ROSS BRANNON

There’s been a lot of talk about DSOs in this book. Let’s take a step back…just what is a DSO?

STAN KINDER

A DSO is a dental service organization. Essentially, these are predominantly private equity funded entities that consolidate individual dental practices under the umbrella of a larger organization with a view toward bringing economies of scale or the resources to the table. They help their constituent practices accelerate their growth and profitability.

ROSS BRANNON

Why are they buying up dental practices everywhere?

STAN KINDER

Yield private equity for many years has generally had an interest in consolidating what are typically described as sort of cottage industries, made up of large numbers of small businesses, aggregating them together with a view toward improving profitability.

ROSS BRANNON

Would it be fair to say that if we weren't in the low interest rate environment we've been in for the past 10 or 12 years, they wouldn't be going after dental practices?

STAN KINDER

I think they would probably still be going after dental practices, but it makes their ultimate economics more favorable. Private equity typically uses their equity dollars and leverages that with debt, which generates a higher rate of return on their equity. So, given that the debt is very low cost in today's world, they're able to generate more powerful economic leverage, which gives them a better yield in the final analysis.

ROSS BRANNON

How did you become known as “the DSO whisperer?”

STAN KINDER

I embrace that description enthusiastically. It came largely as a result of my having spent almost 15 years with three different DSOs, generally in senior management roles, typically being primarily responsible for mergers and acquisition activity. So, I have spent the bulk of my time basically in conversation with dentists interested in exploring a relationship with DSOs.

ROSS BRANNON

I know people who estimate that 75% of all dental practices will be DSOs five years from now. Do you agree with that?

STAN KINDER

There's a lot of speculation in the trade press that over the course of the next three to five years, that number will grow to 60 to 65% of all dental practices. Right now, it's roughly 20%, but it is growing at an ever-accelerating pace, largely as a consequence of a lot of small to mid-size practices. Group practice owners have seen highly favorable economics that come with an eventual affiliation or sale with a DSO and/or directly with a private equity firm.

ROSS BRANNON

Do you see this trend slowing anytime soon?

STAN KINDER

No, not at all. The last company I was associated with was Dental Care Alliance. They're considered an enterprise DSO, a descriptor that tends to refer to the largest and the longest-standing DSOs in the market. They had over 300 practices, approaching a billion dollars in patient revenues under management. That sounds like a lot, but 300-plus is .0001% or less of the total practices out there, so the runway for additional growth is almost unlimited.

ROSS BRANNON

Could it ever come to a point where dental school graduates would not start their own practice, where the market would only be employee dentists versus business owners?

STAN KINDER

In my judgment, there will always be room for private practices, but the challenge of establishing and operating on a sustained basis over an extended period of time is going to become increasingly difficult for a number of reasons. One is huge debt burdens. In 2019, the American Dental Education Association said the average dental school graduate came out of dental school with a little over $284,000 in educational debt. Those folks have a tendency to be more interested in a job where they can service their debt, earn a living, and grow and develop as a practitioner, as opposed to taking on the additional debt necessary to either acquire or start their own practice. Another factor is that currently a little over 50% of graduating dental school classes are female, and statistically, female dentists have a higher level of interest in working part-time. That’s not always the case, and there are many successful female dentists, but on average, they're less likely to become practice owners than their male counterparts.

ROSS BRANNON

What does “adapt or die” mean to you?

STAN KINDER

I think any individual dentist today is thinking about a DSO or a potential relationship with one, since they’re having an ever-growing impact on the profession. From my perspective, it's important that they understand both the particular challenges of remaining independent and the economics and the drivers that potentially make a DSO make sense, whether as an employed associate dentist, or potentially as an owner of a practice liquidating their own equity interest and affiliating with a DSO.

ROSS BRANNON

Have you seen a practice fail to adapt? If so, what mistakes were made?

STAN KINDER

I think every dentist has heard of a colleague or a peer who has struggled in one way shape or form. I won't necessarily attribute that directly to the growth of DSOs, but DSOs bring an incredible amount of resources to the table. They have access to capital. They have highly trained and professional staff to deal with all the non-clinical things an individual practice owner has to deal with, such as negotiating with a supplier and negotiating with a PPO on how to structure employment arrangements for a staff or associate dentist. There's almost an infinite number of things they can do cheaper and more efficiently. As the solo practitioner confronts those challenges, and increasingly has to deal with that burden, their colleagues in the DSO universe are going to be moving at a faster pace, in my judgment, over time.

ROSS BRANNON

What factors can affect a practice’s valuation?

STAN KINDER

There are differences between traditional valuation approaches and how DSOs approach valuation. Historically, practices that have been sold from one dentist to another dentist have transacted, on average, for 60% to 80% of their gross revenue. The primary reason is there has been a limit to what a bank would lend to the dentist buying a practice, and historically, almost 100% of practice purchases were bank financed. So, valuations have tended to operate inside those parameters the vast majority of the time. DSOs, on the other hand, value the practice based on the EBA, the DOD term that you use, which is an accounting measure of the free cash flow that our practice generates. So, where DSOs essentially contribute to the private equity firms making their money, is they acquire their practices at what I would describe as a wholesale price, and eventually, when they exit the DSO, they do it at a retail price. Asa stand-alone entity, a practice has a value of x. The moment it becomes part of a DSO and a large, integrated group, that value goes to x plus plus plus plus.

ROSS BRANNON

Let’s say there’s a dentist who might sell his practice for $11 million. Most people would consider that a very large number and a very good valuation. But if the DSO pays that $11 million, they actually feel like they're buying at wholesale because they can kind of “fix and flip,” create the efficiencies and then sell it to somebody else who wants a bigger DSO or private equity group at a higher price, retail wise.

STAN KINDER

That's exactly correct. Basically, private equity is nothing more than the aggregation of money that gets invested with a view toward generating favorable economic return. The investors in private equity funds are typically pension funds, endowments, high net worth individuals. When a private equity fund invests in a particular company, they usually have a target holding period of somewhere between five and seven years before they would look to do what's called the recapitalization, which is essentially a big word that means up-sell. Most commonly, they're selling to a larger private equity fund, which has the capital to continue to find their continued growth over time.

ROSS BRANNON

So, the larger firms let the smaller firms go out and do the dirty work, the legwork, and they just come in and buy them out later.

STAN KINDER

That's a pretty apt description. The DSOs are generally acquiring practices in today's world at a multiple somewhere between four and a half, to as high as seven, sometimes even eight. That means whatever the EBITDA is, they're paying four and a half to eight times that number, and right now, when they exit, they're generally getting eleven and a half to 14 times.

ROSS BRANNON

What's the difference between a practice that gets eight versus a practice that gets four and a half?

STAN KINDER

Most commonly, it tends to be the scale of the EBITDA. A practice that generates $400,000 in EBITDA is going to be at the lower end of that range. A practice that generates a million and a half in EBITDA is going to be at the upper end of that range. The costs for the DSO and the private equity firm of consummating that transaction are pretty constant from the smaller practice to the larger one, so there's a lot of efficiency gain for them in doing those larger deals.

ROSS BRANNON

Some dentists say they hate corporate dentistry, and they would never sell to a corporate dentistry to outfit a DSO. What's your response to that?

STAN KINDER

I really think that that's a function of misguided conclusions. When DSOs first arrived on the scene, organized dentistry was very anti-DSO for a lot of reasons. One of the one of the biggest was the notion that if a corporation is involved, then you're going to have non-clinicians influencing the care that patients ultimately receive. But almost every state in the country has restrictions on the corporate practice of dentistry, so all the DSOs draw a very bright line between the administrative and business services that they provide. The clinical decision-making generally resides with whomever the chief dentist is in the practice. If a DSO was to cross that boundary, they would very quickly be sanctioned by state boards. So, they're very careful about that separation.

ROSS BRANNON

Who is your typical client? Who should be saying, “I need to talk to Stan Kinder”?

STAN KINDER

The practices that are most attractive to DSOs typically tend to be more than a single provider. Part of the reason for that is it mitigates the risk to the DSO. Most dentists will tell you that the number one way to take a practice backwards is to have provider turnover. If it's a multi-provider office and for some reason one provider is sick or disabled for some period of time, or there's some turnover with one of the clinicians, there are other clinicians that continue to keep the engine running. I tend to work more predominantly with dentists who have larger practices as a consequence of there being more than one clinician, but I have certainly also worked with any number of solo providers.

ROSS BRANNON

Do you really have to have $1 million of top line revenue to even go down the road of selling?

STAN KINDER

It depends. DSOs have different profiles in terms of the kind of practice they're most interested in affiliating with. Heartland, which has been the biggest DSO in the country for some time, well north of $1 billion in top line revenue and more than 1,000 practices affiliated, has a very significant number of solo practitioners in their portfolio. On the other hand, Dental Carolina is another company I was with, and the vast majority of their affiliated practices are larger, and multi-practitioner.

ROSS BRANNON

The majority of DSOs are buying general dentists and orthodontists, correct?

STAN KINDER

Yes, though there has been a growth of solo specialty-focused DSOs. Most of the larger DSOs will look at specialty practices in their mix, particularly in markets where they have a reasonably high density of affiliated general practices, because it lets them create a little bit of a hub and spoke relationship between general practices and specialty practices.

ROSS BRANNON

Do DSOs change much about the practices they purchase?

STAN KINDER

The most common type of DSOs is what is called an “acquisition DSO.” They acquire existing practices and largely operate those practices with precisely the same identity they've had historically in terms of how they face the patient public. Nobody would ever even be aware that they're affiliated with a DSO. There are a handful of what's called “branded DSOs,” the most notable being Aspen, which is the second largest DSO in the country. All of the Aspen-affiliated practices are called “Aspen.”

ROSS BRANNON

Aspen is more like a franchise model, correct?

STAN KINDER

I would describe it as a “retail model.” Aspen does very heavy direct to consumer marketing when they open a practice and look at doctor-patient traffic into the office. A little bit like the Gap, or any other retail store, they look for locations they believe will be successful. They open a store and then use their operating model, which has been proven in many locations, to drive that particular practice. I talked to the chief real estate guy from Aspen some years ago, and he basically said, “We look for a relatively new strip shopping center that has a Walmart, a Panera Bread and a Verizon store. If those three things all coexist, we know we have a winning location.”

Essentially, the dentist owns the practice but agrees to use the Aspen management services, to provide all the back-office support. The dentist also agrees to operate in a way that's consistent with the Aspen umbrella. Very often, dentists in new locations are senior associates from an existing location who have expressed an interest in becoming owners. Aspen will move them into a new location and set them up.

ROSS BRANNON

How does Everything DSO help their clients navigate the world of DSOs?

STAN KINDER

From my time in the industry, I have relationships with a significant number of DSOs. I am what is commonly referred to as a buy-side broker, as opposed to a sell-side broker. Sell-side brokers charge a seller a commission for whatever assistance or support they provide through the process. A buy-side broker is compensated by the buyer.

ROSS BRANNON

Is there anything wrong with the seller paying the commission?

STAN KINDER

Not necessarily wrong, but certainly at a very significant cost to the seller. DSO brokers are typically charging seven, eight, nine percent.

ROSS BRANNON

So, it's in the dentist’s best interest to work with a buy-side broker.

STAN KINDER

It is certainly in their economic interest. The reservation that's most commonly expressed is, “Are you going to be working for me? Are you going to be working for the buyer? How do I know you're going to get me the best deal possible?” Almost 100% of the letters of intent are non-binding in absolute terms, which means that the seller has the ability to walk away from the transaction anytime, up until the closing. If they're not happy with the deal, they can walk away. If I don't bring you a deal that makes you happy, there's no deal. By the same token, if I'm not bringing a deal to the buyer that makes them happy, there's no deal. So, in order to be successful, I'm obligated to keep both parties happy. Private equity has used buy-side brokers for years for other businesses. One of the primary reasons is that commission cost is what's called below the line, which means it's capitalizable to them, and doesn't affect their EBITDA or P&I on a current basis. It's zero net cost to them in the near term. Because it's deductible, they're able to recapture that cost. It doesn't affect the ultimate enterprise value they're prepared to offer a dentist in a given situation.

ROSS BRANNON

How do you help the clients besides representing them?

STAN KINDER

It begins with a conversation where I basically help them to articulate what their specific goals and objectives are. Then I'll do a detailed valuation analysis of their practice to help them understand the range of possibilities in terms of eventual outcomes, and to see whether that fits inside that articulated goal objective. Also, in some instances where a practice perhaps wasn't at the level of profitability that it should or could be, I’ve helped them understand where the opportunities were for them to remedy that over time.

ROSS BRANNON

Is it a tough sell for clients to realize they need you?

STAN KINDER

Dentists are generally not experienced at selling a practice, whether it's to another dentist or to a DSO, so they come to the table with a knowledge gap. Part of what has driven me to pursue the buy-side brokerage proposition is to help address what I call “information asymmetry.” When a dentist is negotiating with a DSO, the people on the other side of the table are highly sophisticated. They buy and sell businesses all day, every day. The dentists may be good business people and very capable clinicians, but they're not particularly adept at buying and selling a business. If I can help them gain the knowledge to become more adept, I see that as a good thing.

ROSS BRANNON

Do you find some of them think they're more sophisticated than they are?

STAN KINDER

Without question. Increasingly over time, people have heard these big numbers, in terms of multiples. They can come to the initial conversation with unreasonable expectations as to what their practice might be worth. Part of the exercise is helping them to understand what's reasonable, given the marketplace today.

ROSS BRANNON

If a client wants to settle with a DSO, what's a critical thing for them to keep in mind as they enter negotiations and want to get the best deal?

STAN KINDER

A practice is an asset, and like any other asset, the better its condition, the more you're going to be able to negotiate for better pricing. That addresses everything from the quality of the infrastructure, the facility and the equipment, to whether it's a practice that's growing or flatlining or declining, to how well the records are organized. The better the organization, the more appealing it is to the DSO, because it means they don't have to create that organization themselves. It already exists, to some degree.

ROSS BRANNON

What financial savvy do you wish you saw out of more dentists?

STAN KINDER

I think the average dentist thinks of their practice as their profession, and a job. It certainly is those things, but it's also a business. I wish dentists could think about their practices more in that context. That way they could step back, look at the business, and focus on the strengths and weaknesses, and how to increase the profitability, as opposed to spending 100% of their time focused on being clinicians and 0% of the time on being business owners.

Dentists who reach outside of themselves and look to get expert help, tend to operate at a much higher level than those who don't.

ROSS BRANNON

What are you reading? Or what's your favorite book?

STAN KINDER

I am a huge fan of anything and everything written by a guy named Dan Kennedy. He's a marketing guru, and frankly, in my mind, a genius. I read everything he writes. I’ve been subscribed to their newsletter for many years. He is just brilliant. If a dentist is really interested in understanding marketing at a higher level, they would do well to read Dan Kennedy.

ROSS BRANNON

What's the best piece of advice, financial or non-financial, you've ever received?

STAN KINDER

Just understand that you're responsible for everything that happens in your life, good or bad. You can blame other people for the negative outcomes, the bad things that happen, but that's not going to change anything. Other people aren't going to get you to a better place - only you can get yourself to a better place.

ROSS BRANNON

That's great wisdom right there. What advice would you give a brand-new dental school graduate?

STAN KINDER

To strike an appropriate balance between the development of their clinical skills and their business knowledge. All too often, the focus is almost exclusively on the clinical skills. I've known a lot of dentists that have attended hundreds of hours of clinical CE, and ultimately are failing in their practices. I've known very average dentists who had exceptional levels of success because they knew how to communicate with people, and focused on some of the non-clinical things. I've known people who were exceptional clinicians that I would go to, I would refer my mother or family to, but who couldn't succeed because they couldn't master the non-clinical things.

ROSS BRANNON

Work on being a better business owner, not just being a better dentist. Thank you for sharing your knowledge.