The year of 2019 was spectacularly successful for dentists of all specialties. LPS clients achieved extraordinary values through partnerships with strong Invisible Dental Support Organization (IDSO) partners. Doctors put tens of millions of dollars in their pockets at long term capital gains tax rates and retained partial ownership for future upside. Their practices are growing faster, the doctors have fewer administrative minutiae headaches and their team members have gained upside mobility in their career paths and better benefits.
More of the larger IDSOs are planning recapitalizations (sales) in 2020. This will stop some of them from partnering with practices as they go through the recap process. The last large one that closed in October, produced a 3X+ return on the parent equity held by doctors who had been in for three years. Two of the Top 10 DSOs are out shopping for new owners now. It will be very interesting to see the values they achieve in their recaps and its impact to practice values in 2020 and 2021.
New DSOs are being formed every month at an accelerating pace. Whether this is a sign of a “top” or not will be revealed in the coming quarters. Many of these are specialty focused which is a good thing for our clients’ potential values, but doctors should understand the positives and the negatives of partnering with start-up DSOs.
LPS Client Results in 2019
We completed transactions for practices in almost all specialties with the usual exception of prosthodontics. The value of 2019 LPS transactions was over $200,000,000. We enter into 2020 with another $280,000,000 of practices under Letters of Intent (LOI) with partners which will close in the first quarter of 2020. In addition, we have another $125,000,000 of clients in the “dating” process with prospective partners, all of which we expect to close in the first half of 2020. The supply of great practices eager to partner with IDSOs is growing exponentially.
Our current client geography ranges from Hawaii to Massachusetts. We have not yet completed transactions for practices in Alaska or Maine, preferably they will become clients in the summer!
Actual Favorite Transaction Results of 2019
We define favorite in a variety of ways. Sometimes it is about achieving an unexpectedly high value. In others, it is a transaction with a great doctor who is rapidly responsive to the items required to complete due diligence with a buyer who wants to get a transaction closed quickly. The hard part of these transactions is NOT finding the right partner, but completing the deal. We get paid nothing until it is DONE and some closings require hundreds of man hours!
GP: Great practice in a small town in Missouri. Seller got us what we needed fast, and buyer once again completed a transaction in about 60 days with nominal glitches.
Ortho:
- Single doctor ortho practice with over $6,000,000 in production who achieved a value of $24,000,000+ from the right new partner which owned five pediatric practices nearby. Phenomenal growth due to the synergies.
- Multi-doctor practice in Wyoming and Montana, the only two remaining states without a DSO until now. Great partner for them, exciting new buyer for us due to unique partnership structure providing large future upside gains.
- North Carolina: The first ortho practice transaction in the state from a new DSO. Long, painful, but educational. Two doctors, two offices.
OMFS:
- Five doctor practice achieved 4X collections value for their rapidly growing practice out west.
- One doctor, $4,000,000 in collections OMFS with two offices. We sold 80% of his practice and 100% of his practice real estate and saved him a LOT of taxes.
Perio: Western state at 2.7X collections for a two doctor practice. Fun doctor.
Fun Transactions In Process to Close in Q1 2020:
$100,000,000+ transaction for a group of pedo/ortho/OMFS practices we assembled in a Western state. World record value and unique structure with HUGE upside for the doctors with a proven, billionaire, non-PE backed buyer.
$80,000,000+ Single owner, two office GP practice. Long complex deal for a very, very unique practice in the Midwest. Buyer has already bought over $100,000,000 from us in the last two years. We like repeat buyers!
Two clients in the Northeast: Large, five office OMFS practice and a perfectly situated Ortho with three offices. Going to a new DSO we helped create for a PE sponsor. Doctors achieved exceptional values. We even found the management of the new DSO for the PE group.
And dozens of other transactions in the $5,000,000 to $30,000,000 range. Some will be more fun than others!
Forecasts for 2020
Endo and OMFS have multiple new buyers entering the market. Good for values, but need to be cautious with new players to the game. What is their end game for the doctor’s retained equity?
Ortho buyers of 2018 still looking for pedos, but very few great ones available. Good for pedo values. Ortho buyers are now turning their attention to OMFS. Management changes at some of the larger actively buying DSOs have slowed several of them down, deal structures are changing (more restrictive) and several of the bigger buyers will pause in 2020 for their recaps, (sale to a new PE partner) just as a few did in 2019. Ortho less popular East of the Mississippi.
GP still valuable as always. Hard to find big, growing, profitable practices though…
Perio: A few more active multi-specialty buyers are helping values.
Political Winds Will Affect Your Net, After Tax Cash Outcomes in 2020 and 2021
There will be a lot of nervousness around the election outcomes as it could result in dramatically higher long-term capital gains tax rates if the Democrats win. We expect a flood of new clients trying to take advantage of low tax rates pre-election depending upon the polls. These transactions take about six months from start to finish, so you really do not want to wait.
LPS Future Plans:
- We have added multiple team members in 2019 including another full time “deal closer” and the former VP of Acquisitions of a Top 10 DSO. The former GM of an 18 office multi-specialty group is helping us manage our growth. These additions are giving us better insight into the thinking of the buyers and the doctors.
- We will announce our new Advisory Board of doctors and former DSO executives in Q1.
- My new book: Dental Support Organizations; The Good, the Bad and the Ugly will be published in Q1.
Happy New Year!
Chip
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