Larger LPS practice clients today are achieving values of 15 to 20% above 2019 value levels. As inflation and interest rates continue their ascent, driving up practice operating costs, all practices are at risk of profit margin compression and thus potential practice value declines later in 2022 and 2023. We urge doctors to understand the value of their practice in a transaction today with an Invisible Dental Support Organization (IDSO) silent partner. Doctors sell 51% to 90% of their practice for cash up front at today’s low tax rates and continue to lead their practice with the doctor’s brand, team and strategy for years or decades.
All of LPS’ GP practice clients today will have five to ten or more qualified Invisible Dental Support Organization (IDSO) partners to choose from. Bidders for GP practices come in all shapes and sizes with different risks and rewards. Some IDSOs will invest at premium values, provide outstanding support capabilities and have significant equity appreciation opportunities; others will not. LPS will only show our clients to IDSOs which have the right financial sponsors (capital backing) and competent, proven management with a realistic growth strategy.
In the LPS bidding process you will meet with multiple potential partners to understand the unique characteristics of each IDSO. You will discover how their operating philosophy and strategy align with your goals, vision and value expectations, both initially and long term. LPS has partnered doctors with over 30 different IDSOs in the last 12 months in over $500 million of transactions. The current IDSO bidders for GP practices generally fall into these categories:
General Practice Only IDSOs
There are hundreds of IDSOs operating in all 50 U.S. states which only partner with GP practices in which the majority of their revenues are not specialty related. They may partner with practices which have specialty services and may add specialty services to some practices, but they do not typically partner with standalone specialty practices.
While similar to the GP only groups, Multi-specialty IDSOs will also partner with standalone specialty practices. Some of the Multi-specialty IDSOs have more single specialty practice partners than many of the single specialty only IDSOs, including ortho, OMS, perio, pedo and endo. As one example, a larger Multi-specialty IDSO has over 60 orthodontic offices, whereas only a few of the 13 ortho only IDSOs have over 60 offices.
New IDSOs vs. More Mature IDSOs
There have been dozens of new IDSOs formed in the last year eager to partner with larger GP practices nationally. Some have Financial Sponsors (not always Private Equity) which have long track records of creating value for their doctor partners in previous IDSOs they have formed, grown and monetized over the last decade or two. Some of these are now on their third or even seventh “new build” of an IDSO. In our view, the groups with successful financial sponsor track records can provide the highest equity returns with relatively low risk.
Conversely, there are many new IDSOs with inexperienced management and financial sponsors without dental experience or even multi-site healthcare backgrounds. The frenzy of dental consolidation has attracted multiple new investors and IDSOs, some of which will succeed and some of which will fail. Understanding the financial sponsor of a new IDSO is critical.
Some IDSOs have been operating for over 30 years and have a successful track record of support, value growth and monetization opportunities for partner doctors. A few have over 1000 offices and dozens of IDSOs have over 100 offices.
Become a Platform for a New IDSO
Larger practices with $15 million or more in collections will have the option of partnering with a financial sponsor to start a new IDSO using their practice as a platform from which to build. LPS has engineered multiple new IDSOs for our clients by finding the right financial sponsor. While many investors are eager to enter the dental consolidation game, we have carefully only partnered our platform clients with financial sponsors who have a successful track record in building and monetizing previous IDSOs.
Financial Sponsors are NOT Just Private Equity
Many doctors believe that Private Equity groups (PE) are the only backers of IDSOs. The reality is quite different. In our last $500 million of transactions, over half were with non-PE backed IDSOs. Other financial sponsors of IDSOs include Family Offices, wealthy individuals, Small Business Investment Corps (SBIC), Venture Capital funds, doctors with bank debt and even Sovereign Wealth Funds.
The “Wanna Be” IDSOs
There are several groups promoting the concept of “bundling” smaller practices for a future sale to investors. They have no financial backing now, but are operating under the theory that if they assemble enough practices as a loosely defined group, they will be able to attract a financial sponsor in the future at a higher value than the individual practices would be worth alone. While in theory this sounds attractive, no one has yet been able to successfully monetize one of these assemblages to our knowledge. Some are even operating under a model where the doctors pay the promoter fees to be a part of the consolidation scheme. A win/win for the promoters, but a very low probability of success for the doctors.
Any great GP practice will have many qualified partners to choose from. It will literally pay for doctors to meet all of their options and enjoy a value enhancing bidding contest to achieve the best fit as well as short and long-term value.