The State of Dentistry with Howard Farran, Founder of Dentaltown - Part 2

In this episode of the Dental Boardroom Podcast, host Wes Read, CPA and financial advisor at Practice CFO, and Dr. Howard Farran, Founder of Dentaltown, delve into the evolving landscape of dental ownership from the rise of private equity in dentistry to the challenges and opportunities facing today’s practitioners.

They explore how cheap financing and investor enthusiasm fueled massive consolidation in the dental space over the past decade, and why the focus is now shifting from quantity to quality. As interest rates rise and capital tightens, DSOs and private equity groups are becoming more selective, prioritizing well-run, profitable practices over sheer scale.

The discussion also contrasts private equity-led DSOs with those founded and guided by dentists, examining how leadership, culture, and long-term vision shape patient outcomes and professional integrity.

Dr. Farran passionately defends the importance of dentist-led organizations, transparency, and long-term patient relationships, emphasizing that dentistry is a “sacred profession,” not just a business. Wes complements this view with a grounded financial perspective, offering practical advice for dentists who aspire to grow sustainably, without losing their clinical focus or personal balance.

Key Takeaways

• The PE Boom and Shift: Low interest rates and abundant capital fueled a buying frenzy in dental practices, but the landscape is changing with higher borrowing costs.
  
• From Volume to Value: DSOs are now focused on high-quality operations and sustainable cash flow rather than mass acquisitions.
  
• Dentist-Led vs. Investor-Led DSOs: Dr. Farran stresses that DSOs led by clinicians, not “suits,” create better care models and stronger trust with patients.
  
• Operational Mastery First: Before expanding, dentists should perfect one successful “prototype” practice much like McDonald’s perfected its first store before scaling.
  
• Liquidity and Transparency Matter: Private equity’s lack of transparency and illiquidity pose risks; publicly traded or dentist-owned models offer more accountability.
  
• AI and Dentistry: Both see promise and potential pitfalls as AI expands into diagnostics and insurance, cautioning that technology can empower or restrict clinicians depending on who controls it.
  

Realistic Growth Path: Building a thriving, million-dollar practice is achievable  but it requires as much business acumen as clinical skill.

Transcript:

[00:00:00] Wes Read: Welcome back everybody. This is part two of my interview with Howard Fran, founder and CEO of Dentaltown. Enjoy. You know, I have, let me, uh, reflect back a number of thoughts on these different topics from my side as a financial advisor and CPA spec focusing exclusively in the dental space with these students that come outta school.

[00:00:27] Wes Read: Um, I did, I'll start there and then I'm gonna move into these emerging DSOs, sort of more established doctors who wanna go that route, route of opening up a second, third, fourth office plus. And then maybe just talk a little bit about the industry in general. But I have a website called Associates on fire.com and it's free for, uh, dental Associates, freshly outta school, and it has three.

[00:00:52] Wes Read: Uh, categories in this, uh, on this ed education platform called Associates on fire.com. The first one is, when you first come outta dental school, what are the key financial decisions you need to make and how do you be prudent with your money? What I find is dentists come outta school and like you said, they buy that Tesla or they buy those cars.

[00:01:12] Wes Read: I call this pent up consumerism. They've stayed in school a lot longer than most of their peers. They see a lot of their peers driving X or buying Y, and they feel that they deserve to have the same thing and maybe they do de deserve to have the same thing, but the economics of it is not in their favor when they immediately come out and unleash that pent up consumerism.

[00:01:32] Wes Read: When they do that, they have, they have lower liquidity that's cash in the bank and it ties them up and prevents them from me being able to do things that are wealth building. Decisions like buying a good practice. Now, banks typically don't require that much liquidity from a buyer when they lend to a young doctor to buy a practice, but they love it and your options are gonna go up if you have extra cash in the bank.

[00:01:55] Wes Read: So I always say when you come outta dental school, keep living like a dental student. Just do it, and you'll find compound returns because you were so good with your defense and you created surplus. Even if you are doing things like maxing your IRA accounts or putting some extra money in 4 0 1 Ks or a brokerage account and you let that compound over 30 or 40 years, the geometric curve on that is phenomenal.

[00:02:19] Wes Read: Now, when it comes to where do you make more money, every time I do this analysis and practice, CFO tends to work with larger practices who really need a CFO. Function, not just a bookkeeper. They need a strategic thinking partner is what I call ourselves. We're a strategic financial thinking partner to you, the business owner I, and so.

[00:02:41] Wes Read: We have a lot of our practices that are being pitched by larger DSOs because they're bigger, and DSOs typically want bigger practices because for the same amount of work in a deal, they can get more ebitda, IE more profit. And that's efficient for them to get 500,000 of EBITDA in one practice than $500,000 of EBITDA in five practices.

[00:03:05] Wes Read: It's a much better return on investment when they buy that larger practice. So practice CFO, working with our average doctors doing 1.5 to 2 million. Typically it varies, but our doctors get pitched all the time, and so we've evaluated so many of these offer letters from DSOs to my sellers, and on occasion they do sell.

[00:03:27] Wes Read: Most of the time they don't, and here's why. On the surface, the offer price is really good. And it is a higher multiple than what they get from a private buyer. From a private buyer, they may get three and a half to four times EBITDA from an institutional buyer. They'll typically get five to seven times.

[00:03:47] Wes Read: Ebitda, which is basically a 30 to 50% increase in the offer price. But here's the thing, a lot of that offer price isn't given on day one. When they sell the practice, it's given through what's called an earnout, and the seller has to produce as well, if not better, for the ensuing three to five years in order to to capture that premium that the DSO is offering.

[00:04:14] Wes Read: They don't just give that premium. With no strings attached. These are clever people. PE private equity is very, very clever and I can tell you, unless you are a phenom, that PE backing that DSO is gonna be way more intelligent than you are when it comes to the numbers and the contract. This is why you gotta be represented very well, and a lot of doctors sell.

[00:04:40] Wes Read: Uh, with underrepresentation and they regret it. I've got a doctor I'm supposed to meet with tomorrow who sold his large practice about four years ago, and I was telling him, you're gonna come to regret this. And he's, he said, we're, we need to have a, I told you so conversation, Wes, I hate to say it, but this wasn't the right decision.

[00:04:58] Wes Read: You and I gonna talk about this and I see that all the time, and it's because. In order to get that full premium value that's being offered from an institutional buyer, you have to work your, you have to work your butt off. There's a lot of strings attached. There's earnouts, there's holdbacks, and there's no slowing down.

[00:05:16] Wes Read: This is not a, I'm gonna sell and phase out into retirement. No, this is, I'm gonna sell and shift into a higher gear, because that's what it takes to get that. Premium. And every time I say if that, if the rollover equity that you get and the rollover equity is if I sell my practice, it's valued at 3 million, but I exchange 1 million in the equity of the DSO.

[00:05:37] Wes Read: So I, so I get, let's say in that scenario, I get a million and a half down, a 500,000 earn out over a three to five year period, and a $1 million rollover that equals $3 million. If that $1 million rollover. Doesn't pan out because that DSO goes belly up, or it's just not as profitable at it as they say it's gonna be.

[00:05:56] Wes Read: They don't have a capital event from the investor. Or maybe it goes down in value to 500,000. If that doesn't work, you are way better off just selling to a private buyer. So the, the rollover equity tends to be the differentiator. And so if you go in with A DSO that's growing well and you're sort of earlier on in their cap table.

[00:06:16] Wes Read: Yeah. You may have, and I've seen this, a doctor who sold to us endo. And was about the eighth doctor. He ended up walking away all in when the dust settles. Probably gonna be eight to $10 million on a $2 million. Endo ds, uh, uh, endo private practice. That is by far though the exception to the rule. I've seen a lot of these go the other way now for young doctors.

[00:06:39] Wes Read: The doctors that I see making 800,000 take home. Take home, not collection, not profit. I mean take home 800,000 plus. These are doctors every single time they're in private practice and they've learned how to run a really good. Business like Ray Crock and these doctors have learned the following that to view their, they, they view their practice not just as a dental practice.

[00:07:07] Wes Read: They don't view it that way. It's dental prac, that's a services business. They view it the following way. They say my business is one third services, IE dental, it's one third dental and my business is one third. Logistics and my business is one third tech. Yeah, those three things I always notice. This is the, the doctors who are running a great business, not a practice, a great business, are the ones who view it that way, which means they're very involved in their processes, they're very involved in workflow, they're very involved in how the front office is answering phone calls.

[00:07:42] Wes Read: They're very involved in what the assistant and the hygiene hygienists are saying. To that person. They're very involved in learning processes and business systems just like Ray Crock did. And that takes time. Maybe that does take 10 years before you've got that dialed in, but unless you look at your business like Amazon, they're not a product business.

[00:08:02] Wes Read: They're not a website business, they're a logistics business, and this is why they're so successful is they have mastered logistics. Same with Walmart. I'm viewing my business this way. How do I create efficiencies and quality, deliverable by structuring the processes and workflows and all of that to deliver a quick, efficient, cost, high quality outcome to my clients.

[00:08:25] Wes Read: That's how they view it. And then tech, tech is the area where you can leverage. In order to compete with the big boys, if you use tech really, really well, and this is where I think AI has some real opportunities for the private practice, is it can level the playing field between them and the big doctors if they learn how to use it correctly in their practice.

[00:08:49] Wes Read: So a third services, a third logistics and a third tech. And if they focus on specific rocks or projects. In each one of those areas, they can become really good. But the challenge is, especially with these young docs, no offense to you young docs, you like to go play and all of this stuff is work that doesn't have an immediate return on investment.

[00:09:10] Wes Read: That return on investment may not come for months or years or even multiple years, and yet that's what it takes to build a platform. Now, a lot of doctors, I'm finding in this emerging DSO space, going back to your comment about. Most esos have between, I think it was four and eight offices. That's because you have a lot of doctors who are sold on the idea, either 'cause they convince themselves or the market convinces them that if they have two offices, they'll double their income.

[00:09:36] Wes Read: If they have three offices, they'll triple their income. If they get to 10 offices, they're gonna sell and walk away with 10 million bucks in their pocket and they're done. And that is a romantic notion that isn't real because there's only one of them. And to open up a second office, doctor's offices are very high fixed costs.

[00:09:53] Wes Read: They're very capital intensive, and when you have high fixed costs and only one of you going around, you end up stretching yourself very thin. And what I see all the time is the first successful office ends up leaking its cash flow into the second and third offices to sub subsidize the losses that are created over there.

[00:10:12] Wes Read: This happens all the time and they're thinking, well, this is okay. 'cause if I could just get to 10, a DSO is gonna come in and pay me 10, 15, 20 million bucks and I'm good, and then they're gonna make it all profitable. No, the DSOs will look at all your offices as one business, one p and L, one ebitda, one multiple, one valuation.

[00:10:31] Wes Read: And if it's not profitable, if it's EBITDA isn't there, they're not gonna buy you just 'cause you have different physical addresses and different websites. They're not gonna buy you for that. They're gonna wanna know, are all of your practices on the same practice management platform, the same accounting and hr, the same marketing platform.

[00:10:47] Wes Read: Everything is working and operating exactly the same, just like Ray Crock did with McDonald's, and, and you figure it out how to hire, compensate, and retain good people. You figure that out. Now you will literally triple, quadruple your income, but that is very, very hard. And it takes an entirely different skillset than what they learned in all of their time being educated.

[00:11:12] Wes Read: And so that's why it is just so difficult. And they get into this place where they got three or four offices. I call this No Man's Land. They're too small to be big, and they're too big to be small. And that's the area that is so precarious because they have all these fixed costs. They can't unwind.

[00:11:29] Wes Read: They're in these leases. They're in these loans. They're kind of bigger now. They're not big enough to really get all the economies of scale figured out yet, and so they don't break through and that no man's land. There's a lot of deaths that happen in that no man's land trying to unwind, and then you really set back your financial planning and your personal life.

[00:11:49] Wes Read: For 10 years plus, and that's why that is just so difficult. So I'm not saying I'm for or against the DSO space private practice, CFO works with the private practice. So from that standpoint, I'm incentive incentivized to promote the private practice. But I will say I've never seen doctors make it much working as an employee of A DSO as they are working privately, but doing that exceptionally well, not leaning on PPOs to fill their seats, but learning about good human relationships.

[00:12:18] Wes Read: Good processes, good marketing, and that's what makes really great successful doctors. Alright, that's my soapbox right there, Howard. Any final talk? Wait, I, 

[00:12:28] Howard Farran: I, I, I, alright. Bring it. I gotta push back on. I, I gotta push back or can we go to overtime on this? Let's 

[00:12:34] Wes Read: do it. 

[00:12:36] Howard Farran: You know, fir, first of all, um, okay, so when I was, I graduated from high school in, uh, 1980, right?

[00:12:43] Howard Farran: And, and the average age of a Fortune 500 company was like 65 years old, and now I am, I'm almost 65 and half of those publicly traded companies are, are gone now. They've all gone to private equity and the average age of a, of a company, um, 2000, gone from 65 to like 30. Now, now it's down to damn, near, under about 10 years old.

[00:13:04] Howard Farran: I mean, and these private equity bills are illiquid. Have you ever heard of Harvard University? They tried to cash out some of their private equity stuff, and they had to go drop a bond to raise capital because they had all these $150 billion in private equity, but they, they can't get out of it. Private equity is illiquid.

[00:13:24] Howard Farran: It's not transparent and it's not all that's made up to be. So when you say DSO, you're talking about an illiquid, opaque American DSO. Let, let's look at the real DSOs When you go down to Australia, um, go, go look at one 300 Smiles, which is publicly traded. Go look at Pacific Smiles Group. Publicly traded, go look at q and m.

[00:13:44] Howard Farran: They all have the same business model. And you know what it is? They all have the same business model. They don't have any hygienists. You know why? It's not because hygienists make $50 an hour and insurance only pays $60 for the cleaning. It's because they looked at when dentists do a new patient exam, let's say that you sell $5 worth of dentistry, and then when you do a recall exam, you do a dollar.

[00:14:05] Howard Farran: So what do they do? They got, they, they, they measured it and they found out it is time spent that when it's a new patient, you're in there with the patient 15 to 20 minutes. And then whatever you tell 'em they need, they do it. And then when you do a recall exam, you're in there for two or three minutes, a patient's upside down and you say, yeah, you need an ML one, two, and a D on.

[00:14:23] Howard Farran: And they don't get any of it done. So what did, what did one 300 Smiles do? What did Pacific Smiles do? What did q and M do? They say, look. No hygienist. You come in, we have a dental assistant. She, she prepares the room, she sees the patient, she takes x-rays. Then the doctor goes in there, he does the probes, she does the record, and then he does all the scaling.

[00:14:42] Howard Farran: He gets out the intro cameras, he reads the x-rays. He's in there for 20 minutes and then he leaves and the assistant comes in and finishes it up and they get the new patient exam dentistry and their overhead. It's 50%. That's why I said when you started DSO, your first office is 10 years. And if your office is 10 years old and you got 65 to 80% overhead, you don't need to be bought by Heartland or, or, or sell to a DSO.

[00:15:07] Howard Farran: You need to get your house in order. There are a gazillion dentists that have 50% overhead. Rick Kersner has a hundred. Comfort dental offices and all their overheads are between 50 and 60%. He thinks a high office overhead is 60%, and and I look at all the publicly traded where they grow. One 300 miles grows new locations every year in cash.

[00:15:29] Howard Farran: They save up so much cash. They buy new offices in cash. There's no leverage, there's no debt. And I'm talking to Dr. Lazy right now. He hasn't done one cleaning in the last 10 years. He, he's sitting in his office while the assistant let, lemme tell you how a crown works. They, they schedule 90 minutes for a single crown.

[00:15:46] Howard Farran: That's how lazy they are. They, they'll, they'll go in there and the assistant comes and begs 'em to go numb. They go numb, then they go back to the office, get back on dental town, post for 10, and then she begs 'em to go back in there. He preps it and then he leaves again because he thinks. These extended function.

[00:16:01] Howard Farran: She's letting the assistant back to court. There's another 10 or 15 minutes. Then he goes back there and takes an impression. Then he leaves and she spends half an hour making a temporary. Then you go look at a doctor to hustle like I would do. I would go in there, press the flesh, how you doing, Wes?

[00:16:15] Howard Farran: What's up? Ask about your wife, your dog, your cat. And then I'd sit there and I, I'd numb you up, and then I'd set a timer for four minutes. I'd use septic, I'd dump whole whole carpet on it, and I'd set a time that four minutes. I take the shade, I'd start writing the lab script, then I'd take an impression for the temporary.

[00:16:30] Howard Farran: Then that timer goes, dang. And then I prep the tooth, and then I pack the zero. I pack the one. And by the way, when when you pack the zero and the one, you learn a lot about your prep, you find that all up, and then you make the temporary. Well, you know. You know, look at these dentist, ask them on their lab bill, how many.

[00:16:48] Howard Farran: Reduction Copings were set. You should ask every one of your clients. Have they got high overhead? Oh yeah. They got a high amount of reduction. Copings. 'cause the lab had to send it back with a reduction. Coping for you to level some off to make the crown fit. There's no, that means you made the temporary.

[00:17:03] Howard Farran: After you make, took the impression, if you made the temporary first as your adjuster in temporary, you'd adjust to the temporary. And you say, damn, I don't have any clearance. And you, you, you'd make your clearance right there and you'd make another temporary. You learn all about your prep, and if you can't pick up the margins on a temporary, how the hell are you gonna have a fitting crown?

[00:17:22] Howard Farran: And then, and then you're all done. You take the impression, you go do a hygiene check, you come back and you see the temporary, that's a 30 minute appointment and you're, you are saying that you don't want to take Delta Dental 'cause they don't, they, you know, you charge a thousand dollars for a crown, but they only give you six 50.

[00:17:37] Howard Farran: That's six 50 for 90 minutes. I know Dennis, they get that six 50 and they schedule 30 minutes for a single unit crown. So they're doing three single unit crowns in an hour and a half while you're doing one. It comes back down to hustle. I mean, Superman worked out of a a phone booth. And my doctor's got an office the size of an operatory and he is in there half the day and he doesn't do cleanings.

[00:18:01] Howard Farran: He doesn't know his practice manage software. He doesn't make temporaries and his overhead 65 to 80%. So maybe you get hustle back and ano another thing. I see, Dennis, that go in there. And, you know, comfort Dental, all their locations are six. Why? Because they have one doctor come in and work the six operatories in the morning.

[00:18:19] Howard Farran: Um, and then when they leave at one, they have another doctor come in and work it all afternoon. So their consumerism is double. But I see doctors that come in there. I. And just rip for six hours doing more production than the doctors that are doing eight or nine. Because look how fast you run when you gotta do a 5K versus how fast you run when you got a hundred yard sprint.

[00:18:40] Howard Farran: When you got a hundred yard sprint, you're all out. And when you like look at a marathon. I, I've done three marathons and I started every one of them walking the first mile till the crowd kind of spread out. And then I go to my slow jog. And I mean, you know that, that ain't a hundred yard dash and uh, you know when you're doing the a hundred meter and when you go in there and you say, look, team, we're gonna be here six hours, no lunch, no breaks.

[00:19:04] Howard Farran: If you gotta pee, here's a cup. Just take a cup with you. And uh, you know, my gosh. And they just, they just rip. They do hygiene checks. They check out patients, they jump in and they do cleanings. They're making their own temporaries docking, load an autoclave. They don't see their office for six hours and they're doing twice the production for half the overhead of Dr.

[00:19:23] Howard Farran: Lazy. So if you wanna talk about DSOs, don't talk about American illiquid, opaque, non-publicly traded. And when you go to get your money out, you gotta beg for years and years and years, go down to Australia. Go down to Singapore, go down and see what Asia and Australia are doing. DSOs and they are nothing but net.

[00:19:44] Howard Farran: Nothing but cash. No hygienists. They all have the same business model. 

[00:19:48] Wes Read: Yeah, that's my, that's my final. Well, I do wanna, I do wanna validate what you're saying here in that there are DSOs. I think PDS is remarkably s, the valuation of that as a private company is insane. I think they have figured that out.

[00:20:03] Wes Read: From what I do know. I did have a client for a while that was. A owner doctor with PDS Pacific Dental Services and got to kind of know their model a bit there and how they do it, and they run a very profitable thing. So I don't wanna say that DSOs can't be unbelievably profitable. Because they can, um, 

[00:20:21] Howard Farran: right, right.

[00:20:21] Howard Farran: But why don't they go public? Go public, man. Man up man. Go to the bar. Go belly up to the bar. Well, the, it's called Nasdaq. Go public the valuation, and then, and then, and then, and then think how long you could keep your doctors. If Steven l Thorn every paycheck was giving you a share of the stock and it was liquid and it was, you know how many of these people are buying into DSOs?

[00:20:40] Howard Farran: And if you don't own 51 per, if you own less than 51% of DSO. You are a hostage situation. You, you're buying into these DSOs. You have 25%, you have no liquidity. I mean, I mean that if you believe in that, then, then look at the, look at the economy. Before we had Wall Street, and by the way, we got the idea of Wall Street from the Dutch, what was that Dutch company called?

[00:21:01] Howard Farran: The, uh, what was the big, uh, east 

[00:21:02] Wes Read: Indies Trading Company and the Amsterdam Exchange. Yeah. East 

[00:21:05] Howard Farran: we, we stole that idea straight from the Dutch. The Dutch. When you say Wall Street, I mean. We stole that from the Dutch, and before that, if you owned a share of a company, you had to go to church and talk around after church.

[00:21:16] Howard Farran: Hey, hey Wes, would you like to buy a share of this company I bought 10 years ago? And well, you'd have to think about it and talk with no liquidity. Let me tell you, that's what, that's what private equity is. Lemme tell you 

[00:21:25] Wes Read: why. I bet Steve Thorn and PS is not going public. Since 2000 and roughly five, we, you've seen a, a massive delisting taking place at public companies.

[00:21:37] Wes Read: And the reason why they're delisting and going private after being on Wall Street and public is because the cost of being public is very high and margins are thin. And if you're giving up. Of your net income, let's say you're giving up one point half to 2% of revenues just to stay compliant with Sarbanes Oxley and all of these securities and exchange rules around being public.

[00:21:58] Wes Read: That is a, that, that is very costly. And since that time, what's emerged is this, this marketplace that's happening under the surface and that's called private equity. And so there's been a massive transfer of money from public stock exchanges. To these private exchanges and the people that make these private exchanges work are the private equity companies and private equity companies.

[00:22:25] Wes Read: They act like the NASDAQ or they act, they act like the stock exchanges, the New York Stock Exchange, and that they help find and pair up those with capital and those looking for capital or investors. With business owners and they make that match and they take, you know, a five to 10% share of whatever the raise is for that.

[00:22:45] Wes Read: Now, I think one of the reasons why we saw such a massive incline in DSO consolidation starting around 2014, 2015 or so, is because a, all of these delisting meant there's a ton of money swimming around looking for a home. And these private equity. Managers don't get compensated until they take this money that they got from investors and they deploy it when it's just sitting there in their account.

[00:23:11] Wes Read: They're not getting paid their 2%, they're not getting paid anything on that. So they are highly motivated to find a home for all this gunpowder that's just sitting there in the barrel. And so they go and they unload it eagerly within companies. And what happens is when you have a flood of capital coming into an industry and these PE companies are looking at all these mom and pop industries and saying.

[00:23:31] Wes Read: We could just roll these up and get economies of scale. Let's develop protocols and platforms to run these well. Well, they looked at dental and they said, holy cow, dental is incredibly profitable. Let's go roll up dental. Now in a lot of states they can't do that because the state only allows dentists to own a dental practice.

[00:23:48] Wes Read: But of course. PE is highly creative. They're spreadsheet jockeys and they build systems to work around those state laws, and they do it through separate entities and management fee agreements that sweep the profits outta the dental practice into that management, uh, entity. So they figured out a way to be an owner without legally be an owner.

[00:24:08] Wes Read: So all that gunpowder sitting there with PE managers highly incentivized to deploy that gunpowder to doctors led to this massive inflow of capital into the dental space and. In addition to that, you had essentially free money from the banks because interest rates were so low for so long, and so the PE companies pair up their capital, they get from investors.

[00:24:31] Wes Read: With debt financing at a very low four 5% tax deductible interest rate. And it means that there is huge buying power from these PE companies, and that's why it was just on a tear there for about five to 10 years because of the demand. And so they were going from five multiple on a dental, private dental practice up to seven and eight multiples just to get these dental practices.

[00:24:55] Wes Read: Well, since COVID and inflation going up, interest rates going up. That low financing money that they would get from banks is no longer as cheap. It's now more, it's more expensive capital now. And so you've, you're seeing, and I'm seeing a slowing up a little bit in the dental consolidation space with institutional and what the, these DSOs are wanting now is they're wanting quality.

[00:25:19] Wes Read: It's not about quantity anymore. They want quality. And so their quality of earnings. That they do once the offer letter is submitted is intense and they are weeding out practices that are not good quality cash flows, and the terms aren't favorable to the DSO. It's not a numbers game because before it was let me buy 20, 30, 40 dental practices and then immediately try to sell 'em to a bigger fish.

[00:25:42] Wes Read: And I'm gonna, I'm gonna make a spread because I'm gonna buy all these at an average. Six EBITDA multiple, and I'm gonna sell 'em at a 13 EBITDA multiple, and I'm just gonna bank the spread there. It's like an arbitrage. That's all they were doing. They weren't actually creating systems and platforms across all these practices to get the benefits of operational economies of scale.

[00:26:01] Wes Read: Now they're coming in and they're saying money isn't as cheap and therefore we want quality practices. So if a doctor's got four offices, how quality are the earnings? How quality are the operations of those practices, otherwise, they're not gonna buy those practices. So I do wanna confirm with you that there are, there is a ton of profit to be made in a large dental institution.

[00:26:25] Wes Read: Public or private. If you've got a lot of offices and they're run exceptionally well, tons of money. I'm just saying that most doctors don't have the background, the skill or the time. I think they could learn the skill, but it's the time is the biggest bottleneck to learn what it takes, nor do they always have access to the same capital that these bigger institutions have in order to run a loss for a period of time to build out the, the systems and then eventually scale that.

[00:26:53] Wes Read: So it's very, all I'm saying is it's very, very difficult for a dentist. To become a Pacific Dental Services. And remember, PDS was started by a dental CPA, it wasn't started by a dentist. A lot of these big companies weren't actually started by dentists. They were started, started by who I call the suits the business people.

[00:27:09] Wes Read: That's how they, they, they did that. Anyways, that's my take on. Hey, 

[00:27:14] Howard Farran: I get, I get a, i, I get, I get a push back again. You can, you can't leave me hanging with all that. You can't say all that. Let me, can I, can I respond to that at all? 

[00:27:20] Wes Read: Let's do it. Yes. 

[00:27:22] Howard Farran: Okay. Well, number one, so the same dentist. Is regretting that they became a dentist and they're like all bummed out.

[00:27:28] Howard Farran: They got 500,000 student loans and now they're a dentist and they're whining. Yet when you look at the, um, private equity money, it's all pouring into healthcare. Um, I mean, I mean, I mean, look, look at, look at some of the deals. I mean, just in the last year, I mean, um. Um, arch Med completed a $730 million.

[00:27:45] Howard Farran: Take practice. Zvi, uh, dental implants, dental materials, dental workforce 'cause they wanna own the whole ecosystem. Steris agreed to sell. Its, uh, dental segment. Hugh Freddy Group to Peak Rock Capital for 787 million. Uh, the carve out close this year. Um, KKR built a roughly 12% stake in Henry Schein and one two board seats signaling activist pressure at the largest US dental distributor 'cause they want the whole ecosystem.

[00:28:09] Howard Farran: Uh, Warburg Pincus Recapitalized MB two Dental with 525 million growth investment along with Charleston Bank. Um, MB two still buying practices all the way through 2025. Dental 365 backed by Jordan Company, um, added mainline periodontic to dental implants. And they're continuing to roll up offices in EE, US and eu.

[00:28:28] Howard Farran: Um, imagine Dental Partners across new states with multiple partner additions, reach 100 practices in late 24 Rock Dental Brown, and, uh, dental brands announced six more clinics. But again, I, I wanna, I want to clarify a couple things. Number one, don't forget that that pendulum, I've been watching it swing for 20 flipping years and Harvard.

[00:28:47] Howard Farran: Had to go borrow money because there's no liquidity in these guys. And when they, Harvard needed their cash, all their billions in private equity, they said, yeah, yeah, you're doing good. You're making money. And they keep telling you have less volatility because the market will go up and down. But private equity, they just keep posting these earnings.

[00:29:05] Howard Farran: But then when you go to get the cash. They, they're having illiquid problems and, and, and when they're rolling up offices, the roll up exactly the opposite of what McDonald's and Chick-fil-A did. Chick-fil-A and McDonald's. And what your homie should do is spend 10 years perfecting the prototype. You don't expand to multiple locations and have profitability issues and burning up your cash flow, hoping that you can sell it to a big DSO and they'll fix your business problem.

[00:29:31] Howard Farran: You spend 10 years minimum in your prototype and you perfect it. And one way and a roll up is when you get a big old loan and you go buy 10 different offices and you roll up into one and one uses Dentrix. One use Ziegel, sot one uses open dental. They all different systems, all different accounting. Some are four ops, eight ops 10 s that that rollups are a joke.

[00:29:53] Howard Farran: And, and what is the opposite of a rollup when you sit there and you perfect your first KFC, that that guy was 65 years old before he opened up his first. He had been thinking about that his whole life, and he opened up one location and it was perfect. And from 65 to 85, he became a gazillionaire. And, and so you don't roll up anything.

[00:30:12] Howard Farran: You roll it out. Rollups are for people who got way too much money, and they usually come from an illiquid source that's not transparent, and they can tell you any bullshit they want because when you say, Hey, I wanna go cash out of my, of my, of my private equity investment, they say, sorry, that might take a long time.

[00:30:31] Howard Farran: You wouldn't believe it. Even in Vanguard, you think, well, Vanguard, they're the, they're the Hallmark. 401k. Yeah, go, go call 'em up and tell 'em you wanna cash out your 401k. That that might take you four or five, six months with something like Vanguard. You know how long it's taken to get out of private equity, call Harvard University and ask them how long it co takes.

[00:30:51] Howard Farran: So the real players of my deal are the transparent. The liquid, the publicly traded, the one 300 Smiles. I mean, I, I like the DSOs publicly traded, no leverage growing in cash. And when those guys get their earnings after a hundred locations, they'll decide, well, next year do we wanna open up two or three or four more new locations, and they don't even buy the land.

[00:31:13] Howard Farran: Landon Building, I, I learned that from Dan Carney from Founder Pizza, went to the same church I did in Wichita, Kansas. Told me, he says. You could have all the land of buildings under all my pizzas. He goes, that's not where I make my money. I make my money in the restaurant. And, and one 300 a mile, they'll go get the hottest flip location because they're not buying the land and building, they're renting.

[00:31:32] Howard Farran: They don't even wanna own illiquid land, illiquid building. So, uh, we could go, we could go on in this. I mean, this is the battle of the brains and, and I, I love it talking. Well help 

[00:31:43] Wes Read: clarify for me where the, the different viewpoint is. I'm actually struggling to see where the different viewpoint is. 

[00:31:51] Howard Farran: Well, I mean, I just, I just think that, uh, private equity, uh, it's been a long, a long swing.

[00:31:57] Howard Farran: But I see ever since that Harvard debacle and illiquid asset a, I see the swing coming back. 'cause there's a lot of people who've had money in private equity for 5, 6, 7 years and they're still having a hard time getting it out. So you can say that. Oh yeah. In here it's a whole glass of champagne. Okay, well gimme a sip of it.

[00:32:16] Howard Farran: Oh. Oh no, it, it's a whole glass. It's a 1912. It's the best champagne. Can I have a drink? Uh, no, but it's, it's just aging fine. I mean, come on man. Where's the liquid? Why did Wall Street come into you? Really think Wall Street's going away. 'cause private equity doesn't want to put up with all these regulations and, and they, they're tired of getting pushback from the SEC and the FTC and they're tired of that.

[00:32:40] Howard Farran: So they decided to. Cover up under blanket, no transparency, no liquidity, and they're gonna hide. Well, if that's the business model, then America would've been the greatest country in the world before it had Wall Street. So I just see that. I see everything. Yin Yang. I-A-D-S-O can't be good if it can't be bad.

[00:32:57] Howard Farran: Private practice can't be good if it can't be bad. I mean, and um, and AI radiology and these guys, these dentist say that if they get pearl or um. Or they get Pearl Overjet that it's gonna be a dream. Yeah. Wait until Delta Dental finishes out their AI rollout of reading x-ray and say, Hey Wes. Yeah, we just got the final film of your root canal and you missed a canal.

[00:33:20] Howard Farran: And our ended on say, that should be within a half millimeter apex and we're not even paying you for that root canal in. On. We're not even gonna allow you to do endo. You're gonna have to send it to someone who finds all the canals. Get the, and. And they got the data saying, Wes, you, you did a hundred molar root canals for us, and within five years, 30% of 'em had to be retreated by end onus.

[00:33:41] Howard Farran: We paid you a thousand to do it and we had to pay them 1500. So we're gonna take away, and that's what I call that yin yang. You can't be up without down. There can't be a right without left, and it can't be a good without bad. I love DSOs. Um, they offer liquidity selling doctors. They offer jobs to the ones that come outta school.

[00:33:59] Howard Farran: Um, they offer more convenient hours, more marketing. I think the greatest, um, DSO was actually clear choice. They came into town because they added the dentist. They added the surgeon plus the lab tech, and then they, they, they put it all under one roof. It was one plus one plus one equals three. And they got the, the, the prosthodontist, they got the surgeon to place it.

[00:34:22] Howard Farran: They got the prosthodontist and the lab man to restore it and the surgeon to place it. And they came in and they carpet bombed the TV and the radio. And at first all the oral surgeon ox saying, who are these DSOs? Man, they're bad. They're, you know, I don't like this at all. And they did so much marketing.

[00:34:37] Howard Farran: All these pa all your patients come back and say. Yeah, I just saw that half hour infomercial on from clear choice. I mean, could I do that? Then all the periodontists and oral surgeons and adult, they, they lifted the entire dental implant. I, I think Rick Workman's one of the greatest people. He's one of my mentors and idols.

[00:34:53] Howard Farran: I, I love that guy. He has taught me so much and I, I think he's great, but you can't say that DSO is perfect and solo practice bad there. There's, it's a yin yang. You can't say ai radiographic technology is great for the. Private practicing dentist when you're gonna find out that Delta Dental and Blue Cross and Blue Shield and Connecticut General are gonna get a, gonna get their own ai.

[00:35:14] Howard Farran: So there's a balance and I think private equity is great. It's done a lot of great things. Right now It's funding, it's funding chat, GDP, I mean, it's funding set all these big AI projects. I mean, I mean they're, they're saving America because you certainly don't want an autocratic communist country to get super intelligence and quantum computing, or we're gonna be.

[00:35:37] Howard Farran: We're gonna, they're, they're gonna be our overlords. And I know I, I've lectured in those countries. I mean, you can say anything you want about those countries, but them are big, poor countries, okay? And I know Silicon Valley's gonna win this race. Private equities, then the money, they're, they're my heroes.

[00:35:52] Howard Farran: But you can't tell me that there's not a dark side to all that stuff. And it's called opaque instead of transparency. It's called illiquid instead of liquidity. And I want my, here's my bias. I'll tell you what my bias is. I got eight grandchildren. And I don't want my little Taylor Marie and my little Evelyn and Lillian and Audrey to be going to a dentist that works for Wall Street, and they're telling him that, you know, that all these mods are crown opportunity.

[00:36:19] Howard Farran: I mean, if the dentist work for Wall Street, who's who, who's my granddaughter gonna go to? I want my granddaughter to go to an owner operator that wants to see Taylor her whole life until Taylor gets married and has a kid and that kid gets older. I, I want a dentist. To be, I want owner operated dentist, where Taylor can have a relationship with one dentist for her whole damn 20, 30, 40 years.

[00:36:43] Howard Farran: And I don't want some revolving door, wall Street, and, and, and, and, and I'll tell you another thing, and I know that this creates a lot of enemies for me, but I don't even believe it should be legal. For a non-dentist to be, uh, running A-A-D-S-O. I mean, look at Boeing. I mean, I grew up in Wichita, which was their second biggest manufacturer, mine.

[00:37:01] Howard Farran: The CEO of Boeing used to be the greatest aeronautical engineer you could find. And all the engineers, it'd be like you working for Carl m or Pete Dawson or Gordon Christian. You were just. In awe that this is your leader. And then Wall Street came along and said, ah, screw those boys in Seattle and Wichita, Kansas.

[00:37:17] Howard Farran: We're gonna move the headquarters to Washington DC That's where all the money is. Money's the answer. What's the question? And it didn't even take two or three years and their plane for falling out of the sky and their quality went to shit. And their product sucks. I think. I think Rick Workman, he, he is a dentist.

[00:37:34] Howard Farran: And he knows dentistry and, and he might not do it every day, but he knows the difference between a good worker. He knows dentistry. And I think those states said, you gotta be a dentist, own a dental office. There's a reason for that. And, uh, so, you know, I, I, I want I, and, and if you're gonna be a DSO and take care of my eight grandchildren, well be Walgreens man.

[00:37:55] Howard Farran: Keep your pharmacist for 30 years in the same location, but if you can't keep your dentist. You're not gonna earn my trust. You're not gonna earn the patient's trust. So, you know, e everybody can be better. I could be better. I could eat less fat stuff. I could work out more. I mean, I, everybody can be better.

[00:38:11] Howard Farran: And when I'm sitting here telling, um, A DSO, they can be better. It comes from the heart for dentistry. It's not, it's not that, you know, I don't believe in evil and stop 'em and shut 'em down. I, I just think we can all be better. So, and I, I think, I think, I think everybody in dentistry is one conversation away.

[00:38:27] Howard Farran: From serving our patients better. 

[00:38:28] Wes Read: So to be clear, what you're saying is DSOs have their place. DSOs are not good or bad, but DSOs that are led by a former dentist are the ones that are the DSOs that you would support as opposed to the DSOs that are just run by pe. Am I understanding? What you're saying, right?

[00:38:49] Wes Read: Yeah. 

[00:38:49] Howard Farran: I, I mean, look, look, look, look what happened to Boeing when they went from being ran by the best electrical engineers, I mean aeronautical engineers in the world with PhDs. To pe the boys in the C-suite with MBAs, their planes were falling outta sky 'cause they made really stupid, dumb decisions.

[00:39:04] Howard Farran: Agreed. And I've seen a lot of really stupid, dumb decisions coming outta DSOs where I love the guy, but I'm cringing because a dentist would never say something like that. And I, I think dentistry is a sacred, sovereign profession. We're not, we're not selling little, you know, little. Tricks and little plastic toys that you give away a Halloween.

[00:39:25] Howard Farran: I mean this, this is a human relationship. This is a human doing. So, you know, 90% of your MD physicians and dos never do surgery on a patient and dentistry every interaction. It's surgery. It's in operatory. I'm gonna lean you back. My hands are gonna go in your mouth and I'm gonna cut on tissue and I'm gonna, I'm gonna alter tissue.

[00:39:44] Howard Farran: I mean, it's surgery, it's a sicker relationship. It's not gonna be replaced by ai. And I just think that, uh, what, what, what is weird about saying that dentistry should be led by a dentist? And lemme go back to Delta Dental. When I got outta school, ed Judd was the director of Delta Dental, and everyone on his board was a specialist that you would send your own kids to.

[00:40:06] Howard Farran: That they were the best oral surgeons, best periodontist. I mean, the board was like a who's who of who you should be referring your dentistry to. And then they said, well, you know enough about that we, we, we need someone to represent the patient. Oh, I thought a doctor treats himself as a fool for a patient, so they got rid of their boards and replaced with their rubber stamp consumers that were there to protect the patients.

[00:40:27] Howard Farran: In dentistry, they don't know what dentistry is. And, and I, I think that, um, I, I think that Delta has lost a ton. Of re of, uh, trust and respect with the dentist, who are their providers? I mean, who was Delta Dentistry or Blue Cross or Connecticut General? Who are they without the dentist? This is dentistry and that board should be the best dentist in America.

[00:40:49] Howard Farran: Not a bunch of consumers who don't know the difference between sar, root canal and OB and theil. I mean, I mean, come on. And, um, and this, this is dentistry. Yeah. And I think that when you get up to bat in dentistry, maybe you should be a dentist. I mean. God. Am I crazy? 

[00:41:06] Wes Read: No, I agree with you on that. I, uh, where I'm at kind of on the ground level in helping these private doctors ultimately have a financially productive life and attached meaning to their money and trying to help them have just a good life.

[00:41:21] Wes Read: Um, I, I see things from my end when I talk about the private equity space. I'm not necessarily advocating for or against. I've seen a lot of. I think private equity people are very clever and they figure out how to extract a lot of value out of the system to their gain and at the expense of other people who.

[00:41:40] Wes Read: Are pitched what appears to be something that's, that's very, uh, strong and glistening. But when it comes to it, pe people know how to manipulate the numbers and the system to extract the value back out to themselves. This is why PE and the investors and people who have capital make a lot of. And partially I think why there's a growing, uh, wealth gap in this country is that those people with capital and PE know how to extract more ca more return on that money.

[00:42:10] Wes Read: But the music is gonna stop when the economy turns and the economy will turn. It's just a matter of when. We just don't know. It's not a matter of if we just don't know when it's gonna occur. And as in all sort of breakthrough technologies or renovations. There's always a bubble created. Now, are we inflated in that AI bubble right now?

[00:42:34] Wes Read: I don't know. Personally, I think we are. I think that in order for these companies to monetize the spend that they've put into this ai, that NVIDIA's a $4.5 trillion. It's worth more than Apple. It's worth more than Microsoft. It's worth more than any of those companies, and it's, this is a relatively new phenomenon.

[00:42:55] Wes Read: For it to monetize a $4.5 trillion market valuation means that its earnings in the future are gonna have to be unbelievably, virtually impossibly high for investors to ultimately make up a return on what they paid for the stock of that price right now. And just like in the.com, everybody saw it. They just thought it was gonna happen in 19 98, 19 99.

[00:43:16] Wes Read: It happened in 2000 and the s and p fell 60% plus during that period of time. It's not a matter of if, it's a matter of when and when this happens. The money the gunpowder dries up. Private equity lending dries up, and if you're not a really stable operating entity as a dental practice operating under a DSO model or a PE model, you are gonna fail.

[00:43:39] Wes Read: I think there's gonna be a lot of PE backed businesses that ultimately fail because when the tough gets going and you're not running well a business, it will surface that it's not a well run business and it will go under. So my advice for these young doctors is I agree with you in that. If A DSO exists and grows, I would love for it be to be headed up by a dentist who understands dentistry and thinks about the patient and the clinical in mind as a sort of a beacon in the way they design everything in that, in their, in their offices.

[00:44:11] Wes Read: Yes. But I do think it's a very high hurdle for a dentist who has spent all their time training to fix teeth and reduce pain, to suddenly pivot into a skillset that requires a tremendous amount of learning. And talent to build a operating entity of any type. In this case, dental, an operating entity to be able to scale.

[00:44:34] Wes Read: And this is where I think you and I are very aligned in that if they do, it probably does take 10 years. To get that one entity dialed in really, really well. That's probably how long it takes to learn it and to adopt it to where you say, okay, if I die tomorrow, this thing's probably gonna keep running without me.

[00:44:51] Wes Read: That's the question. If you died tomorrow, could this practice keep running for the most part without you, because your operating system is so good in that business. If the answer is yes. Now you're probably ready to go open up a second office and carbon copy that thing and plug in a really good dentist.

[00:45:06] Wes Read: Maybe find that dentist who's young, married, stay at home kids, and you know who is hungry and doesn't have a choice but to be hungry. Pick your roster very well, you'd get the operating side really well and your roster really well, and you can break through. I'm just saying it takes a long time and doctors tend to underestimate what it takes to build a replicable model of a dental operation to really scale it to become a DSO, which is why I say, look, do you want balance in your life?

[00:45:33] Wes Read: Do you want like a tried and true method grow a really good healthy practice? And once you do that, maybe we'll lift your head about a second and third office. Don't even think about that. Think about your current practice. Get it to where this thing's cranking out a million dollars to you to take home, and then we'll decide where to go from there.

[00:45:49] Wes Read: And that's a tried and true way. For dentists that they still have, that opportunity is still there. In spite of the pressures of the PPOs, in spite of the economic pressures, it is still there to make a million dollars a year with a really well run dental practice. It just means you gotta spend a lot of time outside of the operatory perfecting your talents as a business operator and not just a clinical operator.

[00:46:11] Howard Farran: And let me tell you something about Rick Workman. The dentist, CEO. Okay? He's on Dentaltown when they start talking about har. He's, he's engaging them and they change each other's mind and they're growing together and his docs are on there. And, and, and there's several of these, you know, these 2,800 DSOs that are between four or nine locations.

[00:46:30] Howard Farran: There's a lot of them on there. And then there's other CEOs like, no, I don't wanna mess. I, you know, I'm not, no, I'm not talking to the dentist. Like, wow. Yeah. You're in dentistry. He's created a community and you're not talking. Well, that's the other thing is creating like this, he's available. He makes a religion out of availability.

[00:46:45] Howard Farran: Yeah. This, any dentist in America could call Rick Workman right now. 

[00:46:48] Wes Read: You know why I think Rick has created a phenomenal culture. It's almost, it's not just a set of a bunch of offices. I think he's created somewhat of a community across his doctors and his, his organization. So credit to him on that. By the 

[00:47:00] Howard Farran: way, by the way, my staff is ready to shoot me.

[00:47:02] Howard Farran: They're reminding me, I've been on this for an hour and 45 minutes. And I keep telling 'em to go away, go away, go away. But they are gonna, they're at this point, they're just gonna shoot me, so, well, let's adjourn. I mean, they're gonna, I'm either gonna get shot on your podcast or we're gonna have to, or we're gonna have to pick us out.

[00:47:17] Howard Farran: It was, it was the greatest one hour and 46 minutes of the week. I love, I've been, I'm your biggest fan. I think you have an amazing mind. I hope that dentist user services, if you're thinking about doing anything about a million dollar practice. And you're talking about maybe even starting your own DSO.

[00:47:33] Howard Farran: You need Wes, you need a team that knows it all to help you. You don't go get some run of the mill lawyer who only has two clients that are dentists and a run of the mill lawyer, uh, CPA, that only has two clients. You guys only specialize in industry. If you need a root canal, you get it in and honest, and you're an accounting, you need less.

[00:47:53] Wes Read: Yeah, everything in our deliverable, our p and ls, our balance sheet, our tax return, our tax planning, our personal financial planning, everything is geared around the nuances of a dentist. And when you structure everything in that ecosystem effectively. Dental specific. It's amazing the financial outcome to the doctor on a very personal level.

[00:48:09] Wes Read: Well, Howard, thank you for joining the show. This was fantastic. You and I could riff for another five hours if we wanted to. I have all these notes and other things that I wanted to cover, but excited to come on your show on Dentaltown. Here soon, and I'll talk all about the financial aspects of a private dental practice.

[00:48:25] Wes Read: Really excited to do that. Thanks again for joining the Dental Boardroom podcast. 

[00:48:28] Howard Farran: Alright, and I hope you start putting your podcast on dentaltown. Man. These guys are just, they, they, they, you. So many dentists have an hour commute to work every single day. They, I don't care how many episodes you had, they'd listen to every one of them before 

[00:48:41] Wes Read: Christmas.[00:48:41] Wes Read: You got it? I will. Thanks again, Howard, and we will be in touch.