Despite COVID, many Invisible Dental Support Organizations (IDSO) are continuing to quietly acquire interests in great practices of all specialties across the country. At the moment, in most cases, our clients are achieving 2019 values of 2X to 3X collections for great practices. But there is now a new COVID twist.
We have signed over $82,000,000 of Letters of Intent between our doctor clients and IDSO silent partners since April 1, 2020. To say the market is active is an understatement. LPS has completed $25,000,000 of transactions since Mar 16 (the day the DJIA dropped 2997 points). Over $250 million of new clients engaged us to monetize part of their practices since April first.
Personal liquidity and closing a transaction in 2020 before the tax increases of 2021 is suddenly very interesting to many doctors. (Biden has promised big tax increases!)
2019 Values in 2020; For a Couple of Months?
For a limited time, IDSOs are valuing practices based upon the practice performance for the 12 months ending Feb 29, 2020 or December 31, 2019. These values are very close to 2019 bubble value levels. However, to adjust for the risk of practice revenue decline, buyers are including what we call a “Return to Before Covid” (RBC) collections levels provision in the agreements.
All of the Letters of Intent signed since April 1 include RBC provisions. Deals signed before March 1 are being renegotiated to include them. Each of the IDSOs have their own unique RBC provision structures, but in general they are trying to ensure that the practice returns to 2019 levels over some period of time after closing.
The RBC Provisions in Detail
The IDSOs are willing to pay 2019 era value levels today, but only if the practice returns to 2019 collections levels over the 15 to 36 months after closing of a transaction. The RBC provisions typically hold back anywhere between 5% and 20% of the cash portion of the initial consideration. The hold back is paid to the doctor once the practice’s collections have returned to 2019 levels over some measurement period which varies by practice and IDSO.
Doctors who are unable to return to 2019 collections levels over time will either receive some pro- rated amount of the withheld cash at a specific date in the future, or lose the withheld consideration entirely. Either event reduces the overall value of the transaction. This value reduction in our view is fair given that what the IDSO contracted for initially, did not deliver a return to the 2019 performance and value. In general, more desirable practices with multiple bidders will have a lesser RBC holdback with more time to achieve the goal.
The IDSOs sincerely want their new doctor partners to achieve the return to 2019 levels and collect the balance of their cash. Growing practices are their primary goals, not reducing purchase price levels. At some point in the very near future, the RBC provisions will be replaced with initial value measurement periods that include the March/April/May 2020 numbers. This will NOT be good for anyone. The window is only open briefly…