You live and breathe it. And but how do you know, if I if someone brings you a three million dollar practice or a group of maybe four or five offices doing five million or six million or something like that, how does the valuation of that practice say, I have a doctor's got a two million dollar practice and they go to the local broker and the local broker? I mean, we value here in Southern California usually 80 to 90 percent of gross revenues, two to two and a half percent of true net profit, which is does not include compensation of the doctors, but EBITDA is very different. So talk about the valuation of a practice when one of your invisible DSOs that you work with are looking at the doctor doing two, two and a half million.

Chip Fichtner: OK, the you know, the and EBITDA, by the way, stands for earnings before interest, taxes, depreciation and amortization, it's functionally the cash flow of a practice and in the way the invisible DSOs evaluate EBITDA, they look at it after a doctor compensation calculation. So in the world of GPs going to get paid somewhere between 30 and 33 percent in the endo world, they're going to get paid somewhere between 35 and 40 percent of collections. And in ortho, the majority of them are using a fixed annual salary. So the buyer's definition of EBITDA is after doctor compensation.

So first thing you want to look at is overhead. So for easy math, let's take it to your GP practice that has a 50 percent overhead number. You're going to pay the doctor 30 percent for generating that two million in collections, assuming there's no hygiene, because in these models, most doctors don't get paid on the majority of the hygiene. Right. So now you have a practice with two million in collections is going to have an operating profit of 20 percent of two million. So four hundred thousand dollars. So that would be the EBITDA of that imaginary practice. Right.

And in our world, depending on where the practice is, how old the doctor is, how long he's willing to stay, what other practices might be in the area that would be complementary. We do a lot of deals where we get a client in an area and then collect other clients in the area so that we can sell them as a group to a single buyer, which enables us to get higher values. But that practice would have a value today, depending on where they are and how old the doctor is and their growth rate. Growth rates really important today. And production or collections in twenty one relative to the same period in nineteen is a metric that a lot of people are looking at. But that practice is going to have a value of anywhere between five and six and a half times EBITDA times that four hundred thousand. Even so, that practice is going to be worth between two and two point six dollars million in our world. If the if that's bigger, let's say the it is twice that it's 800,000, they're going to have a value of six and a half to maybe seven and a quarter times.

Art Wiederman, CPA: But that number is silly.

Chip Fichtner: Well, it's not that think it's silly because I mean, those are relatively small examples. We've done multiple tours and I know doctors like to think in terms of fractions of or percentages of or multiples of collections. We've done probably a hundred million dollars in transactions in the last six months where the practices were valued at over 200 percent of collections. Wow. And we've done some where it was over 400 percent of collections. It's all about the profitability of the practice and our model, the collections number is completely irrelevant. All that matters is the profit.

Art Wiederman, CPA: It's all about what you make. Before we go any further, Chip, if anybody has any questions kind of about how this works, what an invisible DSO is, they want to get more information. Would you be willing to talk to doctors that are listening?

Chip Fichtner: Yeah, absolutely. You know, we urge every single doctor to go through our process because we're happy to give what is functionally a free valuation. No, it's not as sophisticated as a valuation you would provide because we're using a market based meaning what transactions have occurred in the last six to 12 months to determine the value of a transaction. But we urge every doctor to give us a call and have a conversation because we learn something on every practice value. We determine, you know, every practice is different. And so doctors are welcome to call us and we'll talk about any practice they have any time.

Art Wiederman, CPA: Why don't you go ahead. Chip, why don't you go and give out a phone number that you'd like to have and I'll make sure they get put into the show notes. So what's the phone number?

Chip Fichtner: It's nine five four three zero zero two six four four or go to a largepracticesales.com and send us an email. And we would love to talk to you. That's what I do all day, is I love talking to dentists.

Art Wiederman, CPA: All right. Well, that's great. And it's all about gathering information and things like that. So realistically, let's take my doctor, who's 45 years old. He's got a practice doing two million. You said EBITDA 400 just for our discussion. So he's going to be looking or she's going to be looking at a value of two million to two point six million.

So in reading some of the literature about your company and there's some really good articles I found in dental economics about invisible DSOs, is that most of the time it's my understanding that the selling doctor is going to sell some anywhere between fifty one and 90 percent of the practice. Is that about right?

Chip Fichtner: Yeah, that is about right, and we've done transactions in the last 90 days in that range and doctors will make that decision based on the partner that they choose. You know, our whole model is based on putting a doctor in front of typically at least five different bidders or prospective partners, because our belief is that this is a lot like a marriage. You're not leaving. It's not a one night stand. You're getting married to this partner for the next typically at least five years and sometimes 20 or more. And so our goal is to put the doctor in front of as many prospective partners as we can so that they can choose a partner that's the right fit for them, not necessarily the highest value, but the right fit, because you're going to be living together for a long time.

Art Wiederman, CPA: So now one of the concerns that I have you and I chatted about a little bit before we pushed the record button today, everybody might have heard that the folks in Washington, D.C. are looking at changing the tax laws. And that's in my wheelhouse. So, folks, what we're looking at and we actually did a podcast about a month ago with Mel Schwarz, who is our director of tax and our National Tax Office. He's actually I talked about his he's our legislative analyst and he's got his finger on the pulse of what's going on in Washington. And it's my understanding, folks, that you're looking at a situation that right now, the proposal on the table and we are a long way from having a law, but the proposal on the table from the Biden administration is that if you end up in a you know, if you end up if they pass this law with taxable income, I'm sorry, income of over a million dollars, your capital gains rate is going to go from the current 20 percent to potentially thirty nine point six. Now, is that going to be the way it ends up? I don't know.

But and again, everybody here knows that I don't talk politics. Bad things happen to me if I talk politics. But the fact of the matter is, is that our current administration has put out over six trillion dollars in stimulus proposals, infrastructure and all this stuff. And, you know, they've got to pay for it some way. And this is going to be one of the ways. So, Chip, you and I talked about this a little bit. And I mean, you don't, doing one of these deals, an invisible DSO, isn't just like, you know, you go down to the grocery store and you buy a loaf of bread and you give them two bucks. It's not quite that simple. How long does this take?

Chip Fichtner: You know, historically, in 2019, our average transaction from the time somebody became a client to the time they put millions of dollars in their pocket was about one hundred and eighty four days. So six months in 2020, shockingly, during COVID, it was actually faster. It was only about 150 days. So five months. This year, we're telling doctors if they're interested in completing a transaction in twenty twenty one calendar/tax year, they need to start by August 1st, which means we need to start learning because we don't know how long it's going to take to get deals done. There's an incredible volume of deals. We did ninety two million dollars in transactions closed last week. So there's a lot going on, which means the various vendors that help make these transactions happen, which are the lawyers and the accountants, are getting pretty busy. And so we're trying to coach our doctors that we want to have everything close by Thanksgiving, because at the end of the year, you're sort of in the high risk mode of taxes are going up. Jan one, you kind of want to have the deal done and you don't want the risk of it not getting done.

Art Wiederman, CPA: And whether Chip we're dealing in your world, which is big numbers, big, big numbers or you're dealing in in my world, is selling individual doctors. You and I have the same problem. It's the landlord, right?

Chip Fichtner: Yeah, the landlord is always a problem because they have leverage, because you probably have a lease that says the assignment of the lease is subject to the approval of the landlord, and they tend to use that as an extortion opportunity in many cases.

Art Wiederman, CPA: I like that word because I use the same word with landlords. But folks, this is another thing. And whether you're working with someone like Chip or you're working with an individual broker or you're trying to sell your practice by yourself. I had a call from a doctor last week who told me I've got nine days left on my lease in my landlord is a beast. What do I do? And I said, pray. I don't know what else to do. So, you know, it's like if you are getting down to a year or two years, three years with no options on your lease, you know, and you're thinking about something just because, you know, you come to Chip, you come to Chip Fichtner or you go to anybody else and you say, I have a two years left and my landlord won't extend or maybe they will if you give them a check for one hundred thousand dollars.

I have Chip. Once I ended up handing a check for that amount of money to a landlord and I told him he was evil and you just smiled at me because that was the only way they would let the doctor out of the lease. It was terrible. So that's a big deal. Now, I know this is not only general dentistry, but it's also you are primarily not primarily, but you work with a lot of specialists and there's a triangle you were telling me about. So how do you work with the specialists and how does the triangle work? I was never good at geometry in school, regular math I was great. I was the third grade math champion of the borough of Brooklyn. I don't tell too many people that, but I but I am. I guess I just told thousands of people that. But geometry was never my thing. So how does this work?

Chip Fichtner: Well, you know, the interest in specialty practice has grown dramatically, to give you an example, in the last two years alone, there have been a dozen groups formed just by oral surgery practices. There have been 13 groups formed that are only buying endo practices. And there are 11 groups that have been formed in the last two years that are only buying ortho practices. So think about that. That's billions of dollars of capital. That's billions of dollars of capital that are interested in consolidating those three specialties. Yeah, those three specialties. And then recently, we've had the birth of the dental trifecta group. These are groups that I know I mentioned.

Art Wiederman, CPA: Trifecta. Did I say triangle?

Chip Fichtner: Trifecta is a horse racing term.

Art Wiederman, CPA: I got the first letter, right?

Chip Fichtner: That's al.

Right. So these groups are focused only on acquiring interest in paedos, ortho's and oral surgeons in the same communities to functionally lock-up referral patterns. And when they come into a community, they come in hard and fast. We had one group that told us they wanted to be in Salt Lake City, Utah, because the predominance of high children per household there and in the last nine months we have put them into 50 offices of pedo ortho and oral surgery only, and they've spent over two hundred and fifty million dollars in nine months.

They have a pretty good handle on that particular market and that's happening across the country. We're doing trifecta transactions in Southern California. We're doing them in Phoenix. We're doing in Tampa, Florida. We're doing them in New Jersey. We're doing them in Connecticut. And these are oftentimes new groups that are entering into the dental consolidation game who have a lot of money. And there's an opportunity for doctors to get an extraordinary valuation when we can assemble one of those in a community.

And they don't necessarily have to initially be within referral distance because they're happy to come in and build the pieces that don't exist within referral distance. So we have a group that's buying ortho. They just bought five ortho offices in an area and they're going to build five pedo offices in the same area, Denovo startups, they're going to start it. They're going to do startups. So it's an exciting part of this business and it's increasing the values for those specialties. You know, the oral surgeons tend to be the easiest ones to get to join because they look at their pedo and their ortho referral base going to somebody else because you need to pay attention to what's going on. If you're one of those three specialties, perio is actually perio is actually about to become popular. There are two groups being formed that are going to require only perio practices.

Art Wiederman, CPA: Right. So talk about the legal structure, in other words. And then after that, I want to talk about kind of the other part of getting out of this. In other words, if you sell, you know, 60 percent, you still own 40. But let's start with legal structure. So my doctor is a an S Corp or a PLLP. In some states, California, you cannot operate a dental practice as a limited liability company or partnership. It makes accounting really annoying, but that's what it is. Do we do we form a partnership with your invisible DSO? What's the legal structure?

Chip Fichtner: You know, typically what they're going to do is form and well I'll call an LLC type entity and that entity is going to purchase the assets of your practice. Those assets will go into the new entity that will be either jointly owned by you and your new invisible DSO partner, or you may choose to take equity in the parent company in lieu of having equity at the practice level. And that differs based on who your potential partner is, which is, again, why we believe doctors should look at multiple options in these transactions.

So they're doing an asset purchase, which is good for the doctors from a tax, from a tax consideration. And you want to argue as a seller to get as high a goodwill component in that transaction as possible. Yeah, that's probably one of the highest values we bring to our clients is the ability to argue that goodwill argument, because as you know better than anybody makes a massive tax difference.

Art Wiederman, CPA: So, yeah, I get it. And I negotiate. I've negotiated hundreds and hundreds of allocations of prices and it's just amazing what other CPAs believe or think or all this kind of stuff.

Chip Fichtner: It's a huge deal because it's the difference between long term cap gains and ordinary income, and for those of you in California, that's a big difference.

Art Wiederman, CPA: Yeah, in California, we have a mental health tax. If your income is over a million dollars, you get to pay a one percent mental health tax, which hasn't helped that much here in California.

Chip Fichtner: Which you should right.

Art Wiederman, CPA: So let's talk about getting out of the rest of this. So my doctor my client comes to you doing two million dollars. You come up with a valuation of, I don't know, two and a half million. That's wonderful. So they sell 60 percent of their practice value to two and a half million. So they get a check for a million and a half bucks. They still own 40 percent of their practice. What if they. Well, I mean, I get lots of questions. I mean, what if they get, what if they die or get disabled or what if down the road they want to work 10 more years and then they want to retire, how do they get out of the rest of their equity? Is there a mechanism in the documents that says that this invisible DSO will buy out the rest of them? How does that work?

Chip Fichtner: Yes, there sure is. And that's one of the things that we're famous for, is not letting our doctors do transactions where they don't have an exit. So that's a negotiated item based in form on how long you think you may want to practice. So what our typical doctors will do and our average doctor client is 48. They will sign a five year employment agreement. And in connection with that five year employment agreement at the end of five years, they will have the right to force their partner to repurchase their equity at a predetermined multiple of the EBITDA in that fifth year. Or the doctor will have the right to renew his contract for another five years or a negotiated term, hang on to his equity and again have the right to force his partner to buy out that equity at some predetermined multiple again of that distant year.

And the goal is obviously in the first one through five years to grow the practice profitability and therefore increase the value of that retained equity. And the other option that doctors have is to retain equity in the parent company that is acquiring them. And the goal of all of these investors, and they will state it in mantra form, is that the investors goal with these transactions is to increase the value of the equity of their business by three to five times in the next three to five years. Right. So doctors who choose the option of retaining equity in the parent company have the potential to increase the value of that retained equity, which in year two and a half million dollars, for example, if they sold 60 percent, they got a million and a half in cash. That kept a million in equity such as that. That million in equity could become worth three or five dollars million in the three to five years post a transaction.

Art Wiederman, CPA: But you're saying. I'm sorry. Go ahead.

Chip Fichtner: I was just saying that each of these groups is different and their structures are different, and that's part of the dating process, is to understand who your partner is, what their upside is, and what your potential upside is by being partners with them.

Art Wiederman, CPA: So we could be looking at that other 40 percent being, first of all, the first the 60 percent is what you're telling me is if the whole thing falls apart and we don't get the 40 percent because there's risk involved, there's risk in getting up in the morning, but there's risk involved in this. There's risk that this DSO could not be in existence. There's risk of all kinds of things. I mean, we're dealing with big, big money. So it's not likely, but there is risk. But even if there is a risk, you know, you've got I mean, I'm getting basically in your example, 75 percent of the value of my practice today for 60 percent equity. So basically, if I'm hearing you right, I'm pretty much getting if I put this thing on the market as a single doctor selling to a single doctor, probably getting what I would have gotten. And I'm playing with the house's money, it sounds like, right?

Chip Fichtner: Yeah, that's true. But the reason so much money is pouring into dental consolidation is that it has been relatively low risk. If you look at the across the DSO landscape, there have been very few failures where doctors who took equity in the parent company actually lost that money. And that's why you had an acceleration from 10 billion into the consolidation game in 16 to one hundred billion in the consolidation game in twenty twenty one. It's relatively low risk. The number of failed DSOs is relatively small. And frankly, the ones that failed you could identify pretty easily that they were going to fail because they had bad strategies.

You know, and again, that's part of the dating process is to understand who your potential partner is. And we make sure that that our doctors do as much due diligence on their buyer or their partner as the buyer or partner does on them, because that long term value of these transactions is why younger doctors do these things. So let's use a real world example. We had a 38 year old GP client in Arkansas. He sold 60 percent of his practice in November of 2017. Practice was valued at five million. So he got three million in cash. He kept two million in equity.

So thirty eight months later, he had the opportunity because his parent company was recapitalizing, which is a fancy way of selling to a bigger investor. And he had the opportunity to take six point eight dollars million off the table, three three point four, multiple times his two million dollars in retained equity. So not a bad trade for thirty eight months. So at this point, he's now forty one years old and he said, you know what, the new investor in my parent company is bigger and better than the last investor, and they want to keep the exact same management and play the exact same play, he said so I'm going to leave my six point eight million in because I know their goal is to make three to five times their money and I'm in there with them shoulder to shoulder.

So his goal will be to take his six point eight million to twenty to thirty five million dollars in value in the next three to five years. And he's got a pretty good shot at doing that. But the failure rates of these is relatively low. Some succeed far more than others. But the money that's being made by doctors in these transactions is not talked about. But it's staggering. You know, my favorite example is the biggest DSO in the country, which I won't name, but there are doctors that kept equity in that DSO who've made one hundred million dollars. Wow. Well, and not just one, one or two, we're talking dozens.

Art Wiederman, CPA: Well, you know, that's why we're educating and it's all about education. So I got a couple more questions. I wish we could talk for hours, but we don't have hours, unfortunately. So you said that the buying entity really doesn't interfere in anything. I mean, what changes on day one after the you sign the paper and the ink is dry.

Chip Fichtner: Great question, and the answer is they're going to take over banking payroll. Your team is going to go on their group benefits plan, which in every case, without exception, much better is equal to, equal to or better than the benefits that you are providing today. The invisible DSOs go out of their way to make sure that happens. In every case, the last thing they want to do is walk into a room of angry females.

So the benefits become provided by the larger group. Therefore, they are typically better and less expensive benefits. But other than that, it depends on the partner you choose and you learn what that change is going to look like by talking to other doctors who have done deals with the groups that you're considering doing deals with, doctor to doctor, peer to peer, without anybody else on the phone. You get to ask the questions like, are you glad you did it? Would you do it again? What changed? What didn't change? Did they do what they said they were going to do?

So that's part of our whole process, is to make sure the doctors go into whatever transaction they decide to do. If they decide to do a transaction at all is for them to understand exactly what life will be like the day after. And the answer is there's not that many changes. The DSOs are not in the business of telling doctors what to do, what to pay their people and how to run their practice because they're only investing in great practices that have been successful.

Art Wiederman, CPA: Now, that's great information. What's the let's see, millions and millions dollars. What's the downside of this? Millions and millions of dollars? What's the downside?

Chip Fichtner: You know, that's a good question. And the number one downside is dentists got into dentistry not to become multimillionaires. They got into business because of the lifestyle choice, the ability to control their own destiny, to make their own decisions. And a lot of dentists don't have partners at all because they don't want partners and I mean other dentist partners. Right. So this is taking in a partner that would be just like taking in a dentist partner. You're not going to go out and spend one hundred thousand dollars on new technology without talking to your partner, whether it's a dentist or whether it's a DSO.

So to some degree, you have to want to have a partner. And the other thing is you have to be open to potential opportunities, because one of the things that has been a big opportunity, thank you, COVID, is for doctors to be able to acquire other practices and consolidate it with their own practices and grow that way. There's a lot of opportunities there. And these groups have the capital and the expertise to help doctors do that. But they're interested in doctors that have a growth mindset. If you're a doctor who says, look, I don't want to grow and they're not asking you to work any harder, I've never seen a contract where the doctors committing to work one minute more than what they worked the last three years.

The contracts are all very specific on that, that they're not asking to work harder, but they are interested in growth oriented doctors. So if you're not growth oriented, this is not a transaction for you. If you don't want to grow your practice, not necessarily work harder, but if you don't want to grow your practice, this is not a fit for you. These are these are investors interested in growth and they want to give you the tools to grow.

Art Wiederman, CPA: So will the doctor, the selling doctor, will they be reporting to a financial person and sit down once a quarter? I don't know the answer to this that's why I'm asking. Do they sit down with someone and they say, Doc, you know, this thing was doing two and a half and now we're doing two point two. What's going on? What can we do to help? How does that work? Is there a reporting mechanism, someone that they're talking to going over results and consulting?

Chip Fichtner: Yeah, absolutely, and, you know, that's one of the interesting things about these groups, is they have a lot of resources that the typical doctor can't access, particularly research and payor contract negotiations. If you're taking insurance, I promise you, the DSO down the street from you is getting paid more for the same procedures that you're doing. So, yeah, they want to work with the doctor and they will talk to the doctor, let's call it. They'll do a monthly financial review and go, OK, how do we do? How can we improve this? And they're going to provide consulting and services because they want you to do as well as you can.

They're not going to scold you if your collections drop one month and they can't fire you for a reduction in collections. That's not what these groups are about. They're buying people. Right. This whole business is about people to people. You know, we'll do a 10 million dollar transaction and the doctor will say, well, gee, what if they fire me? And I said, why would they fire you? They just the only thing they bought was you and your team. Certainly you have a fabulous lobby decor and wonderful dental chairs, but you don't have two hundred thousand dollars worth of hard assets, they bought you. They're not going to do anything to make you unhappy.

So, yes, they'll do monthly or quarterly financial reviews to figure out ways that they can help you. And one of the things that they're really good at, and this is especially true in orthodontics, is marketing. You know, orthodontics has become a very direct to consumer marketing business. And they're really good at that. And, you know, the other thing is synergies with other practices that they may own in the area. You know, how can how can our group of GPs refer to a specialist that they may acquire? But they add a lot of value.

You know, the standard pitch in the DSO world is, you know, they're going to buy supplies cheaper. They're going to get reimbursed by payers better. They're going to have better benefits for team members. But really today, where they really add value is recruiting. Recruiting is tough right now, whether it's associates or just team members. These groups, many of them I know one of the groups that we've sold a lot of practices to, you know, has a whole full time in-house 15 person recruiting department. So when a doctor needs a front desk gal or a hygienist or whatever they call their partner and say, hey, would you put your recruiting department on this? And they don't hire the person for you, but they'll send you 20 resumes and you'll pick the one you like. And that's so they have resources that are pretty helpful.

Art Wiederman, CPA: OK, well, let's put a bow on this. And the last thing I'll ask you, Chip, is so if someone is listening, what's the ideal? You know, what should this doctor be thinking to say this might be from me. Who the perfect and I know we've talked about. But put a bow on it. Give me a kind of a you know, I'm not going to say twenty five words or less. You can use more than twenty five words. I'm not going to count words even though I'm an accountant,. I'm not going to count words. How many. You know, what's a typical what's the best in your wheelhouse type of a deal that someone should say this might be for me.

Chip Fichtner: You know, it's not necessarily about the deal, it's about the desire to monetize a part of your life's work today at today's low tax rates, therefore get financial security and yet still continue to do what you love every day without interference, without somebody telling you what to do. And so what we urge all doctors to do is at least go through our evaluation process. It's free. There's no obligation. Why not right? Understand what your practice could be worth in one of these transactions.

And honestly, in 90 percent of the cases, the doctor says, hey, thank you for the value. I'm pretty happy doing what I'm doing. And then they move on, but we're happy to do that. And it's educational for the doctors. I had a doctor recently who in his mind, his practice was worth one hundred percent of collections. And I said, no, your practices were three hundred and fifty percent of collections. And he was shocked. He had no idea. So our process is really valuable for a lot of things, not just deciding whether you want one of these partners or not, but at least understanding the value of your practice in today's market because it's changing. So we urge everybody to go through our process and at least learn. We're in the education business just like you are.

Art Wiederman, CPA: And the last thing I'm just thinking, metropolitan area, rural area, suburbs doesn't matter right?

Chip Fichtner: It really doesn't. And COVID has had an interesting impact on that in that you had many DSOs that were geographically concentrated and they are now interested in not being geographically concentrated. So we've sold great practices and towns of 3000 people. We sold practices in West Virginia where everybody said it was impossible and we're about to sell one in Alaska. So where you're located is a lot less relevant than how eager you are to grow. That's far more important than your location.

Art Wiederman, CPA: Well, if it's if it's anywhere near Petersburg, I'll be there next week looking for halibut, so that's good. I like that.

Chip Fichtner: Fantastic.

Art Wiederman, CPA: I've been one more time, Chip, why don't you give out your contact information, the website and your phone number?

Chip Fichtner: Sure. It's Chip Fichtner. And our phone number is nine five four three zero zero two six four four. And that's answered in our Fort Lauderdale office. Or you can go to LargePracticeSales.com. Pretty easy to remember because that's what we do. And we love to talk to doctors all day long. So please give us a call, we're both can learn something.

Art Wiederman, CPA: There you go. Chip Fichtner, thank you for the fantastic information. Very educational. Every time I talk to a guest, even though I've been in dentistry for 37 years, I learn something every single time. So if you would kind of hang on until after we take us out, we'll chat a little bit afterwards. I want to again, folks, thank you for the honor and privilege of your time. Our podcast is growing. We have thousands of people that listen, it's wonderful. I never thought it would turn into this. And we get emails and calls from all over the country of people thanking us for this and thanking us for that. And I'm honored and humbled. It's part of my legacy to what has been a wonderful career in the dental profession. It's not over yet, but it's been wonderful.

Make sure that you again, if you haven't filed for forgiveness of your SBA PPP one loan, make sure you get that done. Most of you are coming up before the end of August, maybe even sooner. If you got more than ten thousand dollars in the HHS Provider Relief Fund before June, you're going to have to file. Listen to our podcast. It comes out on August 4th on that.

If you had a greater than 50 percent reduction in your revenues in the second quarter, you could be one practice, five practices, twenty practices don't matter. You've got some opportunities to score some major money. We have gone over two million dollars in government money that we're getting for our clients. I'm real excited about that.

Go to our partner Decisions in Dentistry www.DecisionsinDentistry.com best clinical content in the industry. One hundred and forty wonderful CE courses at a very low price. And again, they get a lot of really cool stuff coming up, which I'm sure you'll see on their website and in their publications.

And again, if you're looking for a dental CPA, we work with about 800 dentists at Eide Bailly. I'm in Southern California, in the city of Tustin. We work with about three hundred. The firm has about another five hundred spread in the western United States.

Or if you're looking for someone in, you know, about any area of the country. My mother ship is the Academy of Dental CPAs. There's some of my dearest friends in the whole world. And we're going to get to have our first meeting in two years in Miami in October. Hopefully hurricanes. Please stay away from Hawaii the week Hawaii, from Florida, from Miami, the week of October 17th. I will ask you, I don't know if any hurricanes listen to my podcast, but you never know. So the ADCPA is www.ADCPA.org. We have been the financial first responders. I've done forty webinars and all my podcasts on the PPP and the ERTC and the HHS. It's been kind of crazy.

So with that folks, I thank you again for listening and I hope you all have a wonderful day. I hope this information is helpful to you. Please tell your friends about our podcast. Tell them to listen, tell them to subscribe on Apple or through your Android or however else you get to do that. And with that, my name is Art Wiederman. My show is the Art of Dental Finance and Management with Art Wiederman, CPA. And we'll see you next time.