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Largest IDSO Recapitalization Ever and Post Election Comments

by | Nov 13, 2024 | Insights

Largest IDSO/DSO Recapitalization in History Completed

The Largest Invisible Dental Support Organization (IDSO) in the country completed their third recapitalization immediately after the U.S. election. Over 700 partner doctors were able to harvest profits from their retained equity ownership at long-term capital gains tax rates.

Over 50 of those happy doctors were LPS clients which we partnered with this IDSO over the last seven years. Returns ranged to over 500% depending upon when the doctors joined the IDSO. This IDSOs second recapitalization was completed 46 months ago, which was 38 months after their first recapitalization. It pays to choose your IDSO partner wisely. LPS apparently gave good advice to our clients! The value of this IDSO is now approaching $4.0 BILLION dollars.

A second, smaller IDSO completed their recapitalization in late October. These two transactions prove once again that well-run, growing, high quality IDSOs can access the capital markets to create very profitable liquidity for their partner doctors. Several other IDSOs with which LPS has partnered multiple clients are also in the recapitalization process with completion targeted for early in Q1 of 2025.

Election Outcome Impact on Practice Values and IDSO Activity

An interesting and positive effect of the election is President Elect Trump’s choice of his transition leadership team. The two leaders of the transition and thus influential in the choice of cabinet members for the administration are both self-made billionaires, businesspeople.

Howard Lutnick is the CEO of the large Wall Street trading firm, Cantor Fitzgerald, and Linda McMahon is the Co-Founder of the WWF and former head of the Small Business Administration under Trump 45. Their impact on the choice of influential positions in the early development of the next Trump cabinet and policies is most likely good for business and good for investors. Ultimately, on a macro level, also probably good for IDSOs and U.S. dental practice values and acceleration of consolidation.

Tax Impact of the Election

Despite our country’s need to increase tax revenues to offset the $1.83 trillion dollar FY 2024 deficit and pay the interest on the $35 trillion dollar U.S. debt, Trump is a proven tax cutter. His 2017 tax cuts which expire at the end of 2025, in some form or fashion will probably be extended.

The Biden/Harris tax proposal for 2025 on the proceeds from the sale of your practice at 44.6% (plus state) is probably dead! Thank you American voters. Given Wall Street’s late switch to Trump support, the Obama/ Biden/Harris plan to dramatically increase taxes on the “carried interest” incomes of hedge fund, venture capital and private equity fund managers is also probably DOA. This tax increase could have had a potentially debilitating impact on IDSO investment.

Return of Inflation?

Unfortunately, given the potential inflationary impact of Trump proposed tariff policies, practice operating costs could continue to rise. A new round of inflation could further compress dental practice EBITDA margins which have been hurt during our last three years of inflation. Time will tell. There is not much dentists can do about it except keep a keen eye on costs and not be bashful about increasing fees. Inflation has probably, far outpaced, your fee increases and reimbursement rates since 2021.

Interest Rates

The September Fed rate cut did lower short term rates, but long-term rates (10-year UST) have actually increased since then. Many doctors were under the impression that higher interest rates impacted IDSO partnership values in 2023 and 2024. Yes, some IDSOs refrained from bidding aggressively on new practice partners due to higher debt service costs. However, with the over $5.0 billion new investment made in IDSOs in just the first half of 2024, newly capitalized and recapitalized IDSOs filled the void. Quality bidders are still eager to partner with great practices at high values; if you know where to look!

Still Achieving Record Values with Almost $200 Million Completed in Q3 2024

LPS achieved record values for larger, growing practices so far in 2024 with over $600 million of new clients signed year to date. In Q2 2024, LPS completed almost $200 million in IDSO partnerships for our clients, both GP and all specialties. Values ranged from 7x EBITDA to 11x EBITDA. Transaction sizes ranged from $3.0 million to over $60 million.

Compare that to the little advisors which combined, year to date, have not achieved that volume. Nor do they come close to the practice values achieved by LPS for clients. Size matters for value and choice of the right IDSO partner. Remember that of the 1000 IDSOs in the U.S., LPS considers less than 100 of them qualified to bid on our clients. The Blacklist is growing.

What Now?

The liquidity gained at low tax rates in an IDSO partnership today can earn 5% risk free. Despite the welcomed post-election euphoria by investors and business leaders, the U.S. faces significant challenges globally. It never hurts to have low tax liquidity in times of trouble. An IDSO partnership enables doctors to diversify their portfolio and potentially participate in higher return investments like equities and Gold. Buy gold.

Chip Fichtner
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