Orthodontic practices have achieved exceptional values in LPS client IDSO bidding processes for over seven years. In 2023, LPS client values exceeded 4X COLLECTIONS for several ortho practices and over 12.2x EBITDA for a nine-office client. In the last 24 months, LPS has completed over $300 million of IDSO partnerships for our ortho clients from coast to coast. And so far in 2024, we have signed some Ortho partnerships at 10x EBITDA.

BUT… The Ortho world is changing, as are the QUALIFIED bidders. Here is why:

According to the ortho data experts, based on national averages:

  • Case Starts Dropped 8% in 2022 vs. 2021
  • Case Starts Dropped Again by 6% in 2023 vs. 2022
  • And Q1 2024 appears to be down by 4% vs Q1 2023

Revenues were not impacted quite as severely, as many Orthos raised fees to keep up with inflation. But overall revenues are down and costs are up in many practices. But fortunately, not ALL Orthos are declining! Growing Ortho practices are now more valuable than ever!

The Key Practice Characteristics for High Ortho Practice Values Today

  • Case start growth in Q1 2024 vs. 2023
  • Age: Under 60 OR Over 60 With a Young, proven, Associate OR Creative Solutions
  • Adult Case Starts of Less than 25% of Total
  • Invisalign of Less than 50% of current production
  • Marketing: Less is better
  • Have a Relative Who Owns a Pedo Practice Next Door

There are still 14 Ortho-Only IDSOs, but fewer than half of them are bidding for ortho practices today and their proposed value levels and structures are not winning many LPS clients. Several are facing challenges driven by decreasing revenues, higher interest rates and higher costs. They have stopped new partner activities to reduce costs and to focus on improving their current partner practices. Several would like to partner with Pedo practices now to gain a captive new patient referral source, but they have run out of capital, credit and credibility…

Dental Trifecta® IDSOs

Fortunately, there are now multiple IDSOs pursuing the Dental Trifecta strategy. They are partnering with pedo, ortho and OMS practices in the same regions, creating steady new patient flows to their ortho practices. It literally pays for the Pedo to refer to the Ortho in the IDSO family. The first big Dental Trifecta monetized in September 2022 at a record 20x EBITDA. The world’s largest money manager, Blackrock, bought a Dental Trifecta IDSO in December 2023, their second IDSO investment in 15 months. And YES, LPS clients made significant returns on their equity!

The Dental Trifecta IDSOs continue to be aggressive bidders for Ortho in the right geographies. When LPS signs a new Ortho client, our team contacts all non-competitive Ortho practices and pedo and OMS practices within 50 +/- miles. We do not use our client’s name, only telling doctors that we are building a Dental Trifecta in their region and we should have a conversation. When we can deliver two or three of the Dental Trifecta practice types to an IDSO, all of the clients achieve a higher value.

Pedo/Ortho IDSOs

Like the Dental Trifectas, the Pedo/Ortho IDSOs have in general outperformed the Ortho-Only IDSOs. Several newer Pedo/Ortho IDSOs have fresh capital and some very creative strategies. Like the Dental Trifectas, they are winning in the LPS process. Their creative strategies here can be discussed on a call with me, but they are very, very exciting for future equity values. Hint: OMS. Some of the aged Pedo/Ortho IDSOs are having issues due to their homogenization strategies and are on The Blacklist of IDSOs we will not allow to bid on LPS clients.

Multi-Specialty IDSOs

The IDSO, with the second largest number of Ortho partners in the country, is a multi-specialty IDSO with GP and all specialties; not an Ortho-Only IDSO! Several multi-specialty IDSOs have more Ortho partners than most of the Ortho-Only IDSOs. Their overall collections continue to grow. Their Ortho partners benefit from referrals from other practice partners of the IDSO including Pedo and GP.

New Risks in Ortho

Orthos reliant on Pedo referrals are at risk of those practices partnering with IDSOs and sending their referrals to a practice in the IDSO family instead of you. We have completed several larger transactions recently for our Pedo clients in which they had multi-million dollar Earnouts tied to adding ortho to their practices. Note that in these deals we called the local orthos to warn them. We have seen the impact in the past. The IDSOs are happy to provide the capital, support and recruiting to capture the ortho revenues generated by Pedo referrals. Beware….

What Now?

LPS is being more selective in our Ortho clients to ensure that any client will have multiple bidders, often from all four IDSO types. Growing practices can still achieve record value levels today. We signed a 10x EBITDA transaction for a client in NJ in April. Their production is flat vs. 2023 and their new partner is a Pedo/Ortho IDSO with hundreds of millions of fresh capital, with a great equity upside potential.

And if you have a friend who is a Pedo or OMS, we should have a conversation soon! High interest rates, persistent inflation, wars and D.C. political nonsense are not likely to help future values. I wish I were wrong, but now is the time.

Chip Fichtner