Podcast (Dental)

What Dentists Should Consider Before Partnering with a DSO

June 28, 2023

Selling part of your dental practice to a Dental Support Organization (DSO) is a big decision and it’s important to know all the details. In this episode of The Art of Dental Finance and Management podcast, Art meets with Chip Fichtner, co-founder of Large Practice Sales, to discuss what dentists should consider before making the decision to contract with a DSO. Art and Chip also discuss how dentists should navigate the process of selling to a DSO, the difference between invisible DSOs and traditional DSOs, and which dental practices might be eligible.

Reach out to Art if you have any questions regarding dental finance and management for your dental practice. More information about the Eide Bailly dental team can be found at www.eidebailly.com/dentist.

Being more strategic in all aspects of your dental practice will lead to increased profitability.

The Transcript

Art Wiederman: And hello, everyone, and welcome to another edition of The Art of Dental Finance and Management with Art Wiederman, CPA. I'm your host, Art Wiederman. Welcome to my podcast. And today we have a very, very pertinent topic. I was looking for a word relevant, but I settled on pertinent and we've talked about this on the podcast. I'm going to have a couple folks. I've had an attorney that's going to be coming on Jason Wood in the future. He's going to be talking about legal aspects of it, but I'm going to tell you what's going on. And it has to do with selling your practice to a DSO. And when I started in dentistry as a CPA in 1984, we didn't have any of this. And in the last 5 to 10 years, DSOs have started becoming a part of dentistry. And what's happening is that our clients are getting calls from DSOs. There's 2 to 300 of them, give or take. Some are different. They're all different. And the call goes as follows, folks. So I got a call and I'm I'm going to go ahead and sell to X, Y, Z, DSO. Well, what do you know about Well, they're going to give me 27 times EBITA. And we'll explain what EBITA is with my guest, Chip Fichtner of large practice sales here in a couple of minutes. And and yeah, I'm going to get and then we're going to they're going to give me that and then we're going to go ahead and they're going to sell to a bigger DSO and I'm going to triple my investment and I'm going to be able to work and make a really good and go time out. So there's a lot of things we need to unpack here, folks. So one of the reasons I'm having really, really qualified professionals like CHIP on my program is to explain to you what does the real world look like and what should you be doing? Are you a candidate for being to sell your practice to a DSO? Maybe you are. I can tell you if your practice is doing $400,000 a year out of three operators, I probably don't need Chip to tell me this, but probably not a candidate for DSO. But who knows? Maybe he'll tell me I'm wrong. But all of these things we're going to talk about today, so we'll get to chip in a moment. I want to thank my wonderful marketing partner, Decisions in Dentistry magazine. Lorraine Kent and her team at Decisions in Dentistry are second to none. They have an absolutely wonderful wonderful website WWW.decisionsindentistry.com and they have 140 continuing education classes that you can take clinical education classes at a very very very reasonable price. So do go to their website WWw.decisionsindentistry.com. You can also find our prior podcasts on on their website I just finished we're recording this meeting in mid-May. In fact yesterday celebrated my 30th wedding anniversary with my wonderful wife Lyn. So shout out to my wife. I think this, this marriage is going to go the distance. It's kind of feeling that way. And I just spent the last four days with my friends from the Academy of Dental CPAs. We were in Scottsdale, Arizona, and we talked about all kinds of things. In fact, I moderated about an hour and a half conversation just about the tax aspects of DSOs, which we're going to maybe touch on today. And we had wonderful speakers. We had Dr. Leigh-Ann Brady from the Pankey Institute. We had Deborah Englehart. Now she's one of my favorite human beings on the planet. And we had all kinds of different educational courses. So we stay on top of it. If you don't work with a dental specific CPA, you should. I'm biased, but you should. You can give me a call where I'm a dental division director at the CPA firm of IDE Bailey. I'm out of Southern California. We had Eide Bailey work with about 300 dentists here in Southern California, so you can get a hold of me in two ways. Either my phone number is 6572793243. You you have a problem, you have a question. Something doesn't feel right. You heard something on a podcast you want some clarification on. You want to see how the Los Angeles Angels of Anaheim are going to do in the baseball season or your favorite team. We talk about anything like that or email me aWiederman@EIDEBailey.com and I am a member a founding member of the Academy of Dental CPAs. WWW . ADCPA.org. We are 25 CPA firms that work with. About 10,000 dentists. The best of the best. So with that said. I would like to introduce. My guest is Chip Fichtner. Chip is the co-founder of Large Practice Sales based out of Dallas, Texas. And Chip lives, eats and Breathes, helping doctors navigate the minefield of selling to DSOs. And folks, I'm going to tell you, I've been involved in several of these deals in the last two years, and you really need to peel the onion back. So, Chip, welcome to the Art of Dental finance and management.

Chip Fichtner: Thank you. I appreciate it. And thank you, doctors, for taking the time to listen to the segment.

Art Wiederman: So I'm betting you've been a pretty, pretty busy guy. This market is constantly changing, constantly moving. There's all kinds of conferences, but. So we're going to talk all about, you know, what's going on in the market. But why don't you first tell us a little bit about your history and your journey to how you came to be a co-founder of Large practice sales.

Chip Fichtner: Absolutely. Thank you. Well, I'm. I am old and gray, 63 years old.

Art Wiederman: And you and me both. I'm old and gray and 63 years old also. When's your birthday? So we can figure out who's older?

Chip Fichtner: March 18th.

Art Wiederman: So you will be 60. Okay, so I'm a little older than you, so respect your elders on this one.

Chip Fichtner: Yes, sir, I will.

Art Wiederman: Okay.

Chip Fichtner: And that's a topic we'll get to tonight, because having a six in front of your age is a problem today, unfortunately. But we'll get to that later.

Art Wiederman: Sure.

Chip Fichtner: Quick history on my my background is I have been buying, selling, starting, taking public various companies in various industries for the last 43 years. I've been the chairman or CEO of multiple publicly listed companies and private companies in a strange range of industries from pet food, auto parts to dental. 12 years ago, a friend of mine, a venture capitalist that had invested in a dental related business and I was semi-retired at the time and he said, Why don't you go take a look at this for me? You're a marketing guy. Maybe you can help us. And I went and looked at the business and liked it so much. I came back and said, I'm not going to help you market it, but I will buy the company. So I bought the company 12 years ago, right? We built it, we sold it. It was a great business. And in that process, one of my clients of that company came to me. He had an 18 office multi-specialty dental practice and said, Chip, I'm ready to hang it up. I why don't you help me sell the practice? And I said, Well, I don't know anything about selling practices, but if you'll pay me enough money, I'll learn. And so I learned. And we sold.

Art Wiederman: It for.

Chip Fichtner: 48, $48 million, and he paid me $3 million. And I thought, you know what? Maybe this is a business after all. And so we started.

Art Wiederman: I might have a chance. I might have a chance with one.

Chip Fichtner: That might be interested.

Art Wiederman: Could be.

Chip Fichtner: Yeah. So we started large practice films about seven years ago and we made two fortuitous decisions which worked out really well for us. Number one was we said, you know, we're only going to deal with larger practices. So we have a threshold that the practices that we deal with have at least a half a million dollars in operating profit or EBITDA and up. And number two, we said, you know what, we're going to be different from everybody else and that we're not going to get paid by buyers. We're only going to get paid by doctors. This way, we don't have any conflict of interest and we are not pandering to buyers. Instead, we are looking out for the best interests of our clients, the dentists. And so that worked out pretty well because last year we did $612 million of transactions for our clients, all of them with invisible DSOs. We'll talk about the difference between an invisible DSO and a DSO in a second. But the interesting thing about last year, $612 million of transactions and they were for dentists of all types in 29 states with 31 different invisible DSOs. But the interesting thing last year was that 102 million of our transactions were done for doctors under 40. And that is shocking to a lot of people because the general perception of partnering with a DSO or selling to a DSO is that it's something you do at the end of your career. But what has changed is that younger doctors are grasping the concept of the invisible DSO versus the traditional DSO. And an invisible O is not a new thing. It's been around for over 30 years. There are 200 or more of them around the country, and an invisible DSO differs from what doctors perceive as the traditional DSO in the fact that an invisible DSO comes in and buys anywhere from 51 to 90% of a practice for cash up front. The doctors retain ownership in the balance and continue to lead their practice under the doctor's brand team and strategy with full autonomy, but benefit from the resources of a larger silent partner. And so these larger silent partners can reduce the administrative burdens for the doctors, improve their marketing, improve their recruiting. And yes, they do it as silent partners. They're not in there trying to homogenize their partner practices to meet some corporate standard, like the branded DSOs would do that. I'm not trying to micromanage the practice. I'm not going to tell the doctor who to hire, who to fire, how to market, what products to buy or not, by what payers to take or not take. They are truly a silent partner who only invest in great successful practices and they don't want to break what they just spent millions of dollars investing in. So they leave the doctor with full autonomy and the doctor benefits from having a bigger partner for lower product costs or higher reimbursement rates or access to technologies at rational cost that they couldn't get otherwise. So there are a lot of benefits for doctors partnering with an invisible DSO, and probably the best benefit for the doctor, besides the administrative minutiae reduction, is the fact that as an equity owner, typically in the parent company or still in their own practice, they have the advantage of the upside in that equity growth. And when you choose the right partner, the value of that equity can multiply dramatically. The key to that phrase was choose the right partner. As this business has boomed, there have have attracted, as in any booming business, a lot of charlatans who make a lot of promises that they can't keep. But when you choose the right partner, doctors in this business have made billions and billions of dollars. And as recently as just the fourth quarter of 22, there was over $5 billion invested in just three invisible drives. It's a booming category and consolidation is not slowing down now.

Art Wiederman: So I want to I want to unpack some of this because there might be some people listening to this and they don't kind of understand. So, Doctor, let me let me kind of give you a quick overview. There are different ways that you can you can partner with DSOs. What what Chip is talking about is where you sell not all of your practice because you can sell 100% of your practice to a dealer. So that is not what he's talking about. He's talking about you maintaining a partnership. And Chip, the other advantage of doing this and this is one option for you doctors is that not only do you retain control of like Chip, we're saying, you know how you market and your clinical treatment and hiring staff, but you have you have a group that's got great experience but you. Also participate in the profits of the practice, right, Chip? I mean, so if I own 40% of this practice and I sell 60% to an invisible DSO, I'm going to get 40% of the profits. Right. Isn't that how it works?

Chip Fichtner: Yeah, if you structure it that way there.

Art Wiederman: Depending on how it's structured.

Chip Fichtner: Yeah, absolutely. But yes, that is absolutely one of the one of the popular structures.

Art Wiederman: Okay. So talk about the market right now. Now, I you know, we have inflation. Interest rates are higher than they were a year ago. Significantly higher. What what is the you know, I've I've heard that, you know, the maybe the larger deals, the big, big, big deals are not as easy to do, but the middle market deals are hotter than the dickens. Tell me what's going on in the market right now in mid 2023.

Chip Fichtner: You know, it's really kind of shocking to me. The perception of doctors for some reason is that this market is slowing down and the values are not hitting records. And in our segment of the market, again, doctors with with typically over GP's over 1,000,008 and collections and specialists with over 1,000,005 and collections, we're seeing record values and a record number of bidders at the moment significantly higher than we had in 22, which is a great year. It's just there's just three examples. Oh, in the last two weeks we had a paedo practice with 2.9 million in collections. We had 13 bidders and they achieved a record value of over ten times EBITDA or operating profit.

Art Wiederman: Which is very, very good.

Chip Fichtner: It's it's crazy. I think when I first talked to the doctor, I estimated that we would get eight times EBITDA, but I also did not guess that we would have 13 qualified bidders for that practice. But we did. The fact that second example is an oral surgery practice, pretty good size on about 12 million and collections on that number. We had 18 qualified bidders and achieved over 11 times even. And the one that was most surprising to me was the deal we signed yesterday, which was for $4 million in collections GP practice in Michigan, who achieved 10.34 times EBITDA and.

Art Wiederman: Had 8.

Chip Fichtner: Qualified bidders.

Art Wiederman: That that's.

Chip Fichtner: Yeah. So there there are you know, there are some of the bidders who were actively bidding last year who have stopped completely due to capital or credit issues, but they've been replaced by the new groups that have joined the consolidation frenzy or have gotten fresh new capital to continue to expand. So it's it's to some degree a fallacy. Now, I would bet that in the smaller transactions that we don't do the doctor to doctor transactions, that it could have become tougher because the banks are tightening up credit. And so your associate who goes to the bank to borrow the money to buy your practice, maybe having financing challenges and thus that could be impacting values in those transactions. Again, I don't know because we don't do those. But in our segment of the market, it's hotter than ever and we're getting higher values than we have ever gotten.

Art Wiederman: Well.

Chip Fichtner: That's knocking on.

Art Wiederman: Wood. No, not knock on as much water as you can. I hope it continues for you. Let's talk about what kind of a practice is a candidate. In other words, we've got doctors listening to this. They got a guy that's doing, like I said at the beginning of the show, 500,000 a year. He's making 150, 160,000. I mean, he's probably not a candidate. So tell me, who is a candidate to sell to invisible DSO with with retaining a portion of their practice or just traditional DSO? Who who are the doctors that should be looking at this?

Chip Fichtner: You know, the invisible DSOs was the great majority of them would like to buy successful practices. They are eager to deal directly with doctors without middlemen like me who drive up values because of bidding contests and are educated enough to be able to to tell the doctor who the good ones are who the not so good ones are. But any doctor who's got an operating profit of at least $300,000 is a candidate for an invisible DSO transaction. And they're going to get a good value. They're not going to get the kind of values that we get, but they're going to get five times EBITDA in that transaction, which would typically be higher than what they would get in a doctor to doctor transaction. And they would continue to control their own destiny, lead their practice and continue as an owner. And they're going to be partnering with groups that have the financial capability that the doctors not getting delayed on is closing because it is associated, is having trouble getting bank financing. So if you've got a practice with or with greater than at least $300,000 of EBITDA, you've got the opportunity to do one of these transactions.

Art Wiederman: Now, Chiplet, let's break that down a little bit because I'm this you know, once you start talking numbers, you're going to get me all excited and tingly. Yeah. So, so so 300,000. So EBITA as I explain it and you tell me if I'm wrong here, when if I sell a I'm a dental practice broker here in California, if I sell a practice that did $1,000,000 last year and it grows it and it nets 300 oc the egbeda for all intents and purposes to sell to another doctor is 300,000. But in your world we have to deduct from that 300,000 if that's the true profit that the owner is getting on a compensation that we have to pay that doctor or another doctor. Right. So the IBA number is really not 300. It's really one, maybe 150. So in your example, the 300,000 might be somebody who's doing a net profit of 500,000. Am I getting that right?

Chip Fichtner: Yeah, but see, let's go back to your million dollar example. So we've got $1,000,000 collections practice. The doctor is taking home at the end of the year a total of $300,000. Right. And that, that that's paying him for his work and whatever the practice profits are. Right. In my world, that practice actually has less than zero EBITDA because you're going to have to factor in 33% of collections in California for compensation to the doctor. So if if you've got a practice with a million in collections that he's taking on 300,000. In my view, his business is losing $30,000 a year. So he has a negative impact of $30,000.

Art Wiederman: So you really need someone who's doing a million and a half to 2 million or more to really do what you do. It sounds like that.

Chip Fichtner: Yeah, and it varies, you know, profitability as you know better than anybody. Profitability and practices vary widely. So you give me a $2 million GP practice that has a booming hygiene department where they're not paying crazy numbers for a hygienist like in California, for example. Yeah, you know, you can have a $2 million GP practice that could end up with a $500,000 EBIT after paying the doctor, because in that example, the doctor's not getting paid on the hygiene revenues. So he may only be doing $800,000 in collections himself. And so his compensation would only be factored in at 33% of 800, which is $264,000. So every now and then we see $2 million practices that will hit our threshold of a half a million dollars and that But it's got to be a well-run practice with a heavy hygiene component.

Art Wiederman: And I would.

Chip Fichtner: Think it's, on the other hand, or a little different.

Art Wiederman: Oh my God, the specialty numbers I've been seeing are insane, just like you were saying. I mean, Ohmes is crazy.

Chip Fichtner: Well, part of the reason OMS is crazy is because you've had a boom in groups that are interested in knowing best practices. So through the oral surgery market is the fastest consolidating of all types of dental practices at the moment. Six years ago, there were no oral surgery Exclusive consolidators. Today there are 15. So just think in six years we went from the only buyers for oral surgery classes six years ago were multi-specialty groups. Typically today you have 15 oral surgery, only invisible DSOs, and they are all invisible DSOs competing against each other for the for the very few oral surgery practices out there. And then on top of that, the multi-specialty groups who used to hire oral surgeons to travel around their GP practices. That model doesn't work anymore because they can't recruit them. And so they're eagerly now trying to buy oral surgery practices so that their GP practices can send their patients to the local oral surgery practice within their GP footprint. And then you have the most eager of all oral surgery buyers, which are the trifecta groups. So there's two types of trifecta groups. The first is the dental trifecta. And these are groups that are partnering only with pediatric orthodontic and oral surgery practices. And when the first of those, which we helped to build by selling them 110 practices in 35 months, ending September of 22, that group went from a startup to a $2 billion value in 35 months. So my 110 clients that became a part of that group, we're really happy. The early clients made five times their money on their equity and even the later clients doubled their money in their equity. The other type of trifecta that has has relatively low adoption. There are only a couple of them. There are now ten dental trifecta groups up from two in September. That's how eagerly followed that group has been. But the the other type of terrific is the dental surgical trifecta, where there are groups that are only partnering with trios and those in oral surgeons in the same communities. Right. So if you're an oral surgery practice today, you've got a lot of options and the values are crazy.

Art Wiederman: So let me let me again, I want to unpack this a little more for folks is so in your invisible DSO, if I sell to them. Okay. And you're going to get a value of I'll take $5 million, I'm going to pull number of the year. Part of that is cash upfront. Part of that is equity in I call it the mothership. Right. The the DSO that somewhere down the road is going to do potentially a recapitalization event. So what can a doctor expect as far as how are the deals looking, how much cash is coming in? I know they're all different, but what kind of deals are you seeing? You know, if I sell 60% of my practice, how are these deals being structured? How much is cash upfront? How much is equity? And tell me how that works.

Chip Fichtner: You know, it's it's all over the map, to be really honest with you. So let's use 22 in 22, the range of cash versus equity that we did. We did a large transaction for a group of doctors in their thirties. And in that transaction they believed very strongly in the upside equity value of their group. And so it was a a large transaction and they took 51% in cash, 49% in equity. And fortunately that group recapitalized six months later and their equity value doubled in six months. So that's the low cash end of the spectrum. The high cash end of the spectrum last year was for a 59 year old doctor who was very clear that he was only going to practice for another three years. Therefore, he would not be around to see the value of that equity multiply over time because he had a three year time horizon and in his transaction he got 95% in cash and 5% in equity. That was the rates. The most typical deals are 70, 30, 70% cash, 30% equity. And keep in mind, the equity can reside either in your practice or at the parent company. You'll have both options.

Art Wiederman: Right? And you just have to look at the deal. So you have made a comment earlier, Chip, about that. You were kind of shocked that a lot of the deals you're doing are dentists ages 40 and under. And I am seeing you know, you read articles about burnout and then you had a pandemic for three years that really tapped dentists. But but let's talk about this and what are the concerns that I have about dentists in their 40 and under and selling is, you know, they might get a nice multiple and they built a nice practice. But then how much income are they giving up over the rest of their career? So I'm sure that you have that conversation with them. Talk about the dynamic. And we have a 67 year old doctor who says, I want to work three more years. I'm pretty well set in retirement. I'm going to get the value my practice. And then if I get an equity event that's gravy, I can fly first class instead of coach now. And that's great. But the 40 year old let's talk about the 40 year old, which is a large part of my audience. Okay. What does they need to be looking at? What decisions do they need to make as far as whether they're going to go down this road?

Chip Fichtner: Yeah. The short answer is, if you're a 40 year old doctor, the only reason you do one of these transactions is if you find a partner where you believe in the upside value of their equity. And in reality, when you choose the right partner, you're going to make a lot more money between the ages of 40 and 45 than you would between the ages of 40 and 65. So I'll give you a real world example. The first young doctor we sold was to some degree of fluke, and it was in November of 2017 and it was a relatively new group that had just gotten fresh capital. The client was 38. The value of his GP practice in Arkansas was about $5 million in his transaction. He took 60% in cash, so about 3 million and he took 2 million an equity in the parent company. 38 months later, his parent company sold to a larger investor and his 2 million became worth 6 million. So he made three times his money in 38 months. And that same group, which has continued to grow and while he was practice number 38 or something, they're now up to over 500 practices in less than five years. And that group's going to recapitalize again this year. And his 6 million will probably be worth somewhere north of 18 million. So between 17 and 23, his 2 million went from being worth 2 million to being worth 18 million. So it's those types of examples which are real world examples is what's enticing younger doctors to do these transactions. And when they keep ownership, you know, they get the benefits of the resources of that larger partner to help them grow. And those resources can range from not just h.r. Issues and technology but to capital for to go build out and practices that the doctor can have an ownership interest in. And so to me i look at it is it's a great way for a young doctor to build an empire using somebody else's money and they can keep 49% ownership in, let's say, the practices that they may build or buy, that their partner will put up 100% of the capital risk free. So the young doctors that are are builders are getting that. And other young doctors, when they choose the right partner, can see dramatic upside in their equity. And so that's what's attracting it. But it's sort of the side effect of that is that it is as more younger doctors are eager for these transactions, it's reducing the interest level and value for the older doctors. And again, we're 63, so I'm going to have to call it home. But I can I can tell you that unless a doctor has younger associates, when a 65 year old doctor calls me, I'm very blunt with them. And so and say, Doctor, I'm going to be really blunt with you unless you get a younger associate, I'm going to have a very hard time doing a high value transaction for you. Having a six in front of your age is not good today.

Art Wiederman: Because the younger doctor is going to stay for 20 years. And that's what that DSL is looking for, right? That's what you're saying.

Chip Fichtner: Yup. Exactly.

Art Wiederman: Interesting. So, again, you know, it's a math problem, folks. You have to look at how much you're going to get. I mean, if if someone said to you you're going to invest $2 million, you know, which is probably more than you would get if you just sold a practice to somebody else, and that, you know, six years later, you're going to $18 million, that's probably a lot more compensation than you're going to earn over the next 20 years of your career. And if those deals are out there, you know, that's where someone like Chip can advise you and say, this is what we've done and this is what we're seeing and these are the people. So I want I want to get into a little bit about the comment I made at the beginning, Chip, is that I'm getting doctors. I'm sure you get these calls, too. Well, I, I signed up with this group and it's not going well. And I. Well, did you talk to a but no, they called me and they really told me and they showed me abilities. So talk about I mean, there's, what, two or 300 different DSOs out there, maybe more, you know, better than I do. So what is the advantage of using a broker as compared to just taking a call from somebody? And they sound really nice and it sounds really great and just doing a deal with one person?

Chip Fichtner: Well, you know, the biggest challenge and that is that you're not getting to see all of your options, Right. Any practice which is qualified to partner with an invisible DSO, meaning they have at least a half million dollars in equity and they're not 75 years old. They're going to have lots of options. We don't take a client unless we can identify at least six qualified bidders for that client, because multiple bidders is what drives up values, because these groups don't like to lose. And so we see doctors who come to us and say, hey, I've got this offer from this group. What do you think? And I'll say, How many bidders did you have? And he'll say, Would you ask them? And I'll say, I know I can get you more money. My favorite example was the doctor who came to me. He had a $19 million offer in hand. It was an orthodontist, and he called me and we had done his numbers. I knew the value of his practice and he said, Hey, Chip, I've got this offer from this group. And my buddies went there and I've met the CEO and I've drank whiskey at their headquarters, and I really like them. I just I just wanted your view of the world and then, you know, I'm not a client. And I said, Okay, before you tell me the number or the bidder, tell me how many bidders you had. And he said, Well, just one. I like these guys. And I said, okay, I'll get you at least $5 million more. He's like, How can you say that? You don't know who it is or what the number is.

Art Wiederman: Because I've done this and.

Chip Fichtner: It doesn't matter of fact, a practice like yours is going to have ten qualified bidders, even in Tampa, Florida, which is about as hot as it gets. Oh, yeah. And he said, you really can guarantee that. I said, Yeah, absolutely. I said, I'll put in writing that if I don't get you at least $5 million more, you can pay me nothing. And we'll handle the painful part of these deals, which is getting them closed. And I'll do that for free. And he said, okay, you're crazy, but the bidders from X, Y, Z and the bid is $19 million. And I said, okay, I changed my mind. You said, Oh, you're backpedaling. I said, Nope, I'm going to change it to I'll guarantee you $10 million more or U.S.. So we signed an agreement that said, if I could not get him at least $29 million net of my fee, then he could pay me nothing. So we went through the process. He had 11 bidders. The first bidder who was his best buddy, that he drank whiskey with a bourbon. Actually, I called their CEO up and said, John, do you do you really want to stick with this offer on Dr. X? And he's like, What do you mean? I said, Well, we represent him now. And as you know, this is sort of an insulting offer. He said, okay, you're right. He went to 30 million on the first call from 19.

Art Wiederman: And you have. And so we went.

Chip Fichtner: To a process where I just wanted to see where he would go. And the funny thing is, he didn't even make dinner in our process. In a practice of that size, we're going to have the final four bidders come to dinner, meet the doctor, do the after hours practice tour, and the high bidder was 43.5 million. Now he ended up going with the under bidder at a mere 42.5 million because it was 95% cash. And that's what he wanted was cash. So the point being is that you don't know what you don't know. And unless after your eight years of dental and specialty school, you manage to go get an MBA and an investment banking background, you're not a specialist. I would not do my own root canal. I don't know how to do that. That's not what I do. And so it's important whether you choose us or somebody else, you need advice. And this this is a life changing transactions. They're very complex and any great practice is going to have a minimum of six bidders. And, you know, today a great practice is going to have close to ten, which is more than last year. And so it's important that you look at all of your options not just to drive up value, but to understand which one is the right cultural fit for you. Because our transactions, the doctor's sticking around for at least five years. This is a marriage is not a one night stand. You're not getting a check and walking out the door. So it's important to pick the one that's the right cultural fit for you.

Art Wiederman: Okay. So I want to take a second at this point, which I do with all of my guests who are kind enough to share their expertise is maybe just talk a little bit about how your company Large Practice Sales works with clients. And I'd like you to also give out your contact information. So just take a second and talk about your company and what you do and you know how they can get a hold of you.

Chip Fichtner: Absolutely. Our company large tractor sales is is unique in that we help larger practices monetize a part of their life's work. Not all of it. We do not do any 100% sale transactions. We generally don't do any transactions where the doctor is not going to stick around as an owner for some period of time because frankly, that's how you get the higher values. But we can be reached at largepracticesales.com, pretty easy to remember and our process is really simple. I love to talk to doctors. I talked to 18 of them today and what I do is we have an introductory call. We learn a little bit about your practice, learn a little bit about what large practice sales does and this of interest. We're going to provide you with a free practice evaluation by signing a non-disclosure agreement which binds both of us to nothing other than confidentiality. And then we take a look at two years of panels plus the first quarter of 23. My analysts will give you a call, ask some questions, figure out where the bodies are buried, Add back the personal expenses that seem to sneak into every dental practice, financials we've ever looked at.

Art Wiederman: We pay personal expenses. Dentists pay personal expenses through their practice. I had no idea.

Chip Fichtner: I thought none of your clients do that, right? No, no.

Art Wiederman: No, no, no, no, no, no. Absolutely not. Everything they take, they take two trips at Costco. One is a personal trip and one is a business trip. Just so you know.

Chip Fichtner: Of course, you're we've we've never had to go through line item by line item crossed over them that because we do that and I'm sure you do too. So the idea is we're going to look at your financials and then you and I will have a conversation about what's possible from a value in a structure and a number of bidders I would expect for you. And you'll either like that number or you won't. And if you don't, that's okay. You got a free practice valuation and we hope you'll call us in the future. And if you do like the number, then we can have a conversation about the next steps to go, see if we can find you a great partner. Okay. The process from becoming a client to putting cash in your pocket takes about six months. It is not a speedy process, but it's very organized. And I would say we close 90% of the clients that we take. Sometimes it's more painful than others. And it's it's got some challenges. When doctors hit bumps during the process, right now, we're seeing some doctors have reducing or reduced reductions in collections. Right now, that's not a good thing for value, but there are ways to work around that. So that's what we do. Large practice Salesforce.com, and we'd love to talk to every doctor who's listening.

Art Wiederman: So you said that a doctor has to let's continue this conversation, that a doctor has to work. What would you say? You think minimum three years or five years? I mean, if a doctor is just saying, I've got a great practice, but I want to be done, I am bride, I'm done, that probably isn't going to work. Or is it?

Chip Fichtner: The only place where it can work is when the doctor says, I'm tried, I'm done. But I have three great associates that work for me.

Art Wiederman: Okay. There you go.

Chip Fichtner: A single doctor practice. I'm afraid I'm done. I can't help but depending on their associates, doctors who have associates can jump the. I have to work for X number of years. The doctors ask me that question. Hey, I really only want to work two, not five. And the answer is I can still do a deal for you too. But the value will be lower than if you're willing to commit to five.

Art Wiederman: So also, Chip, talk about how important it is to have advisors who understand all of this. And then I'm going to make some comments about the tax ramifications here in a minute. But but talk about having I mean, there are you know, there are attorneys we're not mentioning any names. There are attorneys that specialize in working with, you know, DSO transactions. There are CPAs that understand how this work. And there are dental well, they don't need a really can consultant because they're the seller, not the buyer. But but talk about how important is your advisory team is other than you who are a seller representative. Talk about that for a second.

Chip Fichtner: You know, it's absolutely critical that you have a CPA who actually understands dentistry. And having one who understands transactions is also important. I can't tell you how many CPAs of our clients, including mine, are running big, profitable practices where I have to explain to the CPA that the doctor is not liable for the 3.8% Obama tax in these transactions, and you can explain why they're not. But it is shockingly important to have a CPA, and we recommend our clients to lawyers, typically based on lawyers who have done transactions for our clients with the invisible DSO that the client has chosen. So it's a doctor who's already experienced with that particular buyer, makes the process go a lot faster. And we're always eager to get deals closed and on time because we get paid nothing unless the transaction is completed.

Art Wiederman: And you can refer you're.

Chip Fichtner: Having us.

Art Wiederman: I'm sorry, go ahead.

Chip Fichtner: Yeah, we do. We refer our clients to the lawyers that we have used in the past for our clients with the particular buyers. But the power of your CPA is incredible in getting these transactions done because the speed at which they respond, the knowledge they have of the data that the buyers are seeking is critical to success and the value. And in fact, there's a memo I send to all of our new clients that say your speed of responses and accuracy on your accounting information is going to impact your overall value of your practice. And they're always shocked to hear that because some of them are using the CPA as a go. Yeah, next time I'll get to you in a month. That's not acceptable. So I'm not trying to give a plug plug for you, but I know you're one of the good ones and you're very kind that you get a CPA who understand dental.

Art Wiederman: So I want to jump in here, Chip, for a second and talk a little. You had mentioned the 3.8% Obama tax. That was a big question that we had when that came into the law back in, you know, ten years ago whenever it came into law. Yeah. So, Doctor, if you sell if you sell, you know, General Motors stock, I can mention names. Microsoft doesn't matter. You've got to pay 3.8%, what's called the net investment income tax. So we had wondered, do you have to pay that tax on the sale of your goodwill? And a lot of the goodwill is shown is personal goodwill. There is a wonderful article I have that I found from a tax magazine, which is like the Journal of Accountancy tax Bible called the tax advisor. I don't know if it's the Journal of Accounting, but it's a a magazine called the Tax Advisor, and it's not clear in section 1411 of the code, but it is pretty clear, based on all of the numbers and everything that that we I will tell you that when we have clients who sell their practices, whether it's to a idea so visible and invisible, you know, large small DSO or just to another doctor, we generally do not repeat do not report the goodwill portion because that's what we're talking about here, is the goodwill portion of the sale as subject to the 3.8 tax. The other point, Chip, I want to make to our listeners is this. So part of the example you gave you gave an example of a guy that was selling for 5 million, maybe he got 3 million cash upfront or, you know, and he got 2 million that went into the entity that is going to hopefully recapitalize and make him a lot more money. So doctors, here's what you need to be careful about. If that $2 million is in a contract and that contract says Doctor Dr. Fisher. Dr. Fisher, you're getting a partnership interest that is worth $2 million, and the total sales price of your practice is 5 million. Then you have a taxable event on that $2 million, because then IRS agents are going to read that. They're going to say, yep, you got you got $2 million of value, there's a valuation. Okay. So what we encourage you to look at doing it, which works in many cases, is that you are contributing your personal goodwill to a partnership or an LLC, which is how most of these entities are set up in exchange for a partnership interest. You have a zero tax basis, so you have $2 million of goodwill that you've built up. And the Norwalk and Martin Ice Cream court cases that go back 20 to 30 years allow us to sell dental practices where you've sold your personal goodwill. And we're not going to go deep into this. But generally that's how we do it. But again, make sure doctors that your contract and if you're working with an attorney who doesn't understand this, someone who's not a dental specific attorney and not just dental specific. But someone who's done these deals, you could end up with $2 million that is fully taxable. So you want to show it as what's called a contribution to the capital of that DSOs capital account, the the partnership or LLC. So you contribute that a Section 721 contribution is not a taxable event and it does not generate a tax liability. And then you get a partnership interest or an LLC interest. Then when that LLC interest sells in a recapitalization event and then GIP brings you to a buyer and they recap three years later and your 2 million becomes 6 million. As my late mother used to say, from your mouth to God's ears. Then what happens is, is then you have a long term capital gain. So, Chip, I don't know if you've heard this. We have. You and I haven't talked about this before, but that's what we look at. And there's actually attorneys who do language that state that. And I don't know if you've heard that, but that's something doctors just be very careful that when you're dealing with the legal part of the the contracts and they talk about what you're selling, you're not selling your practice for 5 million. You're selling it for 3 million and you're contributing your goodwill that's worth 2 million, but has zero basis to a partnership, because if not, you're going to have a $2 million taxable event. And guess what? You have no money to pay the tax doctors because your recapitalization event is 3 to 5 years down the road. I chip, I don't know if you've heard these kind of conversations before.

Chip Fichtner: Yup. That's exactly how you should do it.

Art Wiederman: Yeah, and that's how we do it. So, doctors, that's why it's important to to deal with with people that you understand. So what are the biggest mistakes that you've seen doctors make chip in in doing going through this process.

Chip Fichtner: You know, when the doctors try and do it themselves, they make the mistake of not looking at enough bidder's, number one. Number two, they lose the tax allocation negotiation, which is the goodwill versus tangible asset negotiation, because they don't know to ask for. We have a proprietary method of always winning that argument. And so our average deal has been 94% goodwill over the last billion dollars of transactions.

Art Wiederman: Which that's pretty darn good. Yeah.

Chip Fichtner: And we have we have a secret sauce of how we win that argument with the DSOs and every time. And that's, you know, we see a lot of doctors doing deals themselves where they go, okay, we'll do 50, 50, 50, goodwill, 50 tangible. Will they just increase their tax bill by 40%? Huge.

Art Wiederman: Oh, my God. And the other touching. Yeah. Big money.

Chip Fichtner: Yeah, big money. But doctors that do it themselves don't know otherwise. And the other thing when doctors do it themselves is they're not asking the right questions to really understand what's going to change and what's not going to change. And so you hear a lot of disgruntled doctors who did a deal directly with a group, and a year later they're unhappy because they didn't ask the right questions up front to understand what's going to change and what's not going to change. And we go out of our way to make sure our our clients talk to other doctors within the groups that they're considering so that they can hear exactly what life is going to be like afterwards. Because the last thing you want to do is the joyous day of monetizing your practice and then five years of agony working with somebody that you shouldn't have chosen in the first place.

Art Wiederman: Or as we as say, you don't want to throw up every morning before you go to work.

Chip Fichtner: Yeah, exactly. And the other thing that we see is doctors screwing up their leases. You know, there's a huge business of real estate investment trusts out there eager to buy your practice, real estate, especially when it is occupied by a triple-A credit invisible DSO tenant. Not you. Right. Again, these these groups are all going to sign new leases with you, the real estate owner. And how you structure those leases is critical to being able to liquidate your real estate in the future. And just a few little loans in those leases can sometimes render your real estate functionally unsellable at any price because the DSO trick you into a lease that's not favorable to you, but rather favorable to them. And to me, that's one of the biggest value killers that we see for doctors who try doing these deals themselves.

Art Wiederman: Chip to a lot of the do a lot of your.

Chip Fichtner: Complex transactions.

Art Wiederman: Do a lot of the doctors, do a lot of the DSOs want to buy the real estate as part of buying the practice or are they mostly entering the leases or again, is it all over the board?

Chip Fichtner: No, it's, you know, 95% of the invisible. Those have no interest in buying the real estate at all. They will lease it. They will give you a, you know, a standard deal as a five year lease with two five year options. You got to make sure you have a CPI escalator in there. We see a lot of them trying to pawn off leases without escalators or with flat 2% escalators. You know, I lived through inflation. My first mortgage was at 14% in 1980. And so you want to have CPI escalators in these. But the groups, as a general rule, do not buy real estate. They lease it. But there's a whole bunch of real estate investment trusts out there eager to buy the real estate. And the value of the real estate is higher when you have a triple-A credit tenant versus you being the tenant. But it's key to structure the lease properly up front.

Art Wiederman: Now, are you are you seeing hold backs? I know early in the game some of these DSOs were requiring, well, maybe, you know, we're going to give you 70% cash, but we're going to hold back 15% to make sure that you stay for three years or to make sure that are that the revenues of the practice stay at or above where it was. Are. You see, I'm hearing that the hold backs are not as prevalent. What's happening with that?

Chip Fichtner: You know, in a traditional 100% sale to a DSO, you know, the hold back still exists. And the the requirements that you produce X to get your full purchase price still exist in the transactions that we do. There is still usually a reps and warranties hold back. That's going to be an amount less than 5% of the cash for a year, and it's not tied to production at all. It's just tied to the reps and warranties that the doctor made as a part of the transaction has nothing to do with the performance level of the practice. And there are some that that have what we call a clawback where if the doctor doesn't perform at X level, then the buyer can actually go back and retrieve sales price. And we don't do any of those, never have done any of those and should you should not do it. But sort of the flip side of that is what we call the earnout. So in the deals that we do, there are no penalties for lack of performance at all, period. However, in every deal that we have done since the onset of COVID, it has had what's called a covered earnout. Covered earnout was created during 2020 to induce doctors to do these transactions, even though the performance of their practice had not returned to 2019 levels of collections or profitability. And so the COVID earnings were designed to induce the doctor to do a transaction now, rather than waiting to the return to the good old days. And what they did was they basically said, okay, we're going to close the transaction today based on your trailing 12 months performance and we're going to functionally reprice the transaction 12 months after closing or 24 months after closing and pay you for any incremental growth that you have in your practice for the first year, the second year and sometimes three years. And those are a great mechanism for a growing practice that basically locked in today's absurd high multiples and get paid at that high multiple for their performance in the first, second and sometimes third year after closing. It's a huge inducement for young doctors that are growing because they're going to be able to capture that what I'll call embedded growth that they have not yet realized because they added an associate or are just finished building a new office or whatever. But the covered earnout will go away. It's just a matter of when, not if, because they didn't exist pre-COVID, the lawyers did not like them. But today it can mean if you have a growing practice, you know, it can mean an additional millions of dollars in consideration. And when you structure it correctly, it's treated as long term capital gains because we structured them as a purchase price adjustment rather than as a bonus. So it's long term cap gains rather than ordinary income for the majority of them.

Art Wiederman: And doctors, that's a 17% difference. 37 versus 20. That's the answer. You're talking a million bucks. That's $170,000 in your in your pocket. What should doctors, if they're talking to DSOs without someone like you on there on the phone call or in their corner, what things do you hear? And again, we're not mentioning names or or even service. What things if a doctor hear something from a DSO, should they say, Nope, I'm run, don't walk.

Chip Fichtner: Well, you know, the biggest scam going on in dental at the moment are the and there's a couple of them where there are promoters who are out there saying to smaller practices, hey, join our group now. We're not going to give you any money and we may charge you a fee for, quote, helping you, but we're going to put all these little practices together and then we're going to go sell to private equity, as they say all the time. And we're going to get a much higher multiple because together we're more valuable than you are. Stand alone. Now, that's a great theory, but we have yet to see that ever work. There are promoters and charlatans and frankly, scam artists out there who are convincing smaller doctors to, quote, join their group, pay them fees with the hope of them selling the big conglomeration of 50 small practices at a big practice value. The reality is that doesn't work because the buyers have no interest in a bunch of an integrated, smaller practices. So that's that's the number one thing to look out for.

Art Wiederman: Yeah, and I would agree with you. I've seen it, too.

Chip Fichtner: And it's getting bad. I'm hearing about these groups more and more. And it is it's not good. And really, on a couple of them, all you have to do is Google the names of the promoters and dig deep enough and find a bunch of bankruptcies and licensing revocations and other problems. But you got to go down to the third page of Google to find it.

Art Wiederman: I mean, you've got to get your money. You want to get the money. I mean, I want my money. I'm going to sell appliances. I want my money up front. I don't want say, well, you join and we're going to get a bunch. Yeah, so I agree with you. Yeah.

Chip Fichtner: We're gonna we're gonna being the key word.

Art Wiederman: Sure we are. But but anyway, any. I mean, we're getting to the end of our time here. Any kind of final thoughts or comments for doctors that are thinking about going down the road? And I want you to give out your contact information one more time. Again, doctors. You've got a gentleman here on this interview who, you know, again, I get nothing other than the satisfaction of knowing that my listeners, thousands and thousands all over the country and in different countries, too, according to the the literature that my my listeners are getting good information and should be thinking about A, B, C, and D, and that's what Chip is giving you here. So anything else that you want to mention before we we call it, then I'll let you give out your information one more time.

Chip Fichtner: Yeah, it's I can't emphasize enough the fact that doctors have multiple options in partnership and you're going to be a lot happier when you finally pick a partner if you have considered all of your qualified options, not just a few of them, because again, this is a culture, This is your life. It's who you're going to have to live with for the next five years or whatever. And it's important to look at all of your options because they can be very different and watch out for the promises of our backers, our ex, and we're going to recapitalize in three years and make a gazillion dollars. You need to understand, especially today, who the money is behind these transactions. Do they have experience in health care consolidation? Do they have experience in dental practice consolidation? And in those cases, they're more likely to be the winners than the groups that have capital. But no strategy and no experience. And, you know, as this business has boomed and consolidation is accelerating rapidly. And what I like to say is you're either going to join an invisible DSL or you're going to compete with many of them. And so it's important to consider all of your options because ultimately it's a great option when you find the right partner, when you find the right, when you find the wrong partner, it can be miserable. So at least a lot more bidders.

Art Wiederman: The last point I want to make and then we'll let Chip give out his information is this Doctors, if you are looking at going down this road, you need to look at all the positives and negatives and you got to you got to make a decision if this is what you want to do. But the fact is, if you personally negotiate with one of these groups, these groups are really, really smart people. They are going to make you the lowest offer that's going to entice you to sell, but is not going to be your best offer. You get someone like Chip Fitzner and his team and they go and they call this guy just like he was telling you earlier. And you say, Hey, Joe, what are you doing here? You're offering this guy X, and you know darn well then it's worth X plus 30% and he's going to go, Oh, okay, well, I'll bring it up, you know, because they have that ability to take advantage. So you got to make sure that they don't take advantage. And that's in anything that's in if you're selling your your home, you don't want to do that on your own. You wouldn't sell your home on your own. And again, I'm not doing a commercial for a large practice sells. I don't need to do that. These guys know what they're doing. The people I bring on this podcast know what they're doing, and if you want to give me a call. So chip last and then if you're hanging with me as I take the podcast out, best way to get a hold of you and your team and you'll be happy to talk to any of our listeners who are just curious as to how this works, Right?

Chip Fichtner: Absolutely. And large practice sales dot com is the easiest way to reach us.

Art Wiederman: All right. Sounds good to me. Thank you, Chip, for your expertise. Thank you. Chip Fichtner, co founder of large practice sales out of Dallas, Texas. And folks, again, I want to remind you first, I want to thank you again for the honor and privilege of your time. Every year, every year we get lots of emails and calls. I was at a dinner with about ten dentists, about three of them. All right. Thank you for what you do. And again, I'm not pat myself on the back. I'm just saying we had a lot of people that listen to the podcast because the information is good and we want you to be successful and we want you to make the right decisions because there's a lot a lot of people out there looking to take advantage of you. Well, and that's the God's honest truth. This is my legacy. This podcast is my legacy. I don't I don't need to do it. I don't need to do anything as far other than to help my clients, because at the end of the day, this is my legacy is helping all of you make sure you go take a look at our partner decisions in dentistry website WWw.decisionsindentistry.com fantastic clinical content the best clinical content out there A who's who of clinical doctors talking about all kinds of clinical issues 140 continuing education classes at a very reasonable cost. Again if you have a need for a dental CPA, that is what we would ideally do. That's what the Academy CPAs do. If you want to get a hold of me, I'm at 6572793243 or aWiederman@eideBailey.com and the Academy Dental CPAs 25 CPA firms across the United States that represent over 10,000. Dallas is. Uww that adds EPA, Dawg. Well, with that, folks, I'm going to call it a podcast for today. So my name is Art Lederman, Dental division director at the CPA firm of Eight, Bailey and I Bailey. And on behalf of the. What is the name of my podcast again? It's late on a Friday afternoon, folks. On behalf of the Art of Dental Finance and Management with Art Wiederman. Thank you for listening and we'll see you next time. Bye bye.