What is an IDSO?

There are multiple reasons, some that will matter to you and others that will not. But we often hear the following reasons whydoctors choose an IDSO partner vs. remaining independent. I am excited to become debt free and have millions in cash in the bank. The upside in the growth of my retained equity is very attractive as my new IDSO partner continues to build value for all of its owners (including me) through rapid growth driven by smart investors with billions in assets.

• I love practicing dentistry, but the growing administrative burdens are frustrating. I have had trouble finding associates and team members, I need help recruiting.
• Associates do not want to or cannot afford to buy me out when I am ready to retire.
• My competitors are partnering with IDSOs, and it is impacting my practice.
• I am eager to potentially benefit from the higher payor reimbursement rates that the IDSOs are able to negotiate for their partner practices. While I am in no hurry to retire, having a long term defined exit plan is valuable to me.
• Lower costs on benefits, supplies, labs, technology will increase my profitability
• The advent of new technologies including AI can be challenging to implement, an IDSO partner will improve my patient care.

In years past, DSO affiliation was a transition path for doctors nearing retirement. Due to the autonomy, financial rewards and independence offered by an IDSO partnership, in which the doctor retains ownership, IDSOs now appeal to doctors not just in their 50’s and 60’s but to those in their 30’s and 40’s. As an example, LPS completed $150+ million in transactions for doctors in their 30s in the last 24 months.

IDSOs appeal to a much broader spectrum of dentists than do the DSOs because they attract doctors beyond those that are looking for a transition/retirement strategy. And frankly, IDSOs have returned billions of dollars in gains to their investors and doctors in the last 30 years; with an acceleration in gains in the last five years. It is a profit motivation for both the investors pouring billions of dollars of new capital into dental consolidation and for the doctors benefitting from it at their initial partnership and later when they monetize their retained ownership.

Shockingly fast! A couple of examples by IDSO:

• Multi-Specialty IDSO: 37 offices to 700+ in 84 months
• Dental Surgical Trifecta IDSO: 8 offices to 234 offices in 32 months (Perio, Endo, OMS)
• Dental Trifecta IDSO: Zero offices to 211 offices in 35 months (Pedo, ortho, OMS)

Examples of the Number of IDSOs in Specialties Only:

• OMS: Zero single specialty OMS IDSOs to 17 in six years
• Ortho: One to 14 Ortho only IDSOs in seven years
• Perio: Zero to four in one year
• Dental Trifecta: Two to ten in one year Implant Focused: two to six in two years

The great IDSOs expect you to continue to lead your practice with your team, brand and strategy for years or decades. Depending upon the IDSO partner you choose, you will have FULL AUTONOMY. They will not dictate who you hire, fire, when to take a vacation, what payors to accept or not accept, when to be open and closed nor how to provide care. They will also not tell you what supplies and technology to use nor how to use them. Unless you have antiquated practice management software, they will not ask you to change it.

The IDSOs are investing millions in YOU and your team and practice because you have been very successful historically. Without you and your team, they have bought very little. IDSOs do not want to break what they just invested millions in to create a partnership.

IDSOs do not attempt to homogenize their partner practices nor micromanage them. They act as silent partners to provide resources to reduce your administrative burdens to enable doctors and teams to focus on patient care, not minutiae.

To confirm your future autonomy, part of the LPS process is to introduce you to doctors who have chosen the IDSO you are considering, long before you commit to partnering with them. You will get to hear directly from the IDSOs partner doctors about what changed and what did not.

Each IDSO provides differing levels of support services which you will discover as you go through the LPS bidding process. Some, for instance, have significant internal recruiting teams to help you find and hire associate doctors and other team members. Other IDSOs may be exceptionally good at marketing to attract new patients. And some groups have significant leverage with vendors and payors. IDSOs are paying less for everything you buy including benefits.

IDSOs are also in many cases being reimbursed at higher rates by payers than independent dentists. As a recent example, LPS’
$3.5 million in collections client which is almost 100% insurance driven, will see a 20% increase in their reimbursement rates.
Their new partner has 32 offices in his market and has leverage on the payers. This will increase the practice value by millions
of dollars both initially and in the earn outs after closing.

Virtually all of the IDSOs will become responsible for the following administrative functions: accounting, tax, banking, payroll, benefits, benefits administration, IT support, compliance, credentialling, legal, and payor/vendor negotiations. LPS ensures that our doctor clients understand exactly what will and will not change with their chosen IDSO partner long before they make their final choice.

No, never. The doctor makes all clinical decisions. There are no production quotas with the right IDSOs.

That is up to YOU. Your new partner is not there to make personnel decisions for you. They will help you in recruiting and administration, but do not tell you how to manage your team. It is your team; you hire and fire who you want. In an IDSO partnership, without exception, your team will end up with equal to or better benefits than what they enjoy today, plus career growth opportunities and ownership in some cases.

On the other hand, if you so choose, a few IDSOs will take over the entire management function of a practice, but it is up to you.

The value of your practice is estimated by LPS in our initial no cost, no obligation confidential practice valuation process. The ultimate value will be determined by the “market” as defined by the multiple bidders in an LPS process. But in short, in 2024 LPS achieved record values for all practice types that were typically 20% above 2019 values. Multiple larger LPS clients have achieved values of 4.5x collections and double-digit multiples of EBITDA in Q4 of 2024. In a recent audit of our LPS performance for clients, the actual closed transactions exceeded our initial value estimates by about $113 million and about 22% over the last two years. I guess we estimate conservatively. We like to under promise and over-deliver!

Our initial practice valuation considers numerous factors, with the most significant being the practice’s operating income, or Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), after doctor compensation. Other factors include practice growth rate, services/payor mix, doctor’s personality/age, and demographics/growth rate of their region. Multiple doctors add value, but multiple offices may not. It depends.

LPS estimated values are often exceeded by 10% or more as we identify multiple bidders who may be eager for a particular practice type in a specific geography at that point in time. It is surprising how values can be increased by knowing which IDSOs are eager to pay the highest prices due to some internal motivation of their own. Timing is critical for maximum values.

These increases in value above “market” can be due to potential synergies LPS creates with other practices an IDSO may have or may acquire in the area (i.e.: Dental Trifecta) as well as meeting promised growth targets to investors. An IDSO may also be close to a recapitalization event which enables them to pay higher prices for a brief period of time. Our unpaid relationships with the IDSOs add great value to our ultimately achieved record practice client values. With the little advisors who are getting paid by both the doctor and the IDSO, you will not see many of the IDSO options and broad bidding contests are not possible. And the doctors attempting to sell to an IDSO without advice, do not know which IDSOs would be most interested in their practice at unique points in time. We do. Doctors also do not fully understand how to evaluate a potential IDSO partner.

Four examples of LPS Client value increases above our initial value estimates:

1. A large Endo practice’s highest bid was from a multi-specialty group which projected they could double the practice revenues due to referrals from the 40+ GP practices they owned within referral distance of our client. This justified a much higher bid than those from the four Endo only IDSO bidders.
2. After 10 bidders, an LPS ortho practice client achieved a record value over $40 million with 95% in cash at closing. This IDSO bidder could pay more because they were completing a multi-billion-dollar sale to a new investor within 60 days.
3. A large LPS GP client was very attractive to an IDSO with multiple GP practices in their area. One of the IDSOs’ leases was expiring and they wanted to consolidate that practice into our client’s multiple nearby offices. The client achieved about a 20% premium.
4. We assembled five ortho clients in a region to market them as a platform to start a new IDSO. We achieved a record value after we identified a dental experienced PE group interested in starting a new Ortho only IDSO in their states. We also helped the investor recruit the management to run it.

We start by having a conversation to learn more about each other. If your practice is a candidate, we will both sign a mutual Non-Disclosure Agreement (NDA) which binds both LPS and the doctor to keep our conversations and information shared confidential. You are obligated to do nothing else.

Our analyst team will then review 2022, 2023 and 2024 Profit and Loss statements. No tax returns are required. One of our analysts will contact you to schedule a call to ask questions and learn more about the details of your practice. LPS will determine a very specific EBITDA calculation for your last 12 month’s performance. Using the EBITDA and other factors we will give you the value we would expect to achieve for your practice and the types and number of IDSOs which would be the best qualified bidders. This will be discussed with you in a scheduled call with an LPS principal.

At that point you will understand the value of your practice and may choose to do nothing. In the worst case you will have received a very specific value of your practice in an IDSO transaction, at no cost and without obligation. OR you may choose to start the process to identify a great IDSO partner with LPS as your advisor. In many cases, we will be able to provide suggestions on ways to improve your practice profitability and increase value in the future.

Doctors engage LPS as your exclusive advisor. Our Engagement Agreements are short, simple and effectively say this: Give us six months to find you a great partner that you love at an acceptable value to you. If we can, you pay LPS a fee at closing based upon the overall initial value of the partnership with the IDSO. If we cannot find you a partner you love at a value you like, you are obligated to do nothing and LPS is paid nothing.

The LPS fees are based upon the value of the transaction and range from 10% for transactions under $5.0 million in value to only 6% for transactions over $100 million in value. Typically, it will take about six months from becoming a client to closing a transaction. The timing is often dictated by the doctor’s ability to provide the data we need to market your practice successfully and complete the due diligence leading to closing.

LPS’ goal in the “dating process” is to introduce you to as many qualified prospective partners as possible. Smaller practices will usually have three or more bidders and larger practices often 10+. The number of bidders will be dictated by the practice size, geography, growth rate, doctors and other factors. Most importantly, LPS will tailor bidders to your personal goals as to the types of partners and structures that are of interest to you. As an example, some doctors are eager to join smaller groups of like practices and others may want the perceived security of larger multi-specialty groups. Each IDSO is different and LPS will discuss the pluses and minuses of each IDSO with our doctor clients, early and often.

LPS is unique in that we are not paid by the IDSOs who partner with our clients. The smaller advisors are paid a fee by both the doctor and the IDSO. We believe this is a conflict of interest and limits your exposure to the majority of IDSOs which will not pay advisor fees. This reduces the number of bidders, your options and thus your value.

LPS is intimately involved in the entire process from start to finish. Our team sets initial meetings with IDSOs qualified to become your partner, attends practice tours and dinners with you and finalist bidders and negotiates the Letter of Intent which starts the closing process. We will then refer you to legal counsel who will best represent you in your transaction. Our recommendation on lawyers will often be to use one which has completed transactions for LPS clients with the IDSO you have chosen.

LPS then quarterbacks and drives the entire closing process including mutual due diligence, audit, tax allocation negotiations, Quality of Earnings negotiations, lease assignments or creation, associate contract assignment, non-compete provisions and all of the minutiae required to complete a closing. When required, we will send our team members to your office, after hours or on a weekend, to collect the due diligence items requested by the IDSO. Our goal is to make a complex, time-consuming process as easy as possible for the doctor. LPS DOES NOT PROVIDE LEGAL AND TAX ADVICE.

Many doctors are choosing IDSO partnerships earlier in their careers to take advantage of the value increase of their retained ownership. It has not been unusual to see LPS client doctor’s equity grow by 200% to 500% within five years. The commonly stated goals of IDSO investors are to increase the value of the investor’s and doctor’s equity by 300% to 500% within three to five years. Some IDSOs have and will achieve these targets and others will not. LPS advice is critical to understanding the risks and rewards of your retained ownership, how it is structured and which are the best IDSO partners.

The equity portion of the consideration is typically NOT taxed at closing but will be taxed upon the liquidation of the equity in the future. However, with certain IDSO, there are exceptions to this which you should fully understand prior to a transaction

The IDSOs will be assigned and assume whatever agreements you have with your associates currently. In most cases they will want to discuss with you whether you would like to create a path to ownership for the associate, either at closing or in the future, which they will be eager to facilitate. The entire bedrock philosophy of an IDSO is that their partner practices are operated by owner doctors, not employee doctors. Most of the great IDSOs will offer equity ownership structures to existing and future associates to ensure the continuity and growth of the practice after the owner doctor has departed in time. Equity ownership is also a critical recruiting tool in the IDSOs toolbox.

Initially, associates are often wary of an IDSO partnership as it is CHANGE. However, once they understand the details, most are eager for a transaction as they will have greater upside without the risk and headaches of managing a practice. To assuage the concerns of associates, LPS will arrange for your associates or partners to meet with doctors who have been a part of other IDSO transactions to learn about the reality, not the rumors, in a doctor-to-doctor conversation with the IDSO group you are considering. In about 90% of cases this creates associates eager for you to partner with an IDSO. It is all about education of the reality, not what they have heard through the grapevine.

Many doctors have completed transactions directly with IDSOs. Without exception, I can assure you that multiple qualified bidders result in enough of a value increase to more than offset the LPS fee. Every time.

My favorite example of the DIY doctor “disaster avoided” is the Florida doctor in late 2021 who was about to sign a deal at $19 million with an IDSO we knew well. I convinced him to go through the LPS bidding process. We completed a transaction for him at $42.5 million after meeting with 10 bidders. The original bidder at $19 million quickly raised their bid to $30 million when LPS represented the doctor.

Doctors who deal directly with IDSOs are leaving millions on the negotiating table with less-than- optimal structures. But more importantly, doctors who try to DIY the most important transaction of their lives do not get to meet all of their options and consider multiple partnership types. In addition to our guaranteed value increase, making the LPS fee FREE, LPS’ team of professionals handles ALL of the details including the QoE and audit process, tax allocation negotiations, the legal documentation oversight and due diligence process. Our goal is to achieve a rapid and painless closing with terms most favorable to the doctor.

LPS will also provide you with a very unique and valuable resource; the list of lawyers from which to choose that have successfully represented dozens of LPS clients. They all work on a fixed fee basis and will have experience completing transactions with the IDSO you ultimately choose. And remember, LPS is paid NOTHING unless and until a transaction is closed and the money is in your bank account.

Most importantly, we are insiders. LPS completed over $1.0 billion of IDSO partnerships in the last 24 months and almost $200 million in Q3 2024, our sole focus.

We know who is paying the highest value when, where and why because we deal with ALL of the quality IDSOs, not just a few. IDSOs regularly call us seeking certain practice types or specific geographies where we can provide them with multiple LPS clients at the same time. This usually results in our clients’ achieving premiums of 20+% above the value their practice alone could achieve. Size matters and LPS is bigger than all of the other dental advisors, combined. The little advisors and DIY doctors do not have this capability nor the insider knowledge of the IDSOs and their financial sponsors, LPS does.

LPS also gets the first calls from new investors eager to enter the dental consolidation frenzy. Our clients have become platforms for three new, successful IDSOs in the last two years and we have other new IDSOs in process. There is significant value to “getting in early” if, and only if, you have the right partner.

Unless you have an unsupported software system that is OLD, there will usually be no painful change in your software and technology, unless you want it.

Doctor’s reasons for partnering with an IDSO vary widely and are very personal. We estimate that 18% of all U.S. dentists are now affiliated with a DSO or an IDSO and the numbers are increasing rapidly. (NOTE: The ADA disagrees with us and believes it is 13%.) Thousands of dental practices partnered with an IDSO in the last two years. The options for partnership are also expanding with at least one new IDSO being formed every month, many of which are not qualified bidders in the LPS process.

At the moment, one of the primary drivers for doctors to consider an IDSO partnership is that doctors who have partnered with the right IDSOs are achieving out-sized returns on the equity they retained in a transaction. These “early adopter” doctors are generating far more long-term wealth than independent practice ownership can achieve and with fewer headaches.

In the first half of 2024, over $5.0 billion of new capital was made available to IDSOs nationally. One of the largest IDSOs in the U.S. with over 700 partner doctors completed their third recapitalization in November 2024 at a value approaching $4.0 billion. Over 50 LPS clients were very happy with this outcome! Many of the new investors in IDSOs in 2024 were making their first investment in dental consolidation. These investors included the world’s largest asset manager with $10.0 Trillion under management as well as the first Sovereign Wealth Fund. Many of these doctors achieved returns of 300% or more in the increase in value of their retained equity.

Other doctors are eager to monetize a part of their life’s work at today’s low tax rates and utilize the cash to diversify their personal portfolios and reduce risk. And finally, doctors who are completing transactions in 2025 are likely to have significant earnout structure components which pay them for future incremental growth in one or more future years after closing an initial transaction. The earn-outs can be significant with some partnerships LPS has completed in the last year, potentially increasing the initial value of the practice by up to 40% if the practice grows after closing. These valuable components of a structure are being discontinued by some IDSOs. You want them if you have a growing practice.

Defensively, some doctors are concerned about macro-economic events including margin compression from rapidly escalating costs vs. static reimbursement rates. Specialists are also concerned about the loss of their referral sources who partner with IDSOs and thus refer “within the family” and not to outside independent practices. This is particularly prevalent in ortho and OMS at the moment with the rapid growth of the Dental Trifectas.

Doctors are paid a negotiated amount which is usually based upon the replacement cost of the doctor in their local market. The higher the go-forward compensation, the lower the initial value of the transaction. Ultimately, smart doctors prefer the lowest compensation rate possible as it results in more cash, up front, at low Long-Term Capital Gains tax rates. A higher compensation structure for production results in lower net income at higher tax rates. Orthodontists most often are paid a salary plus growth incentives and all other dentists are typically, but not always, paid a negotiated percentage of collections.

Virtually all IDSOs will have a comprehensive, fully paid benefit package for the doctor’s and their families, plus 401K and other long-term benefit options. Most of the IDSOs will also pay for liability insurance, association memberships and CE. It is all negotiable.

The IDSOs want you to continue to entertain referring doctors, team members, patients, etc. in whatever forms have been successful for you in the past. Business and educational related travel will also be covered in amounts negotiated up front.

You will have two great options. One, you will have an AAA credit tenant paying you rent for 15+ years. The terms of this lease are critical. OR your real estate is now more valuable to the dozens of Real Estate Investment Trusts (REIT) eager to purchase IDSO occupied buildings, nationally. Your practice building is no longer a dental practice; with an AAA credit tenant, it becomes an investment grade asset which has a much higher value in most instances if you structure the lease correctly. If you do not, you can render your building unsellable at any value.

The highest values are achieved for the doctors with the longest time horizon. The IDSO would prefer that you stay until you die, but a typical transaction requires the doctor to continue as the leader of the practice for three to preferably a minimum of five years. The doctor will have the option to stay as long as they want.

LPS completes transactions without a five-year doctor commitment regularly, but it will impact the value of the practice. However, this is dependent upon a number of factors including number of owners/ associates, location, type of practice, geography and others. We have executed very creative strategies over the years to customize transactions to meet the doctor’s personal time commitment goals

Every transaction is unique in multiple facets including cash at close, equity ownership retained, compensation, earnouts, future employment requirements, etc. However, in virtually all transactions, the doctor is selling a part of their practice for cash at closing and retaining an ownership position (equity) at either the practice level, the parent level or a combination of both. A fairly typical split between cash and equity is 70/30.

LPS has completed transactions in the last 24 months where the cash vs. equity mix ranged from 51% cash and 49% equity to 80% cash and 20% equity. Doctor’s will have multiple structure options to choose from in an LPS bidding process.

In many cases, younger doctors choose higher equity components as they have a longer time horizon to see the equity value grow through multiple recapitalizations, whereas older doctors often prefer a higher cash component. It is important to note that in multi-doctor practices, the consideration mix of cash vs. equity can vary based on each owner doctor’s goals.

WARNING!
As interest rates have increased and access to credit has been crushed for many investor groups and IDSOs, some IDSOs are attempting to peddle very destructive partnership structures to doctors. This is happening in many cases where naïve doctors are dealing directly with IDSOs and do not have LPS as an advisor. LPS completes extensive due diligence not only the IDSOs, but more importantly on their financial sponsor, its track record and their current and future access to capital for growth. Specifically, beware of those IDSOs offering certain types of Preferred Equity and seller notes.

When you retain practice level ownership, you directly own a piece of your practice and therefore your equity upside is dependent primarily upon your practice performance, not the group. Practice level retained ownership usually entitles you to distribution of profits from the practice, typically paid monthly or quarterly, after all costs have been paid. The ultimate exit of this ownership structure will vary considerably and have a lower upside potential than ownership in the parent IDSO.

By retaining ownership in the parent IDSO, you are diversifying your risk/reward across multiple practices and the performance of the group, not just your individual practice. Unlike practice level ownership you will not get profit distributions as the parent reinvests the group profits into more practice partnerships and growth.

However, depending upon the structure you may have considerably more growth potential in the value of the equity in the parent IDSO vs. direct practice level ownership. The structure of the equity you receive and its assumed value at the time of issuance is critical to the ultimate value to you. Some IDSOs will offer Preferred equity with an imputed, but not paid yield, and others will issue shares from a single class putting the doctors on the same playing field as the investors. This is one of the most important negotiated elements in an IDSO transaction and it will pay to understand the exact details of the structure of equity retained. We see many DIY transactions where the doctor does NOT understand exactly the value of the equity they receive and what the upside or downside of that equity could be in the future. Caveat venditor.

Some doctors will also have the option to retain equity ownership at both the practice and the parent IDSO.

Each IDSO will make different promises and commit to various obligations on how you ultimately can sell some or all of your equity. Some will give doctors the option to force their IDSO partner to buy the equity in the future at a predetermined multiple of either the practice or parent’s then EBITDA. Others will promise that the doctors can liquidate when the parent “recapitalizes”. This is a fancy term for allowing doctors to sell when the financial sponsor sells all or part of their investment in the IDSO, typically to a larger investor. Understanding how you can monetize your ownership in the future is a crucial part of any IDSO partnership.

LPS is not a tax advisor, and you should seek specific counsel from your CPA or tax lawyer. Most transactions are structured as asset sales where there is a value assigned to tangible assets and goodwill; the Tax Allocation negotiation is extremely important to a doctor’s net, after tax proceeds. In our last billion dollars of transactions, LPS has achieved about 94% of the cash consideration taxed at Federal Long-Term tax rates of 20% and about 6% of the cash received taxed as ordinary income rates. State taxes will vary as will your personal situation and basis of the assets sold.

First, note the Biden administration’s newly enacted plan to add $78 billion to the IRS budget to track down high earners under paying their taxes. That means YOU! The IRS now has a specific mandate to increase audits on small businesses. Secondly, the typical IDSO partnership transaction is an asset purchase. The entity in which you are utilizing your current “tax optimization” strategies will still be 100% owned by you. It does not go away. Depending upon the advice of your CPA, you can continue to use this entity. This can be particularly attractive in the states which allow dentists to be paid as independent contractors (1099) vs. W2. “There is a little-known codicil in the Faber College constitution…”

The basic value creation can be understood by simple math: buy practices at X and sell the larger group at 2X. When IDSOs can buy practices at 7x EBITDA and sell the larger consolidated group at 14x, the math is pretty simple. However, the returns on the equity are magnified by leverage, meaning debt. In the case of IDSO practice partnerships, the doctors are functionally providing equity by retaining ownership. When an IDSO pays 7x EBITDA for a practice and the doctor is taking 70% in cash and 30% in retained equity, the IDSO has to produce 4.9x in cash (70% of 7x = 4.9). Many lenders will eagerly finance acquisitions by a profitable, growing business at 5x acquired EBITDA limits. Or put another way, partnerships require “NO MONEY DOWN” from investors!

Using this math, an IDSO can buy an almost unlimited number of profitable practices without increasing its cash equity contribution. Therefore, the return on EQUITY for doctors and investors can be staggering. In the recent years of low interest rates, this system of consolidation has accelerated. In the coming years of higher interest rates, things may change.

This model is not unique to dental but can be particularly effective when consolidating provider-based businesses in which the seller is retaining ownership. Ophthalmology, dermatology, veterinary, behavioral health, medspa, physical therapy and many others have all utilized this playbook to create massive value for investors. Dental just happens to be the largest target in terms of potential partners, solid, consistent, 50+ year growth and relatively limited consolidation.

No, this is a very common myth which is far from the truth. While PE groups have backed multiple IDSOs and are growing their investment in dental consolidation rapidly, Family Offices, Sovereign Wealth Funds, SBICs and other investor types are also eagerly investing in IDSOs nationally. The little advisors seem to forget all of the IDSOs except those backed by PE which are the easiest to identify. LPS has completed over $300 million of partnerships for clients with NON-PE backed IDSOs in the last 36 months.

One of the ten largest U.S. IDSOs is owned by a Swiss Family Office who made their billions naturally in chocolate. They also own the largest DSO in Europe. In 2022, the first Sovereign Wealth Fund invested $1.0 billion in U.S. dental consolidation. In addition, there will be Initial Public Offerings of DSOs at some point in the future. The only publicly traded DSO in North America at the moment completed their IPO in 2021; DentalCorp in Canada.

Three of the Top 10 global Alternative Asset Managers (fancy word now for Private Equity) are now in dental consolidation. KKR, the third largest PE firm globally, bought Heartland Dental in March of 2018. They doubled in size through acquisitions and new office builds by the end of 2022. In August of 2021, one of the largest PE firms in the world, Blackstone, paid a record multiple value for Deca Dental in Dallas. This rang the bell for some of the other 3,000+ PE firms to look harder at the opportunities in dental and is driving billions more in capital into dental practice consolidation. In Q4 2022, the world’s largest asset manager, Blackrock, joined the U.S. dental consolidation frenzy with a billion+ investment in a specialty IDSO. A Blackrock ESG fund invested in a Dental Trifecta IDSO in late 2023. In 2024, Blackrock invested in two more IDSOs, not DSOs.

With Blackrock’s ESG fund investment in a predominantly Medicaid driven Dental Trifecta IDSO, we expect to see more bidders and higher values for pedo, ortho and OMS practices in 2025 and beyond.

Every IDSO transaction has a long list of contract provisions which can impact, either positively or negatively, your ultimate consideration. It can be confusing. The following are some very basic descriptions.

EarnOut: A very valuable structure which pays the doctor additional purchase consideration depending upon the performance of the practice after closing a transaction. Earnouts became popular during COVID as a mechanism to induce doctors whose 2020 and 2021 performance had not returned to 2019 levels to complete transactions now rather than later.

EarnOuts are typically tied to the growth of the practice after closing and can be measured on a number of metrics, all of which are tied to growth; either revenue growth amount, increase in profitability or pace of growth. The time period for EarnOut measurement is typically two years. The most common metric is an increase in EBITDA in a dollar amount measured at the end of the first two years after closing.

Earn Outs can also be tied to growth rates of collections (i.e.: 10% per year, compounded for X years) and/or to dollar increases in EBITDA or in some cases tied to increases in patient visits instead of dollars. (Common for practices with government payers), Earnouts can be meaningful for growing practices, and we have structured some which could increase the total consideration amount by up to 40%. The trick is to understand which measurement metric is most appropriate for the practice’s specific attributes and how the IDSO partner will impact future performance after closing.

As an example, we have a client which uses a specific implant system for which the IDSO is paying half what our client is. In this case we want to base the Earnout on EBITDA, not top line growth. The practice will see an immediate gain in EBITDA due to the lower cost of implants.

When LPS structures earnouts, they result in Long-Term Capital Gains tax treatment, not ordinary income, a little trick of the trade.

Maintenance Holdbacks: These are structured where an amount of the initial value at closing is withheld, and its release is conditioned upon post-closing practice performance. These are often tied to the maintenance of a certain collections level. These are very uncommon in transactions LPS advises but are used in special situations to overcome some short-term issues in the practice performance such as a recent loss of an associate, storm damage, doctor health issues and other factors which may have impacted recent practice performance.

Indemnity/Reps and Warranties Holdbacks: This type of holdback is specifically designed to protect the IDSO from incorrect representations and undisclosed liabilities of the practice which may arise after closing. Five percent of the initial value can often be held in escrow and is typically released to the selling doctor at the one-year anniversary of the initial transaction.

Clawback: Certain IDSOs will actually require a provision in their structures which can entitle the IDSO to retrieve purchase consideration after closing if the doctor does not meet specific performance objectives. LPS does not suggest that doctors choose partners with these punitive features except in very rare cases.

This will vary based upon the partner you choose (there I said it) as each IDSO structures future growth opportunities in different forms. This may include acquisitions of complementary or competitive practices by the owner doctors. The IDSOs are eager for growth and in most cases are not capital constrained. Depending upon the structure, the IDSO will often provide 100% of the growth capital and support resources required with the doctor gaining ownership in whatever he has bought or built after the capital has been recouped. A growth focused doctor’s goals should be discussed early in the dating process as a part of choosing a partner. Some IDSOs will offer more favorable growth structures than others.

Size, experience, relationships with investors/ IDSOs and insider knowledge matters. None of the other advisors will honestly contest LPS’ dominance of the dental transaction advisory business for larger practices. They will however point out that our fee is higher than theirs. Our NET fee is actually lower as LPS is not paid by buyers. When you choose the little advisors who get paid by both you and the buyer, or just by the buyer, you will miss many of your options and have fewer bidders and a lower value. Any fee the IDSO is paying to the advisor reduces the value to you. LPS has completed more transactions with IDSOs in the last 24 months than the other Top 10 advisors combined. There must be a reason!