This week, the Dental Amigos welcome Brannon Moncrief, the Principal and CEO of McLerran & Associates, who specializes in providing sell-side advisory to large dental practice owners seeking to monetize their businesses in private buyer sales or DSO transactions. Brannon has personally facilitated the sale of over 1,000 dental practices and is widely considered to be an expert on DSO affiliations.

In this episode, Brannon offers his insight on the “DSO vs. private doctor buyer” debate, emphasizing the importance of defining personal, professional, and financial goals before making a decision. Brannon draws on his extensive experience to help listeners understand concepts like EBITDA and the different types of equity to help listeners understand highly complex and often confusing DSO offers. Finally, Brannon discusses the challenges of internal succession planning and his long term strategies for facilitating a smooth transition into retirement.

To get in touch with Brannon and his team, schedule a free, confidential discovery call here: https://dentaltransitions.com/contact-us/. Brannon can also be reached directly at brannon@dentaltransitions.com or (512) 660-8505.

Listeners who want to reach Paul can do so at Paul@DentalNachos.com and those who want to reach Rob can do so at Rob@RMontgomery-law.com.

‍

FULL EPISODE TRANSCRIPT

‍

Bumper  

Welcome to the Dental Amigos podcast with Dr. Paul Goodman and attorney Rob Montgomery, taking you behind the scenes of the dental business world. All the things you didn't learn in dental school, but wish you had. Rob is not a dentist, and Paul is not a lawyer, but since Rob is a lawyer, we need to tell you that this podcast is for informational purposes only and shouldn't be considered legal advice. Listening to this podcast does not and will not create an attorney client relationship. As is always the case, you should formally consult with legal counsel before proceeding with any legal matter. Learn more about the dental amigos at www.dentalamigos.com. And now, here are the dental amigos.

Rob Montgomery  

Hello, everyone, and welcome to another episode of the Dental Amigos podcast. I'm Rob Montgomery, and I'm joined, as always, by the Head Nacho himself, Dr. Paul Goodman.

Dr. Paul Goodman  

Great to be talking Rob.

Rob Montgomery  

Paul, it's good to talk to you, and it's good to be podcasting again. The only podcast that is hosted by a lawyer and a dentist.

Dr. Paul Goodman  

As far as we know, yes, we're unique.

Rob Montgomery  

I haven't done any due diligence on that, Paul, recently, but I suspect that's the case. Today, we have a very special guest. Brannon Moncrief, the principal and CEO of McLarren and Associates, is with us today. He's going to be talking about practice transitions and really, Brannon has great expertise in the DSO space and selling to DSOs in some of these larger transactions.

Dr. Paul Goodman  

A very seasoned veteran in the dental industry, and really excited to chat with him and hear what he thinks about the current market, and just giving our listeners some great tips and things to think about if they are looking to transition their practice.

Rob Montgomery  

So as I said, Brannon Moncrief has over 20 years of dental industry experience serving as a banker, broker and sell-side advisor. For the last 13 years, he has served as the principal and CEO of McLarren and Associates, which specializes in providing sell-side advisory to large dental practice owners seeking to monetize their business in a private sale or a DSO affiliation. Brannon has personally facilitated the sale of over 1000 dental practices. He is widely considered to be an expert when it comes to the topic of DSO affiliations, and Brannon and his guys do this stuff around the country for dentists, although he resides in Austin, Texas with his wife and two young daughters. And now, without further ado, here's Brannon Moncrief, welcome amigo, and thanks for being on the show.  Hey So Matt's is the name of the place.

Brannon Moncrief  

Hey guys. Hey Paul, Hey Rob. Thanks so much for having me.

Dr. Paul Goodman  

Great to have you, Brannon. We always ask hard hitting questions. So if we were in Austin, Texas, where would you take us for nachos and what is your favorite topping? Your go to topping?

Brannon Moncrief  

Oh, that's a tough one. I mean, this is kind of a mecca for Tex-Mex, but I like old school, classic Tex-Mex. I'd probably do Matt's El Rancho on South Lamar. It's only a few miles from my office. I'm kind of a classic Nacho guy, so cheese and pickled jalapenos. If I had to pick my favorite topping you're in Austin, that would have to be chopped brisket.

Dr. Paul Goodman  

Oh, nice. I like that.

Brannon Moncrief  

Matt's El Rancho. Yeah, it's been around a long time, actually, one of the highest grossing restaurants in Texas. .

Rob Montgomery  

It's cool. It's funny, because I've said this before, like, we asked people from around the country this question, and it's always like, the more mundane names aren't the places where you'd expect to have the sexiest nachos. In the southwest, you know, it's like names like Matt's.

Speaker 2  

I always say that nachos are the Golden Retriever puppy of appetizers, because no one ever gets stuck. They always got a place, and they know exactly it. And in fact, they usually do what Brannon does. They I could hear what you were doing. Brand You were thinking of a few places, and Matt's came to the top. So probably there's even more than, you know, one good place.

Rob Montgomery  

He's in ground zero for that. So let's just kick off with a very popular question that I see Brannon on Facebook groups and blogs where people are debating the merits of, should I sell to a private buyer dentist or a DSO? And so talk to us and our audience about that. If somebody asks you that question, you're meeting with a dentist for the first time, and they say, I have a practice. I'm going to make it challenging for you. I have a practice that grosses $2 million. Who should I sell to?

Brannon Moncrief  

That's a great question, and we always start with unpacking. Like, where are you at in your career? What's your runway to exiting your business? What are your goals? Personally, professionally, financially, like, define your "why", right? We always have to start there, and then we start to look at economically, what are these two options look like? Because they are very different. And when you cross about the $1.5 million rev threshold, and you're talking about 300,000 plus in EBITDA, that's where the it's kind of a demarcation point when it comes to valuation and demand, private buyer versus DSO. Once you cross that threshold in the private buyer world, the buyer pool starts to narrow a little bit, because there's only so many doctors that are confident and competent enough to buy a practice of that size, and lenders start to tighten up when we start talking about loan amounts, you know, over a million bucks. But in the DSO world, valuations start to accelerate, and the demand increases pretty remarkably. So when we start the process, we typically unpack that "why", and then do a deep dive and quantify. What are the economic implications of each of those options, right? Private buyer world, what's that practice worth? How's that deal going to be structured? What's going to be your post closing obligation? And it's pretty simplistic. In the private buyer world, typically, you're talking evaluation somewhere in the range of two to two and a half times net cash flow, 70 to 100% of annual revenue. It's going to be 100% cash at close, or close to 100% cash at close, and you're likely going to walk away, or have some sort of short term, you know, work back. In the DSO world, completely different set of circumstances. We're looking at a multiple of EBITDA. So let's say that practice 2 million top line revenue has $400,000 in EBITDA. You know, it could trade for two and a half to $3 million from a valuation perspective, comparative to, you know, 1.5 to 1.8 million. And the private buyer world pretty big, you know, delta between those valuations. But in the DSO world, it's going to come with more strings attached. You're talking, you know, 50 to 80% cash at closing. You're talking about a two to five year post closing commitment. So they are really night and day, but they're both viable options when you start talking about a practice of that size and caliber.

Dr. Paul Goodman  

Brannon, I want to ask a question, since I'm only one of this podcast who went to dental school. Would this be a fair way to describe EBITDA with a $2 million practice and $400,000 of EBITDA, right? And I'm going to and I'm going to describe it in like, six year old dentist world. This is the money I would make owning the practice if I had associates do all the work. Is that a fair way to describe it, if I step back associate so, just so our listeners understand this, because I know someone's driving or on the treadmill or working out and saying, I want to hear Rob Paul and Brannon. This is such a hot topic, right? Just like, right? This topic is so hot right now. Like, cancel from Zoolander, hope people get that joke. And if someone's listening, saying, if you have a $200,000 practice, and there's $400,000 of EBITDA, that would be the money you would make if associates dentists worked for you, and you just step back and own the practice, and that's I think just is an easy way for dentists to understand it. I know financially, it could be more complex, but I'm glad you said that's kind of a fair way to think about it, to frame this conversation moving forward.

Brannon Moncrief  

Yeah, absentee owner profit. So if you were not doing the dentistry, you were paying someone else to do all the dentistry, after all the overheads paid, and you pay someone else to do the dentistry, what is the cash left over at the end of the day? And that's why DSOs buy practices. They buy practices to acquire profit, to acquire EBITDA. But where a lot of doctors make the mistake is they don't factor in a market wage for the doctor. And a lot of times we'll get a call where someone says, top line revenue is 1.2 million. I have $400,000 in EBITDA. You know, what is my practice worth? And I'm like, hold on, back up. Did you pay yourself to do the dentistry? And in that scenario, oftentimes the answer is no. Once you factor in a wage for the doc, maybe $300,000 a year. That $1.2 million top line rep practice only has absentee owner profit EBITDA of a higher $1,000 and therefore it probably doesn't make sense to look at a DSO affiliation, a private buyer valuation is going to be significantly higher with a cleaner deal structure.

Rob Montgomery  

I'm going to talk about deal structures too just so people understand, because we all throw out, you know, cash at closing. And all know what that means, but tell our listeners what you're referring to when you talk about 50 to 80% of the purchase price will be cash at closing in a DSO deal. What? What's the rest of it? And how does that factor into sort of the consulting and the decision that a selling doc has.

Brannon Moncrief  

Sure, so let's use that example of the $2 million top line revenue practice with $400,000 in EBITDA. And just for simplicity purposes, let's say the valuation of the DSO world is seven times EBITDA. So $2.8 million valuation. So you're typically looking at cash, at closing money in your pocket of 50 to 70% so that's going to be somewhere in the range of, you know, 1.4 to 1.8 million on the high end. And then the remainder of the value is typically some form of equity, and that equity can come in different forms. The most two common forms of equity are joint venture equity, what we call JV equity. That essentially means retained equity at the practice level. So it's a true partnership. Let's say you take 60% cash to close and then retain 40% equity in your own business. And rather being a partner with another clinician, you're partnered with a DSO, you're going to get 40% of the ongoing profit, and they're going to get 60% of the ongoing profit from the business on a go forward basis. The other form of equity we refer to as holding company equity, or hold co equity. And that's where you don't actually own equity in your practice. You own stock in the DSOs parent company, so you don't receive any ongoing EBITDA distributions. You own stock in the parent company that DSO. And the goal there is, once the DSO hits a recapitalization event and sells the company to the next investor, you have the opportunity to liquidate that equity and partner in full, hopefully at a handsome return. And if some deals are a hybrid deal structure, where you have the cash at closing component and then the equity component is bifurcated between both types of equity. So maybe you do a 60 20 20 deal where you take 60% cash at close, 20% hold co stock and 20% retained equity in your own practice on a go forward basis. And there are a lot of different deal structures out there. A lot of nuances involved in these deals. Some of the deals also involve some type of earn out or revenue or EBITDA maintenance provision. They may have an earn up whereby you're going to get additional cash payouts predicated upon hitting certain revenue or EBITDA growth benchmarks post sale and and then some of them have just very unique terms. So no two deals are alike, and every DSO has a preference in regards to how they structure their transactions.

Rob Montgomery  

And I think that's great, and it's really helpful for people to understand that. And I think this is a good segue into, you know, get on my soapbox here for a minute, unsolicited offers in this space, which a lot of dentists receive unsolicited offers from a DSO. Hey, you know we value your practice at ten million we think you great. Here's a letter of intent, and you could sign here. It's non binding, and let's get on with things. You don't need a pesky broker to get in. The pesky brokers, they just hold up the deals exactly, you know. And why are you going to pay a broker? You already found us, right? And pay a broker a percentage of this deal, and then, frankly, even from a legal standpoint, you know? Yeah, you can get a lawyer involved later, but this isn't binding, right? And now the train has left the station with this one DSO, you know, and I do want to talk about why that's bad, for a lot of reasons, but one of the reasons is for why Brannon was just talking about, which is that all DSOs are different. Their deal structures are different, whether they're going to offer JV equity or hold co equity, or a hybrid of them how much cash they're going to offer. And some people, some selling dentists, might like that JV equity model. Some may hate it. Some may want more cash. Some may want less cash. And generally speaking, Brannon, it's true, though, that DSOs kind of have their way of doing it, more or less. And so there might be some wiggle room, but if you really want to have a menu to choose from in this world, as a seller of a dental practice to a DSO, you really need to bring different potential buyers and DSOs to the table to see what they're offering, to see what fits one particular doctor, because all these deals are not created equally. Doctor's goals and what they're looking for in their transition are not going to be the same. And some things might be great for Paul Goodman, but they're terrible for Rob Montgomery.

Brannon Moncrief  

Yeah, absolutely. We talk a lot about the fact that every DSO is different. I say this all the time. If you met one DSO, you met one DSO. And if you're going to approach one of the most impactful decisions in your entire life, not just in your professional career, you need perspective, right? And the only way you get perspective is to have a great team of advisors and to talk to multiple suitors, to shop around. You need optionality, because, like you said, every doctor has a different "why". They have different goals, personally, professionally, financially, and they're looking for a different type of buyer. You know, some doctors want a buyer that's very hands off. They want the access to the economies of scale, but don't want them meddling in the day to day operations of the practice, whereas some of our other clients want a DSO that's very hands on, that has, you know, large infrastructure where they can help administer and operate the practice on a daily basis. Those are two very different things that people are looking for. So you need to create optionality and perspective to make sure you find the right partner for your practice. And then third, you've got to create leverage to negotiate the best deal terms and the highest valuation you possibly can. And the only way you do that is to create competition. Create, essentially, for lack of a better word, a bidding war among multiple DSOs. So even if you think you found the right fit, the right partner, the right buyer, you have to hold their feet to the fire to ensure that you're getting a fair deal. And that's where we come into play. You know, DSOs are opportunistic. Their goal is to buy low and sell high. If you were in their shoes, you would do the exact same thing. They need to protect their investors. And it's kind of a funny conversation we have with our clients, because you want them to be wildly irresponsible when they buy your practice. Give you the sexiest deal structure possible and the highest valuation possible, and you want them to do the opposite for every practice they buy after yours, to protect the value of your equity, but the only way you hold their feet to the fire, the only way you're going to negotiate the best possible terms is to run a formal process and to pit them against each other. And that's what we do, and the results of doing that are incredible. Oftentimes, I would say, half our clients have an unsolicited offer in hand from a DSO at the time they approach us. And oftentimes the way that happens is they get a letter in the mail, or, you know, their buddy that sold to that DSO makes an introduction to the business development person at that company. And a conversation that starts off casual becomes very serious very quickly. When an LOI hits the table and through conversations like this or a recommendation from their attorney or CPA, they call us to gut check the offer, and we say, Well, hey, let's pause on that conversation with that DSO, they're not they might threaten to get up from the table, but they're not going anywhere. Let's gut check the offer. Let's do an independent EBITA analysis. Let's talk about what we think the EBITDA is and what we think the practice would trade for in the open market, and how does that compare to the offer at hand? And what we often find is two things, the DSO has manipulated the EBITDA substantially. Tried to convince you that your EBITDA is lower than it actually is, and every dollar of EBIT can be worth six to $10 in value. So controlling that narrative regarding Eva is critically important, and then the multiples typically a little lower than market might be half a turn or a turn lower than market. So by controlling the narrative regarding Eva, and then creating that competitive environment. If you can move the needle on EBITDA by a couple 100,000 and then move the multiple by a turn, you could be talking about millions of dollars in additional value. And we've helped many, many clients achieve that. They ultimately sold to the same BSO they had already identified as being the right partner for their business. Their business, but they were more secure in that decision because they had perspective, because they talked to other buyers, and were able to then say, now that I've met 10 DSOs, this is the right partner, but they ended up negotiating much better deal terms and a much higher valuation as a result of running that formal process.

Dr. Paul Goodman  

I want to add in here, one, a special offer for me, Justin, from Brannon's firm, came to Philadelphia on the program you were on, and his talk was about exactly this, right? How the final offer was much higher. I don't want to spoil his very dramatic 25 minute presentation. So people like to watch that for free. I will put that link in the show notes. It's really eye opening. And the other thing, Brannon, you've been around the dental world for a long time, and Rob too, would you agree, both of you, that the dentist that you talk to, that their associate dentist, their trusted associate dentist, is one of the most important people in their life, emotionally, financially, ability to go out spend time with their family. Would you say that an associate is a really important part of a dentist life? Brannon, like the owners that you know you would you agree? I'm sure. So I was just at an event and an owner said to me, I don't need your service for job. Connect. Paul, I was on the plane, and a third year dental student has a boyfriend who's a fourth year dental student, and he's moving to Philly now. Next month, so I think I'm just going to hire him. And I go, Well, that's great start, but you really want context and choices for the most important person in your life. And what will happen is you'll interview other associates, and that plain boyfriend will either become the top associate, or you'll say, oh my gosh, there's better choices out there. And he goes, that's really good advice, Paul. And then if we just accelerate this brand on what you said, I was kind of copying ours, this is the most important decision of a dentist financial life all their their entire work. And it's wild to me how they would just say, I'm just going to go with door A and not think of any others. And actually, you know, this is a podcast that talk about the real world of dentistry. I don't know why that is for dentists. Do they? Do you think sometimes they just don't want to go through the hassle?

Rob Montgomery  

Well, I mean, for starters, I mean, the whole thing is rigged. Let's make no mistakes. This is not like an accident, that this unsolicited offer is what it is. You look at the at the term sheet, or the letter of intent, and there is an eight figure valuation at the top, and they would like for you not to continue to read. And then some people you know don't get beyond that, because if my practice is valued at ten million or $12 million or whatever, how could anything possibly go wrong, right? And then, so that's one thing. And then, but yeah. And then the next thing they look for is, what is the multiple of EBITDA? And you know, if they see a multiple that they think is something that sounds like something that they heard a friend of theirs say that they got, well, then they're cool with that too, and then the rest of it, they don't really understand, okay. And so that's the goal for the DSO, for them, just to stop there, assume that that number nothing could go wrong. Be maybe too embarrassed to go talk to somebody about, what are these earn outs? Talk to me about this equity rollover. What is it really? What isn't it? And you know, what is the, you know, the delta here on this employment agreement that I'm going to have post closing, versus continuing to be an owner, like they don't know what to ask. And, you know, again, if you, if you saw that, that ten million number at the top, these DSOs don't want you to get past that, so it and then there is a somewhat high pressure cell, I see it comes along with that.  

Dr. Paul Goodman  

What do you think Brannon? What are the psychology of dentists in that way? Why does this work? Why do you think they do this? I mean, you've been around the dental world, transitions, other stuff. What's your dentist psychology take on it?

Brannon Moncrief  

I think some of it's naivety. Some of it is they think they have a good deal, but they don't know how much better it could be. And you know, dentists are somewhat notorious for, you know, stepping over dimes to pick up pennies. They don't want to pay a broker, they don't want to pay an attorney, they don't want to pay their CPA to do the EBITA analysis. And hence, this is where the horror stories from the DSO world come from. If you don't follow this advice, if you don't run a formal process, you risk doing several things, and that is going the DSO route, when maybe that wasn't the right fit for you, selling your business prematurely, choosing the wrong partner, that wasn't the right fit for your goals, leaving a ton of money on the table, not understanding the deal structure. All of those elements in combination, or even one of them alone, could lead you astray and create a lot of financial and emotional distress. Post closing, and those are the stories that you often hear about those DSO horror stories, but you don't have the context of how did they approach the process, and it's why we have, like, I could give you an infinite number of references of past clients who are very, very happy with what we did for them and with their DSO partner long term, and it's because they followed a very regimented process. And at any point in time, if we got to a point where it didn't make sense, they have the ability to back away and not do it. But when you're in this echo chamber that the DSO has created and they're controlling the narrative, it's very easy to fall into that trap, close the deal without really thinking it through, and then deal with ramifications, you know, after the fact. And I'll also say, especially now, given that there have been a handful of DSS that have failed, you have got to do your diligence. And if you're going to go down this path, you've got to pick the right horse, or you run the risk that you know how it was supposed to play out, culturally, operationally and monetarily, doesn't play out the way that you know. Maybe they had projected it in that loi discussion. In. So you gotta pick the right pony in this marketplace.

Dr. Paul Goodman  

Is this the right time, Brannon, I want to stay friendly with you, is this the right time? Like you want to pick an organization like the Philadelphia Eagles that have been at the top, because they're gonna stay friends. And we keep saying that we're back in the Super Bowl for the third time in the last seven years. Brannon, sorry, I don't know.

Rob Montgomery  

That's a great point, though, if I may, I think it's too many times. I think people misunderstand that aspect of things. Brannon, where, you know, it's like, yeah, I'm going to, I'm going to get, you know, 75% cash and get 25% equity in this, DSO. And then when they do their recap, I'm gonna, you know, be multiples richer of that, it's like, okay, you know, maybe! But you know, and this is where I really see people with what I believe to be a misunderstanding, you know, it's 25% you know, of the purchase price is stock in this Bugs Bunny DSO, you know, it's not like you're investing in, you know, Microsoft, when Bill Gates was in the garage here, you know, the multiple and that recap for that, for that DSO is going to be at the same multiple that, you know, a big, tried and true, experienced DSO that's done this before is going to get paid. So it's not like you get paid for, you know, essentially that additional risk in rolling equity into this unproven group.

Dr. Paul Goodman  

I want to ask Brannon, because it's about responsible information, right? So I'm actually curious, man, like, since you're so tied into this world like, how often do you hear of a new DSO on the block? Daily, weekly, monthly?

Brannon Moncrief  

I'd say probably weekly. And you have to understand that there's a risk-reward equation, right? If you are betting on a small, unproven DSO. Yeah, there might be significantly higher upside on the equity, but there's significantly more risk associated with that, as opposed to partnering with the DSO that's had a couple of recaps and is backed by, you know, one of the top 10 private equity firms in the world. There's going to be a maybe a lower ceiling, a lower return on that equity, but far less risk. So you have to understand that there is nuance comparing risk reward on the equity equation. And we know a lot of the water cooler talk about who's healthy financially and who's not interacting with all these DSOs and their management teams and their business development team and their private equity fund, seeing how their buying behavior changes from time to time, and knowing the assets they have in their portfolio. I mean, we know because we have broad perspective on who we would bet on and who we would not bet on, and that's why there's over 500 DSOs buying practices right now, and we work with about 70. So what is that 15% of the marketplace right will allow to sit at the table with our clients. 85% of the marketplace is not allowed to bid on our practices.

Rob Montgomery  

But BRannon is there really even a reward for those smaller, quote, unquote, less proven emerging DSOs, because Isn't it like if they get to a point where they've got ten million of EBITDA, is there ten million of EBITDA going to trade any differently than, you know, the ten million of EBITDA of a proven DSO that's done this before? Like isn't ultimately the number, the number like, is there really a reward for that risk?

Brannon Moncrief  

There is because the smaller the DSO, the less it has to grow to generate substantial arbitrage, comparative to one of their peers, that's substantially larger. So look at it from this perspective, if I'm a 50 location DSO and I recap and add another 200 locations over the course of five years, I'm five times larger. I've grown 5x during that recap cycle by adding 200 offices. But if I'm a 500 location DSO, and I recap at the same multiple and then I add 200 offices over the course of five years, I haven't even grown by 50% right? Okay, my return on equity is going to be substantially lower than that smaller DSO. And as I get larger and larger, the recap cycle typically extends, because I need a longer period of time to grow to generate that return, right? So as a DSO gets larger, typically, the recap cycle will increase in time and the return on equity will go down comparative to a smaller DSO. But I would argue smaller DSO has more risk of potential failure than a DSO that has seasoned and been through multiple. Caps is likely owned by a more sophisticated, larger private equity firm with deeper pockets and better banking relationships and terms. So it's all it's all relative. You have to take that you know into consideration as well

Rob Montgomery  

But as you talk about evaluating these, I mean, there's some that we see where it's obvious that they don't know what  they're doing. They don't have the track record. And what I'm amazed about oftentimes, is where we see people that, again, I'm just gonna roll $3 million into this, into this whole co-equity of this DSO and like, it just becomes like, Monopoly money, yeah, and like they there's no way in the world they would ever write a check for $3 million to buy stock in this company? But it's just sort of like 3 million here, a million and a half here, you know, and it's like the I think they just lose, you know, become detached from reality about how much money we're actually talking about.

Brannon Moncrief  

Yeah, it's interesting when you talk about the equity component, because I see a lot of the noise on Dental Nachos and some of these other platforms. And it's it's interesting that, you know, a lot of people are saying that private equity is making a ton of money on the backs of dentists, but then also arguing that the equity is worthless. Well, those two things are mutually exclusive. Private Equity is either making a ton of money or the equity is worthless. The reality is that some of these DSOs are going to be wildly successful and generate an amazing return. That's who you want to be with, right? If you're going to choose a partner and you're going to roll equity, you want to be with one of those companies. And there are going to be a handful of DSOs that go to zero, and all the other outcomes are going to be somewhere in between. We want to make sure that we keep our clients away from anybody whose equity is going to zero. We want to make sure we keep our clients away from anybody that's going to have a mediocre return on equity. We want a good return or great return on the equity component. So that's why we're so vigilant in the diligence we do and vetting DSOs and only allowing the best options to sit at the table with our client. Knock on wood, I can say that I have not had a client lose $1 in equity value the handful of DSOs. And it's not a bunch. People say a bunch of DSOs have crashed and burned. That's not true. It's only been a handful, but we have not sold a single practice to those handful of DSOs that have failed or now in receivership.  I think you said that in passing. But it is important to circle back to what we talked about the outside, that you know this is not the time or the place to try to save money and DIY it.

Dr. Paul Goodman  

Brannons gonna keep you away from the majority of the DSOs out there that you would have no idea, are not one of those top 70%.

Rob Montgomery  

Absolutely, it's not obvious. They're not distinguishable. They don't come with, like, a warning, like this inferior product. Be careful. You know, it's like they have websites and looks the same. And we had to deal with an emerging DSO for a client that you know, against our advice, continue to proceed with the transaction. And we knew that this was the first deal that they were doing. Lo and behold, though, they had a website with testimonials from these dentists that claimed to have sold to them. Like this is not even true. You haven't done a deal yet. What is this? It's just BS. But you know, it didn't. It all looked good, unless you had somebody telling you that it really wasn't what it appeared to be, which is, you know, a good sell side advisor or an attorney, you're, you would really be be rolling the dice.

Brannon Moncrief  

I want to another mention, because I think it goes along with the topic that we're talking about, and I think it's important to bring up. But there's been this Advent with all of this private equity money filling their space of some dental influencers out there, consultants, whatever you want to call them, that are pitching this roll up concept that you can wrap your arms around, you know, 2050, 100 practices, and pretend like they're one company and sell them all simultaneously to the same private equity buyer at a premium, multiple. In other words, Hey, Doc, your practice is only worth six times, even on your own, but join my co op. You're going to pay 25,000 to join in, and 5000 a month. And collectively, we're all going to come together. We're going to pretend like for one company, and we're going to go sell for 12x or 13x or 15x simultaneously to a private equity firm, and the reality is that that unicorn deal is never going to happen. No, it's death by a million cuts. You're going to pay these people hundreds of 1000s of dollars. They're going to try to convince you for years that this unicorn deal is right around the corner and it's never going to happen. Because private equity is not stupid. They are not going to pay an elevated multiple for a platform that is not integrated and has no commonality, and we have seen doctors fall for this time and time again, and we are watching these charlatans of the industry get rich pitching this trash to dentists.

Rob Montgomery  

Public service message brought to you by Brannon Moncrief. Stay away from those deals. But I think that's sort of like, I think those things appeal about, like, what's the what's the mindset? Why do people, for lack of a better word, fall for this and that thing? I just think people think it's like, the non-DSO DSO. Like, it's the rebel, you know, we're gonna band together and create a better, new community, like that. Sounds great, you know, but, as Brannon said, yeah, it just doesn't work.

Dr. Paul Goodman  

I want to ask you guys something that I don't think people ask enough on podcasts, both of you, what types of practices are buyers looking to purchase things like that? But instead of that, I want to ask, what are the characteristics of successful dentists with these transitions from their happiness? Like Brannon, you've met them from the first call to they get back you and say, I'm glad I did this thing. And Rob you've spent hours and hours of time with selling dentists to DSOs, and you see them again someday. And I'm just curious, either of you, what are some I'm a dentist, and if you're saying to this audience, what are some characteristics of successful dentists who've sold the DSOs, whether it has to do with their mindset, whether it has to do with their procedures, whether it has to do with their age, what would you say?

Brannon Moncrief  

I think for us, our clients that have that the highest level of satisfaction are one those that own larger practices, right? That would be very, very difficult to sell to a private buyer. So economically speaking, from an options perspective, the DSO route was the only route that really made sense. And those are practices typically with revenue of, let's say, 3 million plus, where, if you want to monetize the business, it really becomes kind of a no brainer. A lot of those clients are looking for several things. One, they want to de risk, right that they've got a tremendous amount of their net worth tied up in a liquid business that has an insane amount of Chem risk, and a lot of doctors don't realize how much key man risk their practice has. You are one heartbeat away, one ski accident away from your practice, potentially being worth nothing. And when there's blood in the water, the sharks circle, and you are not going to be able to fetch anywhere near what you would fetch valuation wise, if you're healthy and relatively unmotivated to sell. So a lot of our clients are looking at De risk, take some chips off the table, diversify their wealth, sleep better at night as a result, and partner with a larger entity that is well positioned to fight some of the headwinds that dentistry is facing. DSOs have economies of scale that single practice centers don't when it comes to negotiating better reimbursement rates with vendors, sorry, better reimbursement rates with payers and better pricing with vendors. And they have resources that they can bring to bear to help solve some of the problems, not all of the problems that private practice owners are facing. So if you're in a situation where you own a large, multi million dollar practice, and you're within, let's say, 10 years of exiting the business for one reason or the other, whether that's retirement, relocation or choosing another career, you want to diversify and protect some of your wealth, and you want some operational support. If you check all of those boxes, you are going to have the highest probability of being very satisfied with going down the DSO path if you only check one or a couple of those boxes, then it becomes a more dynamic, nuanced decision. Does that make sense?

Paul Goodman  

Yeah, that makes a lot of sense. What would you say, Rob?

Rob Montgomery  

Sort of parallel to what Brannon just said, I think it's just not chasing the valuation or not chasing multiples, you know that understanding what the different options are, what these different DSOs can bring to you. And so if you are looking, if you are a dentist who is looking for support, like that type of DSO to kind of take things off your hands and and not the dentist who wants to have autonomy and independence, but like, if you're looking for that, and then you and, but then you end up going signing with the DSO. That's the exact opposite, just because they gave you a higher valuation, or they promised you a better multiple. Like, those are the people I find that that generally are not happy because they didn't understand sort of the bigger picture, both financially, operationally, professionally, you know, it's just they, they check the box of this is the best. And you know, most things in life, if you, if you try to just look for what is known by others to be the best, it generally doesn't work out well for you. So that that's, that's my, my take.

Brannon Moncrief  

I think the take it away there is that valuation is not the end all. I would argue that fit and deal structure are equally or more important than valuation. When you hear the stories that people are dissatisfied post sale, it's it's always about culture and fit and operations, and they changed my business, and I don't like working here anymore. My staff pissed off. Whatever it is that's typically what you hear. So it all matters, right when you're making this decision, it all matters the way we come at it. Create that competitive environment so we can identify who is the right fit, and then use that competition to let as leverage to negotiate the best outcome with the DSO, not adso, the DSO that you deem to be the right partner for your business.

Rob Montgomery  

Yeah, right on. Yeah, that's really, really powerful stuff. Let me just circle back to because I don't want to not talk about this. I think also, when we talk about, should I sell to a DSO or should I sell to a private buyer, I think people don't understand that if you have the right advisors helping you with this decision, that it's not really an either or, that the decision somewhat makes itself. You know that if you, if the practice is a certain size, like brands talking about you're selling to a DSO you know, like, unless you want to take the the practice to your to your deathbed.

Dr. Paul Goodman  

Someone who's saying, I have a giant practice. I have two associates. Why don't I just sell portions to my associates? Why don't they sell to a DSO? I'll just chop it up with my Associates, and they'll all buy it. What is the usually, why that doesn't work out.

Brannon Moncrief  

Yeah, that's super easy to do.

Rob Montgomery  

But look, here's the thing. Like, I guess you know what you can if that's what you want to do. You know and like, and if you if I've had clients that have that kind of arrangement where, like, if that allows you to be essentially an absentee owner of 50% of the dental practice for the next 25 years, then that might work. You know, yeah, maybe that's a really tough need, though. I mean, don't get me wrong, brand or audience. Like, I'm not saying this is definitely the way to go. It can work, but it takes a lot of a lot of massaging.

Dr. Paul Goodman  

I kind of set myself up to answer my own way, as someone who talks to more dentists than anyone. The associate dentist that's working there and making you successful isn't the one who wants to be an owner. And oftentimes offering them ownership might be a way for them to leave your organization. Because when you build a team like that, most of the time, these successful associate dentists are enjoying their life as a well paid associate and saying, Hey, do you want to buy 20% and the rest of you are going to buy 20% of this thing. Like you said, Brannon, you put it more simply, that's not so easy to do. So it doesn't mean it's impossible.

Brannon Moncrief  

You know, it is an option. And we always try to be very objective. And it's like, hey, Option A, B, C, D, right? Like, option one is, don't do anything. Just keep doing what you're doing. Keep your head down. You built a great business. You don't have to sell it. Option two might be to sell it to a private buyer, or do some type of internal succession planning and sell pieces of it to an associate. Option three might be go the DSO route. Let's explore all of the options. Let's don't act like you know, at least at the onset of our conversation, that one is better than the other. And I think Rob, as you said, if you go down through that exercise, the truth will reveal itself, and you'll ultimately land in the right spot. The thing I want to mention is, you know, we're talking about an alternative to a DSO sale with a large, multi million dollar practice with multiple doctors. And the alternative is typically some type of internal succession plan selling minority interest to multiple doctors. Lot of moving parts that that can be done. I've done it with many clients, but it's very difficult to pull off, and you need to make sure, if you're going to go that route, that you got Rob involved. You got a great attorney and CPA involved on your team. But what I have seen recently, and this is very troubling to me, I'm dealing with three transactions right now that are on the brink of falling apart, where my client has decided to bring in minority owners, associates that were working in the business that ended up being gifted or sold minority equity interest. And now I'm we're at the point where the senior doc, the majority owner of the practice wants to monetize their ownership in a DSO transaction because it's worth substantially more in that world than it is monetizing it to individual buyers. And by the way, the minority owners don't want to buy out senior doc. But they are the future of the business. They are the primary producers. They are the youth in the office, and they dig their heels in and block the senior doctor from monetizing their equity in a DSO affiliation. And even though the senior doc has a tag along, drag along right the DSO is not going to buy that practice if the main producers, the minority owners, are not on board with the deal. So if you're going to go down that, that road, just understand there is risk, and you should approach it with some hesitancy and some trepidation in making sure that ultimately, when you're ready to Divest yourself of your remaining equity, what are your rights? What are you going to be able to do if your minority partners are not willing to go with the flow? And we're seeing this more and more, where these minority owners, former associates are blocking BSO sales, and now the senior doctor is stuck with equity.

Rob Montgomery  

They can't liquidate, right? I mean, you have to have an exit strategy. No matter what you're doing. You have to know that this is, this is what it's going to look like, and how it could play out. And yeah, I mean, it's absolutely we have this conversation with a lot of clients, Brannon, where they want to sell a portion of their the practice to their associate, and it's like, well, yeah, you can, but know that you are now limiting your options down the road with that.

Dr. Paul Goodman  

I can't help but say my catchphrase by the end, because if I said in the beginning of dental offices are people places, not pizza places, because you don't really care who's making your pizza, as long as it turns out good. But in that example, Brannon, which was such a good one, that DSO really cares about those people who are the CO owners and how they're going to feel about this transition. And like, I'm assuming that that sell the dentist with the majority of the equity may regret how he managed some of this. He or she managed some of this.

Brannon Moncrief  

This is one of the most provider-centric businesses, period, health care or otherwise.

Rob Montgomery  

Yeah. I feel like you can make one of those deals work where you bring associates on a minority interest, if you've got the type of practice and you you're basically running a business like you are a DSO that happens to be a dentist. You know that you're not the producer, that you truly are running this like an investor. And you look at this and say, I have five or six locations. I'm not providing any kind of meaningful dentistry at any of them. I could sell it, or I could just hold this for the next, you know, have a couple decades and continue to make money off of that, yeah? Like, I've got a business, right? And it's the difference between having a true enterprise, I guess, being a business, I have an enterprise here that I've built that could run without me and can and I can just continue to make money off of that. But there are very few dentists, yeah. I mean, that is, that is, that is a unicorn for sure. You know, most of them are involved clinically, and it's not that easy just to say, I'm going to just hold this for as long as I feel like and just keep making lots of money off of it. Because, you know what? I got a great I got a great thing here that runs itself. But very, very few people, I think, are in that situation, totally true brand. This has been awesome having you lots of lots of great content, and not surprisingly, from somebody that's got as much experience from you in the industry. And so I thank you for being with us today and providing all of your insight and experience to our our listeners. If people want to get in touch with you, Brannon, learn more about what you do and what McLarren and Associates does for dentists. How would they go about doing that?

Brannon Moncrief  

Yeah, I encourage you to check out our website. It's dentaltransitions.com there's a DSO Resources section of that website. We've got a lot of podcasts and webinars, conversations just like this, because we're big on first and foremost, get educated. And get educated from a group of advisors that put your interest first and takes an objective approach to guiding you. We always start every conversation with a 30 minute casual, confidential discovery call. You can text me. That's probably the best way to get a hold of me, other than email. My cell phone number is 512-660-8505, my email is Brannon , B, R, A, N, N, O N, at dentaltransitions.com, so any of your listeners that you know just want to hop on the phone and get to know each other and you know, talk about what's next for them and what their goals are. I'd welcome the opportunity to have a conversation.

Rob Montgomery  

It's great. And everybody knows always that all that info will be up in the in the show notes too.

Paul Goodman  

Awesome, man. Thanks for talking with us. Thanks, Brannon.

Brannon Moncrief  

Thanks so much for having me. Guys, take care.

Rob Montgomery  

You too. Lots of great info there. I mean, it's this is why you work with people that have this experience. In this perspective, to guide you and to give you the right advice, to help you vet different offers, and really, to just walk you through the process that you know, quote, unquote, the right wa.

Dr. Paul Goodman  

Sure, and you need us to know about these things before you have to do your thing. I mean, it's like this is happening throughout the dental profession daily, and you just have to have, like, the best word, I think, was context of what to know. And, you know, I think there's a lot more emotions than facts out there, and hopefully things like this get people to understand what they need to pay attention to.

Rob Montgomery  

There's just not a lot of transparency in these deals and these offers, you understand the part that you understand, which are the numbers. This is the valuation. This is how much cash. But that's only the really the beginning of the story, and you really have to understand the rest of it if you want to be somebody that's happy with with their transition. Otherwise, it's like you say, Paul, and we've talked about a lot of times on the show, and I tell my clients, otherwise, you are taking what's behind door number three.

Paul Goodman  

And not the door you want to choose with such a big decision.

Rob Montgomery  

Thank you, Paul. Thanks everyone for listening. Thanks Rob, thanks

Bumper  

for listening to another great podcast with the Dental Amigos. And don't forget to tune in next time to have the dental business demystified. If you're looking for more information about today's podcast, you can find it on the dental amigos.com if you're looking for Paul, you can find Paul at DrPaulgoodman.com and if you're looking for Rob, you can find him at your dental lawyer.com. This podcast has been sponsored by Orange Line Media Group, helping dentists and other professionals create content people love. Find out how we can help you take your business to the next level at www.orangelinemg.com. Till next time.

‍