LPS has completed IDSO partnerships for our clients with almost 40 different IDSOs in 30 states in the last couple of years. Values this quarter will continue to hit records, but certain legacy IDSO bidders have stepped on the brakes to practice criteria and values. Fortunately, there are dozens of newer IDSO bidders across the country with billions of fresh capital.
The high value IDSO bidders for LPS clients come and go depending upon their capital position and changes in strategy. As just one example, between 2017 and 2019, we completed over $200 million of partnerships with one IDSO. They then became a low bidder. We completed our first transaction with them in almost four years this week. They are back in the game thanks to new capital.
New IDSO Bidders in Q4 Still Getting Record Values, But I Think This Will Change Soon
We will complete IDSO partnerships with at least eight “new” IDSOs this quarter. Some of these new IDSOs have been around five or more years but have new capital to ensure their success and enable them to qualify to bid on LPS clients. Others are backed by capital sources which have successfully built lucrative IDSOs in recent years and are now building new ones. These are some of the best equity upside opportunities for our clients.
Three Aggressive Bidder Types this Quarter
Multispecialty
The first is a 200+ practice multispecialty IDSO which is approaching a recapitalization in 2024. They are bidding aggressively with a higher cash component for larger practices, both GP and specialty. We have partnered multiple clients with them in the last several years with 100% of the doctors thrilled.
Dental Trifecta
One of the original Dental Trifecta IDSOs has access to new capital and is bidding at record values for pedo, ortho and OMS in specific geographies…10x+ EBITDA in many cases. There are also three newer Dental Trifecta IDSOs offering high initial values and promising equity growth opportunities for specific practices nationally.
Implant Focused Practices
GPs, Perios and OMS practices which have 35% or more of their collections from implant or All on X cases now have a half a dozen or more newer, qualified bidders. These are in addition to the multi and single specialty IDSOs which have been the traditional partners for implant practices.
High Interest Rates Impacting IDSO Partnerships in a GOOD Way
In an IDSO partnership, doctors are functionally trading a part of their future practice profits for cash up front at low tax rates. Two years ago, that cash might have yielded less than 1.0% in risk free assets like U.S. Treasury Bills. A doctor’s $5.0 million after tax cash at closing would only earn $50,000 per year.
Today, cash received in an IDSO partnership can yield about 5.5% in risk free liquidity. That same $5.0 million in cash can now earn $275,000 per year, in part offsetting the doctor’s loss of ordinary income. Liquidity in the challenging times we are facing today can be deployed in a variety of high gain potential investments in the coming years. Cash is KING in troubled times.
The Debt Bomb for Some Small Group Practices
Hundreds of smaller practice groups which have been built on bank debt in the last five years are struggling. We regularly see groups with 5 to 20 practices which have been built by borrowing from their “friendly” banker to build or buy practices. Two years ago, that floating rate debt might have cost 4% and today the cost is well over 10% in many cases.
If a practice had $10.0 million in debt at 4% in 2020, its interest expense was $400,000 per year. At 10%, the interest cost is now $1,000,000 annually. This added expense is crippling many of the smaller groups and causing sleepless nights for the ambitious dentists who personally guaranteed these loans. A reckoning is coming, but there will also be opportunities.
- Practice Partnership Podcast Ep 14: The Surprising Drivers of High-Value Practices - December 11, 2024
- Death, Taxes, & Dental Practices: The power of diversification - December 5, 2024
- Decisions in Dentistry: The Rise of Invisible DSOs - December 4, 2024