OR, Should You Monetize a Part of It For Cash Now and Exit Later?
The Age Factor in Practice Valuations
The most important factor in a 100% practice sale to a doctor, or selling part of your practice to an IDSO, is your age. The farther you are past 55, the less valuable your practice becomes unless you have younger associates. If you are over 55, you need a plan now to achieve the highest value.
Today, doctors can exit 100% of their practice by selling to another doctor or to a conventional Dental Support Organization (DSO). In these transactions your age is less of a factor. However, many doctors are achieving much higher values, earlier in their careers, by not selling 100%, but rather selling 51% to 90% for cash now to a silent partner, called an Invisible Dental Support Organization (IDSO). Doctors monetize a part of their practice value and continue to practice autonomously, as an owner, for years or decades with the support of an IDSO and the upside of ownership.
Benefits of IDSO Partnerships: Risk Mitigation and Diversification
With an IDSO partnership, doctors can eliminate part of their ownership risk and diversify their personal asset portfolio. They can sell a part for cash today at favorable tax rates and retain ownership and practice autonomy and achieve future increases in value over years or decades.
While not all doctors will qualify for the IDSO option, this strategy achieves far higher values both short and long-term than does selling to another doctor or DSO. IDSOs value younger doctor-led practices higher than older doctor practices. In 2022, LPS completed IDSO partnerships for over $100 million for doctors in their 30s.
The Option You Choose for an Exit Will Dictate the Timing
The Two Exit Options for Dental Practices with Less than $1.5 Million in Collections
If your practice has less than $1.5 million in collections, two primary exit options are available: a doctor-to-doctor sale or a doctor-to-DSO sale.
Doctor to Doctor Sale of 100%
The traditional exit path for most doctors is to sell their practice to another doctor stepping into their shoes. Values are roughly 70% of collections. However, this option is becoming more challenging as more new doctors are joining IDSOs and DSOs rather than seeking to buy a practice.
Apparently, the current generation is more concerned with lifestyle and secured income choices than becoming entrepreneurs and practice owners. This shift is also possibly driven by the high levels of student debt and the current practice purchase financing issues. But doctors can no longer afford to buy larger practices as their values have increased due to the IDSO option.
Statistics show that in 2013 only 15% of recent dental school graduates joined a DSO or IDSO. The number for 2022 is estimated to be 30%+, thus reducing the traditional pool of buyers for smaller practices.
Doctor to DSO Sale of 100%
Given the reduction in new doctor buyers, the sales of 100% of practices to DSOs are increasing dramatically. Hundreds of DSOs in all U.S. states are eager to buy smaller practices. The values doctors will achieve in a DSO sale are similar to the doctor-to-doctor transactions at a percentage of historical collections. While there is no real urgency in timing of a doctor to DSO sale, age will play a role (younger and growing is better than older and shrinking), but it is less critical than in a partnership with an IDSO at a much higher value where age and timing can mean millions of dollars in value differential.
The sale to a DSO and doctor-to-doctor exit timing is not critical, except for the short-term trends impacting the practice performance (inflation causing declining practice profits) and long-term trends changing the type and number of potential buyers.
When a Doctor Qualifies for IDSO Partnership, Practice Valuations Can be 2x to 5x Higher
IDSOs value practices based upon the operating profit of the practice, not on its historical collections. But using collections as a metric, LPS completes multiple IDSO transactions every quarter at 150% to 200% of collections and some at well over 400% of collections.
The highest values in an IDSO partnership are achieved by younger doctors with growing practices and a minimum of a three year chairside time horizon. IDSO partnership is not a short term exit or transition, but rather a long term wealth building partnership. Age matters as the IDSOs value practices highest when the doctor may have a five to twenty-year career remaining. Because IDSOs do not buy 100% of a practice, doctors remain as owners and continue to benefit from the growth in value of their practice and the IDSO, long term.
If a practice is qualified for an IDSO partnership (minimum EBITDA of $400,000+) timing a partnership for maximum value is critical. In an IDSO partnership, LPS client doctors will have six to ten or more qualified IDSO bidders from which to choose their new partner. Practice values in the IDSO world can change literally weekly depending upon the goals and changes at the specific IDSO bidders.
Two Recent Timing Examples to Consider:
#1) A quality IDSO with which LPS has partnered multiple clients in the last 36 months, just completed a partnership with our large MidAtlantic client at a record value of 12x EBITDA (over 300% of collections). Thirty days later, their new CEO has now imposed a 120-day moratorium on any more partnerships. Had the doctor waited 60 days to start the process, his value would have been about 25% less at 9x EBITDA from one of the 10 underbidders for his practice. Waiting would have cost the doctor millions of dollars.
#2) We convinced a large, growing client in Florida to become the platform practice for a newly formed IDSO in early 2022. We felt this was the best strategy to achieve not only a high initial value, but also massive gains in the value of their retained equity ownership.
We chose an investor for this new IDSO which was just completing the monetization of another IDSO at a $2.0 billion value. LPS helped build that IDSO by partnering 110 LPS client offices with them in 35 months. The investor had capital and more importantly, recent, proven experience in creating hundreds of millions of dollars in value for LPS client doctors. The timing was perfect for the investor and for our Florida client. That IDSO has now grown from our client’s $20 million in collections to over a $100 million in collections run rate in 13 months. Our client’s equity value has already doubled. Had the doctors waited 90 days, this option would not have existed.
Maximizing Practice Value: IDSO Partnership Timing
For doctors who qualify for an IDSO partnership (typically requiring a minimum EBITDA of $400,000+), timing becomes a critical factor. Doctors should understand ALL of their monetization and exit options today to develop a plan, either short or long term. Timing is less important in a doctor-to-doctor or DSO 100% sale, but critical in an IDSO partnership. The best options change regularly! Are you ready to explore the optimal timing and options for selling your dental practice? Reach out to Large Practice Sales today to connect with our experts and develop a strategic plan for maximizing the value of your practice. Don’t miss out on the opportunity to achieve the highest returns on your investment. Start planning your successful partnership strategy now.
- Dentistry Unmasked: Inside the world of invisible DSOs | with Chip Fichtner - February 21, 2024
- Practice Partnership Podcast Ep 9: Top 10 Attributes to Achieve the Highest IDSO Partnership Value in ’24 - February 21, 2024
- The DrBicuspid Podcast featuring Chip Fichtner - February 6, 2024