Any larger dental practice today should be considering an IDSO partnership for a number of reasons I have touched on in other memos. These include liquidity at low tax rates, admin burden reduction, lower costs, higher reimbursement rates and equity upside gains on their retained ownership.
Recently, many doctors have also realized that a doctor- to-doctor ultimate exit is not possible at market values for a larger practice. Most associates cannot afford to buy some or all of a practice when market values are 150%+ of collections. In 2023, LPS completed some IDSO partnerships at over 400% of collections, far out of reach of associates.
But many doctors are still hesitant to enter into an IDSO partnership for a variety of reasons; here are the Top 9:
Loss of Autonomy and Control. No great entrepreneur wants to be told what to do and how do to it. In an IDSO partnership, doctors are not micro-managed nor do IDSOs attempt to homogenize partner practices. We prove this to our clients via conversations with other doctors who have joined the IDSOs our clients are considering. Doctors get to hear what real life is like in a partnership with your specific finalist IDSO. LPS clients learn that full autonomy is the norm long before they get “married”; not just clinically, but in all aspects of practice management.
Impact on Team Members. IDSOs understand that your team is an integral part of the success of your practice. In every transaction LPS has completed, practice teams end up with benefits equal to or better than what existed, without exception. Doctors make the hiring, firing and compensation decisions.
Production Quotas/Claw Backs. Unlike some traditional DSO sales, any transaction negotiated by LPS will have no claw backs of initial practice consideration and there are no required production quotas for doctors. IDSO partnerships entail the doctor remaining as an owner and it is assumed that ownership is enough of an incentive to keep growing profitably!
Loss of Ordinary Income. Yes, your ordinary income will drop in an IDSO partnership. You are functionally exchanging a part of your future practice profits (ordinary income tax rates) for cash today at a multiple of those future profits at low, long term capital gains tax rates. However, with today’s high deposit rates, the cash you receive will earn 5.0%+ interest rates, risk free, to offset that loss of income from your practice profits. You will also be paid a negotiated rate for your production/collections.
Exit of Retained Ownership Certainty. An IDSO partnership pays a doctor 51% to 80% of the value of their practice in cash, at closing. The balance of the value is retained in ownership either at the practice or parent IDSO level. Your exit timing and value of the equity when you are ready to retire is fully negotiable. There are multiple structures available to ensure your exit of the retained ownership at an optimal value when you are ready.
Missing Out on Future Value of a Growing Practice. Many doctors tell me that they want to wait a year to focus on their EBITDA so that they can achieve a higher value in the future. With COVID era Earn-Outs still available in virtually every LPS advised transaction, doctors will be paid for their growth in the two years AFTER closing.
Losing an Associate. Many doctors are concerned that an IDSO partnership will disrupt relationships with existing associates. In reality, the IDSOs are eager to create a path to ownership for current and future associates. Associates can become owners without the burden of borrowing from a bank to buy into a practice. Doctors can live up to their commitments of associate ownership.
Failure of an IDSO Partner. Fortunately, very few IDSOs have failed in the last 35 years. The safety and upside in IDSO equity is why over $3.0 billion has been invested in IDSOs by some of the world’s largest investors, just in the first 45 days of 2024. IDSO investment for both investors and doctors has been a low risk/high reward proposition for decades. Choose wisely and the upside can be significant over time. Over 1000 doctors will experience 300% equity returns in the next 180 days. The risks in IDSO ownership are far less than most other investments you are making today.
Timing. The timing of partnering with an IDSO is a major decision. Some doctors are not concerned about risk (we had two clients die in 2023 mid-process) nor are they interested in creating low tax liquidity and becoming debt free. However, doctors who are interested in achieving the maximum value for their practice in the coming years will complete a transaction today, at record values. The future may be different….
Today, many LPS clients will have the opportunity to get in on the ground floor of the equity upside of some of the newer, well capitalized, high potential IDSOs. This is where the long-term gains are made, not in waiting another year to squeeze out a higher EBITDA. The Earn Outs will pay you for future growth. Values are peaking. Where they will go from here, we do not know.
- 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