Practice values in an IDSO partnership vary based upon a number of factors. Timing cannot be stressed enough. With more than 1000 IDSOs and DSOs searching for dental practices to partner with our purchase, values will change significantly depending upon who wants what, when where and why. While part of the valuation puzzle is what dental practices are seeking transactions at the moment, it’s just as important to know who wants to partner with a dental practice that fits your profile.
LPS’ highest value transaction in 2023 in both multiple of EBITDA (14x) and Total Enterprise Value ($43 million) was due to the fact that one specific IDSO needed a practice just like our client’s practice. Because we were able to find the needle in the haystack, the LPS client achieved about a 50% premium over offers he had been trying to negotiate on his own. It was the perfect match for both sides of the transaction. And it was possible because we knew where to find the best IDSO partner for him. He did not complain about the LPS fee!
Key Practice Value Drivers in IDSO Partnership
With over $1 billion in dental practice transactions under our belt in the last two years, we’re the de facto experts in dental practice valuation. In holding thousands of conversations with IDSO partners and our dental clients, we’ve identified the following key drivers of dental practice value. The more of these boxes you can check, the more desirable your practice will be to IDSO silent partners. If you meet most, or possibly several of these valuation factors, now might be a great time to seek an IDSO partner.
If you don’t fit these criteria very well, all is not lost. You can use this advice to help you increase the value of your dental practice. Consider it as a roadmap, and consider us to help you find an amazing IDSO partner when the time is right.
1. Practice Size
Larger practices achieve the most bidders and the highest values. The cost of completing a partnership for an IDSO in terms of legal, accounting, time commitment, etc. is similar in a $5.0 million transaction vs. a $25.0 million transaction. Most IDSOs would prefer larger partnerships vs. smaller partnerships. IDSO partners show the most consideration to practices with at least $1.5 million in collections, with premiums being paid as the total collections value grows above this threshold.
2. Growth Rate
Growing practices achieve higher values whether GP or specialty. Growth rate in the most recent 12 months is the most important metric. Practices which have maintained a multi-year growth trajectory will also achieve high values even if the most recent 12 months may have been flat. The 10x EBITDA transactions completed by LPS in 2023 were all for practices with 20% +/- growth rates.
3. Geography
IDSOs have expanded their interest in practices in some of the overlooked states, attempting to NOT compete in the “Hot States” of FL, TN, SC, TX, AZ, CO, ID, UT. This has been good for values across the country. However, high population growth areas will achieve higher values in most, but not all cases.
4. Age of the Doctor
The growth of IDSO partnerships with doctors under 50 has been dramatic in the last 36 months. Younger doctors are now grasping that an IDSO partnership is NOT “selling out to corporate” and not a retirement or transition strategy, but rather a long term, generational wealth building partnership opportunity.
Since IDSOs are seeking long-term relationships, their interest in 35-year-old doctors is higher than their interest in 60+ year old doctors.
5. Identified Opportunities for Higher Payer Rates
As more IDSOs negotiate higher reimbursement rates from payers, predominantly insurance-based practices may become more valuable than Fee for Service practices. When a prospective IDSO partner knows they can increase a practice’s collections and EBITDA by simply switching their new practice partners to their negotiated payor contracts, values go up. Instant gains are attractive.
6. Identified Opportunities for Cost Savings
Prospective IDSO partners will examine the potential partner practice’s cost structures, particularly supplies and benefits costs. Their size enables IDSOs to pay less for everything than independent practices. A recent IDSO bidder for a $25.0 million in collections LPS client calculated that they could reduce the practice’s costs of supplies and benefits by 30+% immediately.
7. Service Mix
IDSOs will examine the procedures performed in a practice to determine if a change in, or addition to, the services provided to patients may be modified to increase collections and profitability.
A recent example is a large OMS practice which performed no implant procedures. The IDSO calculated that they could increase collections by about 40% if it provided implant care. The owner doctors of the practice were happy to add implants to the practice, but needed two additional surgeons to handle the volume. The IDSO was happy to help them recruit new providers to the practice. The 40% collections increase target was hit in the first 15 months after the initial partnership.
8. Doctor with a Personality and a Plan
In the LPS process, doctors will speak with multiple, qualified bidders and ultimately choose three to meet in person at an after hours practice tour and dinner. Unlike the little advisors, LPS team members are at every dinner and have spent time with our client doctor helping them craft their growth story. Doctors who can convincingly outline their growth goals and strategy will achieve higher values than those who cannot. The personality of the doctor can result in 10% to 20% increases in value.
9. Organized Books and Records
In an IDSO partnership process, doctors will be asked for voluminous information about the performance and procedure metrics within their practice. LPS studiously collects the needed data early in the partnership process so that questions by the IDSOs can be answered quickly. Doctors who are not able to deliver rapid responses to questions will achieve lower values.
We see this often when a doctor is attempting an IDSO partnership by themselves. They’re too busy providing the best possible patient care to generate financial reports and field follow up calls from potential partners. One of our many jobs as a dental broker is to provide hundreds of hours of support marketing your dental practice to potential IDSO partners. This includes crunching numbers and answering all types of questions.
10%Multiple Bidders
The IDSOs are competitive. They do not like to lose. Values can often increase by 10 to 25% when eager bidders are forced to compete with each other. A great LPS client will typically have six or more qualified bidders from which to choose their best long-term partner option. Doctors have more choices in IDSO partnership and achieve higher values when represented by LPS vs. Do it Yourself (DIY) or using the little discount advisors. The LPS fee is always offset by the increase in values we deliver. There is a reason LPS completed $1.0 billion in IDSO partnerships for clients in 2022/2023 alone.
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