Who Owns Dentistry

In this episode of the Dental Boardroom Podcast, Wes Read continues his analysis of the ADA Health Policy Institute 2024 study, focusing on one of the biggest shifts in modern dentistry who actually owns the industry today.

This episode dives deep into the rise of Dental Service Organizations (DSOs) and compares them with traditional private practice models. Wes breaks down real data on ownership trends, career stages, and practice sizes, and shares practical insights from years of advising dentists.

Beyond the numbers, he explores the hidden challenges of scaling multi-location practices, the financial trade-offs of choosing employment over ownership, and the reality behind DSO deal structures.

The episode closes with a strong perspective on the future of DSOs, why many may struggle in the long term, and why private practice ownership remains the most powerful path to autonomy, control, and wealth in dentistry.

Key Takeaways

1) Ownership Trends Are Shifting
Younger dentists are moving away from solo ownership.
The majority of older dentists still prefer private practice.

2) DSOs Are Growing, but Not Dominating
Only a small percentage of dentists are DSO-affiliated.
Most practices are still single-location setups.

3) Scaling Is Harder Than It Looks
Expanding beyond one location adds significant complexity.
Many dentists struggle in the “in-between” growth phase.

4) Stability vs. Wealth Trade-Off
DSOs offer more predictable income.
Private ownership offers significantly higher long-term earnings.

5) Small Income Gap = Massive Lifetime Impact
Even a $50K annual difference can lead to millions lost over time.

6) DSO Deals Can Be Misleading
Higher valuations often come with strings attached.
Earn-outs and equity rollovers carry uncertainty.

7) Early Players Win in DSOs
The biggest gains go to early adopters.
Late entrants typically see limited upside.

8) Private Equity Plays a Short-Term Game
The focus is often on scaling and reselling, not long-term operations.

9) Future Risk for DSOs
Talent retention and performance consistency are major challenges.
Many DSOs may struggle as original owners exit.

10) Private Practice Still Wins (for Most)
Greater control, autonomy, and wealth-building potential.
The best path for long-term financial success in dentistry.

What You’ll Learn

• The current breakdown of DSOs vs. private practice ownership in dentistry
• Why solo practice is declining among early-career dentists
• How student debt is influencing career decisions and risk tolerance
• The real challenges of scaling from one to multiple locations
• How DSOs are structured and how their deals actually work
• The difference in income and long-term wealth between owners and employees
• Why many dentists may be leaving money on the table by choosing DSOs
• The role of private equity in shaping the dental industry
• Predictions on the future of DSOs and potential market shifts

Transcript:

Wes Read:  Hey everybody. Welcome back to another episode of the Dental Boardroom podcast. It's Wes Reed, your host. Today I'm carrying on part two of my analysis of the A DA Health Policy Institute 2024 study on, uh, certain aspects of the dental industry. So I just got done doing a podcast episode on is dentistry, struggling, talking about income levels, collection levels, overhead levels, um, the differences between male and female dentists, hours worked, new grads, things like that.

And, uh. The summary was there are definitely some headwinds. However, the takeaway for me was that if you're a good practice owner today, you can be equally as successful, if not more than a dentist 30 years ago, where it was a time that being effective as a dental practice owner, so a business owner, was less critical than it is today.

Now I'm gonna talk about the question of who owns dentistry. Let's talk about DSOs versus private practice. That's the nature of the day. Stay tuned at the end for my takeaways on what I think about the future of DSOs. Alright, let's kick it off. So those of you watching on YouTube, uh, can see that I have a one page, uh, image that I'm gonna be going through.

For those not on YouTube, I'll narrate this. So, key takeaway from this study around, actually, let me just, uh. Okay, thank you. There we go. I had to switch the screen here. Who owns dentistry? So key takeaway from this study is solo practice is fading for new dentists. Well, that may not be a surprise for anybody.

We all know what's going on in the industry. Only 15% of early career dentists are solo versus 48% of those near retirement. So older doctors are not as affiliated with the dsso. By a long shot. DSO affiliation is highest among the youngest dentists at 26.5%. So the overall, here on the left hand side, the overall percent of dentists that are affiliated with C with DSOs is 16.1%.

Now, frankly, I thought it was a bit higher than that, but that's according to the A DA Health Policy Institute research in 2024. Now, DSO by gender, so of those 16.1%. Of dentists in our country that are affiliated. And by the way, my understanding is this, yeah, this is US dentists only, DSOs by gender, 17.6%.

Of female dentists are associated with A DSO and 14.8% of male dentists are associated with A DSO. Now let's look at practice size distribution. Practice size distribution. So the categories are a solo, one doctor, one office, one doctor, two plus, sorry, one doctor, one, sorry. One location, one doctor. That's first category.

Second category is, is one location, multiple doctors. The third category is two to nine locations, so that's obviously gonna be multiple doctors, 10 to 49 locations, 50 to 99 locations, and a hundred plus locations. And so let's go through these a little bit. Of all practices in the us, 33.6%, so almost exactly a third are solo practices.

One doctor, one office, 33.6%. Now you get to still one location, but you have multiple doctors. That is 39.1. Percent. So there's no, there's no DSO going on here. And between the two of those, what is that, 74%? 73%? Yeah, about 73% or so. So about three quarters are still in that sort of boutique one location, um, context.

Now you get to two to nine locations. These typically, I find. Tend to be dentists who are trying to go DSO. They have two to nine locations, that is about 9.9%. So 10% of practices in the US or practice owners, uh, are between two to nine locations. The next category of 10 to 49 locations is significantly less.

It's only 3.8%, and then from 50 to 99 locations. Is 2.7% of practices fall within an ownership structure where that ownership structure owns 50 to 99 locations. And lastly, a hundred plus locations is 10.8. That's gonna be the Heartlands, the Pacific Dental Services, uh, as well. I, what I don't know in this study is.

Companies like MB two, which is different than Heartland because MB two doctors typically have kind of their name brand, their own name on the door of the practice. It's a little bit more of a, of a distributed type of ownership, but I believe that the 11% here of a hundred plus practices is, says essentially all of these styles of DSO, whether that's, um, whether that's a heartland where it's sort of.

Uh, it's usually one name brand, or whether that's more of a distributed name, but ultimately under one umbrella style. So General, general Dental, that, that's another one in this, in this pretty big category over here. So let's talk about these a little bit. Um. This for me was pretty heartening because I like the private practice.

I love the private practice. I support the private practice. I believe that in the private practice, the doctor has the most tried and true pathway to wealth accumulation. And I'll explain here in a bit why I think the DSO pathway is significantly underperforming as a viable pathway toward wealth accumulation.

Stay tuned on that now. The other thing I noticed in here is that the two to nine location had 10%, and then the 10 to 49 location had 3.8%, and the 50 to nine to nine location had 2.7%, and then boom, it balloons out to 10.8%. Here's my belief that doctors typically underestimate the challenge that it is to platform their business into a multi-office, multi talk doctor, DSO.

Structure where there's a central management entity that is handling all these quote unquote back office or administrative functions like payroll, like billing, like marketing, like practice management, like hiring and other hr, um, processes. It is extremely difficult. To platform multiple businesses. And the most difficult side of that is all of the people getting everybody from disparate offices, different, uh, associates and doctors, uh, especially if you have some specialists in there, that everyone is in harmony in the way these, these offices are flowing together under or behind a centralized management entity.

That is what a true DSO. Is a dental service organization, which is that sort of hub. And then each practice is a spoke. Now, I have found so many times over the years that a doctor comes to me and says, Hey Wes, I have six locations. My first one was amazing. I was doing 2.5 million. I was probably making almost a million dollars a year.

I was crushing it. And so I opened up a second office in order to grow more. And because I wanted to go bigger than me. That's kind of the big term. Wes, I wanna go bigger than me. And I get the concept, it's kind of a romantic idea. I can go bigger than me and do something really impactful in my community or the world, et cetera, and make a lot of money along the way.

And so they do it and they have everybody telling them to do it. Hey, doc, you need to open up a second office and get a second loan and buy more chairs and more another cone beam and cadcam. You need to, you, you, you need to buy more, more supplies, pay for more marketing. All this stuff. Everybody's telling you to go spend more money and one way for you to go spend more money, trust.

Is to open up a second and a third and a Ford LO location. Why? Because as I explained in my last podcast and in many other podcasts, most of your costs are fixed. Your rent is fixed, your people tend to be fixed. Most of these, your phone bill is fixed. Your accounting costs tend to be fixed. These things generally are fixed.

70 to to 90% of your costs tend to be fixed. So you go open up a new location and suddenly you just bolted on. A set of fixed costs without any guarantee of other income. Now, you could buy another office that has a practicing dentist and maybe that practicing dentist will stay there. But the big question is, will that dentist put in the same love, the same heart and soul that they were doing as an owner?

Now that they're just an employee? And truth is generally speaking, they don't. Now, a lot of times you just get a good soul who's gonna work hard no matter what. But the nature is most people are highly motivated by the way that they are compensated. And if you are no longer receiving the profits of your practice and you're simply paid as an employee, that can be incredibly disincentivizing for that selling doctor.

And the selling doctor probably sold because they don't wanna do the business side of it anymore. Which means you have to do the business side of it as well, and there's only one of you and there's only a certain amount of hours in the day. So you gotta figure out how to allot your time across your practice and the second and third and fourth, et cetera, locations in an effect in an effective way.

A lot of doctors underestimate just exactly what that is going to be like. So what I find is that these doctors who suddenly go from uh, one office to multiple offices, and in this case there's 10%. Of these two to nine locations end up realizing that it's incredibly difficult and a lot of them end up having to back out and cut their losses.

They just try to sell that second office on the other side of town, find a buyer, sell the patient records, negotiate out of the lease just to cut those losses because just look at the stats. Those who make it through from two to nine and get to the next category of 10 to 14 is cut by. By almost 60, 70%, so it's down to 3.8% have successfully got to that point.

I always say that once you go into three offices, you're getting into this place. I call no man's land. And no man's land means you're too small to be big and you're too big to be small. To elaborate on that, you're too small to be big, too small to be big, means you haven't established your processes effectively yet.

Your operational processes, your marketing processes, your financial systems, all practices need to be on the same practice management software, the same payroll software, the same hiring process, the same HR policies. The same handbook. All of that needs to be managed as if they were operating as one. And it's difficult sometimes to do that, especially when you're acquiring another office that has a different tech stack, a different culture, a different mindset, and maybe even a different patient base.

It's very difficult to align all of that together. And so they get to that third or fourth office, they're too small to have all of those processes in place, and that's what I mean by you're too small to be big and yet. You're, uh, you're, you're now too big to be small. You got three offices and that's gonna take up a lot of your time.

There's only so much of you. To go around and you get squeezed, your energy gets squeezed, your bandwidth gets squeezed, your stress level goes up in that space of three to four offices. And that's when you have to decide, do I cut my losses or do I somehow level up to become an incredible business person?

And if you can level up and become a credible business person, maybe you'll get out of that no man's land where you're too small to be big and you're too big to be small. So that's why. Then you get to the next one, 50 to 99%, only 2.7 get to that point. And then you got the 10.8%. So there are some people that broken through no man's land and they figure out their systems and their policies and their HR and their financial systems, and maybe they got good, uh, banking relationships or maybe they got some equity capital to invest in from a, a, a private investor or a PE fund.

And they're able to truly build out those systems. For example, um, PDS Pacific Dental Services, I gotta give it to 'em. They built out some incredible systems, and I know because I had a client for a while who was a PDS doctor and we would log into his PDS intranet and see how they have developed these in highly customized technologies and tools to measure productivity, create a competition across these doctors to produce.

I mean, these doctors, they know how to sell and PDS encourages them how to sell. I, I gotta be careful there. I don't wanna say they encourage 'em. I don't know what they do, but I do know that every day, at least back then, the doctors could see across the company, production levels top to bottom and they could see exactly where they stack up.

And you know, we are. Comparing, comparing machines, our brains like to compare how we're stacking up with other people and everything from our physical condition to our economic condition, to the success of our practice, to our relationship with our family, or our. Girlfriend or spouse, we just compare.

It's terrible. We shouldn't be doing that. But one thing PDS knows, and a lot of businesses know that when they create a competition board like that, it certainly does drive a lot of motivated behavior. And then of course, compensation goes up when productivity goes up as well. But the thing that PDS has done well is they absolutely systematized virtually everything in their practice.

And this is critical. This is extremely hard to do. They figure it out. How to give, uh, doctors ownership at the local level, not necessarily at the parent level, but at the local level that the doctor's actually operating in. And to be able to buy and sell equity at the local level in a predetermined format in.

Yeah. And it's almost like a marketplace for local practice equity for dentists to buy and sell. So it's almost like there's a hybrid element of ownership and, um, and being an employee, and that's worked out incredibly effectively for them. I gotta give it to Steve Thorn, who was, by the way, a former dental CPA is my understanding.

Credit to the dental CPAs out there. Huh? Alright, so that's 10.8%. I don't know much about the other ones, but they've broken through and it's because they've truly platformed their systems and their business effectively. Well, and then those companies end up being worth a lot of money. That is true, but I wouldn't say that is your highest probability of success to go that route.

Most doctors who get lured into that siren song end up. Crashing on the shores unsuccessfully, and some of them ultimately file bankruptcy and have to essentially remain an employee for the rest of their career. Not that that's the end of the day to be an employee. I don't mean to say that, but I do believe that the highest.

The sort of level of achievement and financial success comes through private ownership. Alright, uh, let's go on to some of these other statistics here. Early stage dentists, so those viewing my screen on YouTube, early stage dentists. Uh, I'm gonna compare solo practices by DSO by careers stage. So I've got three stages.

Early career dentists. Those are dentists under 10 years outta school. Mid-career dentists. Those are dentists between 11 and 25 years out of dental school and late career dentists are dentists over 25 years out of dental school. Those early career dentists as of 2024, meaning that they graduated. Uh, after 2014 of those dentists, 26.5% of them are in, uh, the large DSOs.

The DSOs that are a hundred plus locations like Pacific Dental Services, for example, or Heartland or, uh, those, those are our associates. Um, under 10 years outta school, 26%, 14.9%. Are in private practices, that's a solo doctor or a doctor with one, uh, with, with one other dentist or maybe two other dentists in that single location.

So one location offices, 14.9%. The other, roughly 60% are somewhere in those other categories between the small one location office and the massive a hundred plus location office. Now you get to the mid-career dentists, those that have been outta school between 11 and 25 years. Now, only 14% are in DSOs. So under 10 year dentists outta school, 27% between 11 and 25 years outta school, only 14% are associated with DSOs.

So that's a good thing. That means that in time, more dentists are going private because private it goes from 14.9% in the early career. Dentists category 2, 35 0.1% in the mid-career category. So that is a significant increase by about 120. 125% or so, uh, from early career to mid-career, going from DSO to private practice and, um, about a 40% drop, uh, 50% drop, uh, in DSO, um, employment.

Now we get to the late career dentists. These are dentists who have been outta school for more than 25 years, so most of these doctors are going to be in their upper fifties and sixties and even seventies. Of those doctors, only 9.1% are working for DSOs. 47.6% are working in that one location, dental practice.

And the other, roughly 40% are somewhere in those middle, uh, uh, uh, categories with multiple locations. Now, some of these 9.1% of doctors in their late career may have sold to A DSO, and now they're working for A DSO. That may be where they come from. I imagine most doctors in their late fifties and sixties have not been working for DSOs their whole career.

Obviously since generally speaking, DSOs really weren't around. If you go back 25, 30 years, uh, there were a couple emerging ones, but so that trend just means that as doctors get further and further away from graduation, they tend to move into private practice. However, those stats are changing every year as more doctors are staying in the DSO environment and not moving to the private environment.

And as DSOs have been buying up more private practices. Alright, now let's move on to DSO affiliation by specialty. Which specialty do you believe has the highest affiliation with DSOs? Go ahead and think about it. If I list off some in no particular order. You got pediatric, gps, endo, OMS, perio, prosthodontic, and orthodontic.

So those are the seven categories that I'm gonna outline here from this study. So the number one specialty. Attached to DSOs these days is orthodontics and orthodontics is 23%. Now, I don't know why exactly, I'd have to think about that. Maybe it's because orthodontics is the most leverageable in that once you get contract receivables, a lot of times it's the orthodontic assistants who are doing a lot of the work and the doctor shows up for a moment, does a couple things and says a few things, and maybe so maybe it's, maybe it's a little bit more leveragable.

By, uh, non-dentist, IE private equity people to, to be able to scale that. I don't know, I could be wrong about that, but they are number one on the list at 22.8%. Now, only 1% below that actually is OMS, oral and Maxo, maxi Maxillofacial Surgeons, surgeons, I, I always struggle with that term, but oral surgeons.

They're at 21.8%. And uh, that is actually quite opposite from what I said about orthodontics or oral surgery, is you need that oral surgeon doing those dental implants or doing that big, those big treatment, those big surgeries. So, but interestingly. It's that way. You know why I think that is because oral surgeons are at the top of the food chain when it comes to profitability.

No offense to everybody else. Y'all make some good money as well. And I have some unbelievably profitable gps who make more than most oral surgeons, so it's not always the case. But on average, oral surgeons make the most of any of any specialty out there, and therefore it could be that private equity and DSOs have.

A bigger appetite for those types of practices because of the profitability of them. So the next one is endodontists. Endodontists are about 20.8%, so not that far behind. Endos are not far behind oral surgeons when it comes to profitability. Endodontists make incredibly, incredibly good money, especially well run endodonic practice.

So that's right behind. And then there's a bit of a drop by almost 6% down to 15% of pediatric dentists are owned by DSOs. Then right about the same level at 15.5% are gps, uh, right there in the middle. So about 15% of general dentists as of the end of 2024. Are owned by DSOs, which pretty closely correlates to the original overall DSO affiliation of 16.1% of all dental practices are affiliated with A DSO.

All right. The next one down just below that is periodontists. They're at 14.3%. We just had a Periodontic client, uh, sell to a large DSO called specialty one, and uh, I can explain why I was ultimately okay supporting that one. The cash down was just so un outrageously large. It was hard to say no.

Generally that's not the case, but that's PIOs. And then the last one here are prosthodontists at about, at 11.1%. And I actually don't know why. I'd have to do a little research and think through why that one's the lowest, but, but it is. So on average, 16.1% of practices are a affiliated with DSOs. That's a lineup.

Ortho OMS. Endo, pediatric dentistry, GPS periods, and prosthodontists. Alright, now lemme talk a little bit about the DSOs in general and some of my, my thoughts before we, we, we, we end here. Um, lemme talk about how it's affecting dental students. This, this may not be breakthrough, but I want to emphasize this.

Average student debt. Right now, if dentists coming outta dental school is about 300,000. And if they're coming from a private school that's closer to 500,000 in certain private schools like USC, it's probably closer to six to 700,000 in some cases. Oral surgeons I've seen come out with over a million dollars.

Yep. I've seen an orthodontist too come out over a million dollars. Typically from USC. That's what I find some about that school. Huh. But it can be very high, and it's not that this necessarily limits the new dentist's income because of the government programs that are. Income driven. So idr, income driven repayment programs, idr, and there's, that's a, that's a general term for various types of income based repayment programs.

So IBR, income based is one. Um. There is pay, which is pay as you earn. There is revised pay as you earn, known as repay. And I've done some podcasts on and on my associates on fire.com website. I go over those. I generally, uh, tend to like, um, repay, uh, but it depends on the circumstance. It depends on who you're married to and whether or not they have income and student loans.

Where you are in your career. There's a number of factors that drive. Which one of those is better? I'm not gonna get into that. But my main point is that it doesn't necessarily hinder their economic potential that much, given that you can limit how much is paid out, up to 10% of of income going towards student loans.

So it sort of curtails the economic bite of the student loans, especially in their first 10 years or so of the doctor's career. However, what it is affecting a lot is it's shaping the way these young doctors are thinking about their careers. And it's causing many of them to, um, simply prioritize a, a, uh, a fixed paycheck over career potential.

They're trading autonomy. For salary. And the reason why I say autonomy is as a practice owner, you have a lot more autonomy. As a DSO employee, you have a very predictable salary, and so a lot of these young doctors tend to be risk averse, partially because of the student loans that makes them feel like they don't have a choice.

They simply have to have a predictable paycheck, even though. If they sign up for the right repayment program with the government, that fluctuates and doesn't have to be an impediment to practice ownership. It doesn't, but it creates this perception that they need predictability and their appetite for risk and buying a practice is more risky than being employed.

Um, and so they prefer to trade that autonomy of practice ownership for a salary. That's the way they're viewing their career path. Right now. Now let me though, put into perspective the cost of that choice of trading practice ownership, autonomy for a salary. Let me, let me quantify this for you. This is, this is really important in the world of finance, whether you're investing in the stock market, for example, or you're investing in real estate or a private investment.

Risk and return are very, very related, and there is a direct correlation. Between risk and return, the more risk that you are willing to take on over time, the more return you should expect for that risk. So if you're gonna invest in a, in a, in a micro stock that has very little track record, you, you're gonna expect to get something a lot more than what you get in a 10 year US treasury giving you 3.5% on that US Treasury.

Why? 'cause that US Treasury has almost no risk. Very, very little risk associated with that US treasury bond. So why would you go invest in a micro cap stock that, that, that is very unpredictable, which may end up in the graveyard in a year or two if you are only gonna expect a 3.5% rate of return. You're not, you're gonna expect a 15% rate of return on that.

Or if you go and invest in an s and p 500 company, you might expect a 10 to 12% rate of return or, or an eight to 10% rate of return. So the more risk you take on, the more a finance professional is expecting a return on that risk. Now there are some risks that don't come with corresponding compensation, and I'm not gonna get into that.

That's an investment topic of how do you only take on compensated risk. I just want to focus on this concept of the relationship between risk and reward, risk and income. And it is true. You're taking on less risk by going in, working for Heartland, you know, that's just less risk. Because they've got their marketing down, their operations down, their presence down, it's, they're very stable that way.

Their balance sheet is probably very strong, and so they're probably gonna be around for a while. And so that's low risk. And if you go and own a practice, it's higher risk because so much is unknown for you. Are you gonna be able to do this? Are you gonna be able to market? Are you gonna be able to lead your team, manage a great culture?

Get patients in the door, get them to say yes to treatments, are you gonna be able to do all that stuff? And that might feel a lot more risky. So let me, let me put some numbers behind this. In here it says in the research that private practice own doctors are taking home somewhere around $228,000 a year.

Now a lot of our clients take home a lot more than that. 2, 3, 4, 5. Eight times that amount because the wonderful thing in our capitalistic system is if you can run a phenomenal business, you can make phenomenal income. This isn't communism here. And so you are rewarded pro rata based on the effectiveness of your business management skills, your leadership skills, your communication skills, all of those things, your grit, your hard work, all of those things.

But here, an average doctor per this report is doing $228,000, take home. A DSO doctor on average is doing $177,000 take home. So that is a difference of, let me see, that is a difference. Uh, let me open up one of my spreadsheets that I use. We have 228,000 less 77, so that's 51,000. $51,000 less every year.

So let's say that you could take that 50, let's say you bought a practice, you took on the risk and you earned that extra 51,000 every year over what you would receive if you were an employee of A DSO. So 51,000. And let's say you invest that, and let's say you invest it in the s and p 500 every year. So you take about 4,000 plus per month.

From that extra income and you drop it in an s and p 500 index fund, and let's say that gets you 8%, and let's say you do that your whole career of 30 years. Let's say you graduated at like 32 and you retire at age 62, 30 years. What you would have accumulated in that s and p 500 index fund is $5.77 million.

5.7, you're approaching $6 million there. Now, if you back that into today's value, because you know that with inflation every year, the value of a dollar goes down, meaning it will buy you less stuff every year because that dollar is deflating. Because of the effects of inflation. And if I put 2.5% inflation and take that 5.77 million at the end of 30 years, and I say, what would that be worth today?

What would that 5.777 million buy you in today's dollars? It would buy you $2.75 million worth of stuff in today's dollars. So I'm trying to create an apples to apples comparison factoring out. Inflation so that you can sort of conceptualize what this means by being an employee of A DSO rather than owning a dental practice.

Now, there's other assumptions in here. I'm sifting out. I'm just keeping this simple. So you're leaving on the table $2.75 million over that 30 year period. When you retire, you're $2.75 million less. In the bank because you were an employee and not an owner. Now, if you're an owner, like a lot of our practices that we really work with to grow their collections, we, they, they typically are eager for coaching.

They get practice management consulting. They become better at marketing, you know, and they're doing 1.5 to 2 million to 2.5 million. They're their gap as opposed to working as an employee might be. $200,000 a year, and if you did that, they're leaving in today's, in today's dollars, $10.8 million on the table by being an employee rather than owning their own dental practice.

And that, that's just accentuating those numbers. So you grasp the concept of how much money you're leaving on the table by taking the safe route and being an employee. Now we have a lot of doctors that retire and a lot of dentists don't retire with $2.7 million in the bank. They don't, they don't retire with that.

And so then that's just the spread. If you're a practice owner and you're making that extra 51,000 and you're investing, you know, beyond that, you're gonna have a lot more than that. And I would say our average doctor at practice CFO is retiring with somewhere around. $4 million plus or minus some lower and some a lot higher.

And on top of that, they generally have all their debt paid off. A lot of them own their building and a lot of times their building is paid off as well. They may own one or two rental properties, and so their net worth is probably running somewhere around 10 to $15 million. That's a good career. And then they live off that and they're able to retire at age 65 plus or minus, you know, five years and live out the rest of their life without having to worry too much about the economics of their life because they've been consistently disciplined in setting aside money in assets that will take care of them later on in life.

Alright, now lemme tell you what my prediction is on the dso and I'm gonna, I'm gonna try to stick the lining with this, with, with this set of comments. Honestly, I should do a whole another episode on this. When DSOs buy a private practice, they will issue an offer letter and that offer letter will say, here's how much we're gonna offer for the purchases of your practice, or, and generally speaking, they will give, they will value your practice and let's say they value it at 1.5 million.

Then what they will do is they will say, of that 1.5 million, we're gonna stratify that in a few categories. You're gonna get $750,000 down. You're gonna roll over $400,000 into equity of the DSO. So now you become a, a small partner of that DSO, and that three or 400,000 might buy you 0.2%. Equity of that DSO.

So you're this tiny fraction holder, almost like owning stock, you know, in a, in a public company, except if you own Apple, you probably own 1e-07% of the stock, where you might own 0.2% of the DSO. But in concept, you're a small fractional owner of that DSO because you took some of the value of your practice.

When you sold to that DSO and you rolled it into, or you converted it or what We sometimes say you swapped it with the equity of that DSO. So you land 700,000 down, you, let's say you got 400,000 rollover, that's 1.1, and then you have 400,000 that is earned by maintaining your collections over a certain period of time.

It's usually two to three years that if you maintain or grow your collections, the rest of that 400,000. Of the 1.5 million valuation is paid out as you earn it, and so that's sort of an incentive element of it. Now, let's say that practice, your practice would've sold for 1.2 million on the private market, so there's an extra $300,000 that you're getting.

Now, normally what these DSOs require is that you stay on board for a minimum of three years and many times for five years. Sometimes they may have a contingency. If you can find, hire, and train an associate to replace you, then you could withdraw or retire earlier than the three to five year mark. Now, the peak heyday of DSOs was around 2019 to 2023, you know, 2022.

Huge peak. Peak for, for the DSO acquisition market and some of these dental, uh, brokers that broker four DSOs, there's a handful of them out there, were just making a killing at that time. I mean, you had brokers making $1.5 million to $2 million a year because they're selling these practices to DSOs.

They had relationships with various DSOs, and I'm not trying to fault them for that. They're, they're out trying to make their money. However, I will say the group of people in this DSO space. That is the most disadvantaged and who is losing out the most are the dentists themselves. And I'll explain why in this, in, in this ecosystem, you've got the dentists, you've got brokers, typically you have.

Um, sometimes other ancillary people, you've got consultants out there that are trying to package up their clients and sell 'em off to A DSO. You've got a number of people just saying, Hey, I have all these relationships with dentists. Let me convince them all to group and cluster, and then we'll sell to A DSO and everybody rides off into the sunset, which ends up being complete and utter BS most of the time.

And then you've got the, uh, the PE people themselves. And guess what? These PE people are out to make a lot of money. They're out to make a lot of money. They work hard. They went to a lot of school. They know how to crunch numbers. They know how to make one plus one equals three, or at least present it that way and convince people of that and.

At the end of the day, a dental practice produces a certain amount of economic value, and that economic value can only go around so far. And yes, they can come in and implement some systems and maybe save you, you know, a few percent of your supplies and a percent or two on labs, and maybe manage some of your processes around HR and hiring and get some economies of scale.

But it's not like they're gonna go in there and cut your overhead by 50%. They might cut your overhead by five, maybe 10% at best. But generally speaking, here's where the value is, and it's a house of cards. It's a pyramid scheme, it's a multi-level marketing program. Those doctors that are in early get most equity on the cap table of the DSO.

Those doctors have the larger share of ownership, so early doctors might have five to 10% ownership. You got the DSO people, sorry. You got the private equity people who will always make sure that they have control. And that they have the majority of ownership. Why? Because they're not at this as a charity.

They're out there to make some money, and they're looking at dentistry and they're saying, wow, this is a remarkably profitable industry still, even in today's competitive environment. Why don't we use our PE skills, our gunpowder of money that we get from investors, and let's go start consolidating these companies, these dental offices.

Let's roll 'em up, create platforms, economics of scale, and then let's. And then let's sell to a bigger PE company. And this is the nature of the game. A fish buys a dental office, a set of dental offices, and then sells to a bigger fish who does the same thing, packages them up, sells to a bigger fish, does the same thing, packages them, sells to a bigger fish.

So the only time that I've seen doctors really crank some money on this is when they're the early doctors. The early doctors. And if A DSO gets to 500 doctors, I'd say the first a hundred doctors probably gonna make some decent money on that. The other 400, probably not much money on it. If you're the first 10 doctors, 15 or 20 doctors in a group that gets to a hundred to 200 to 300 offices, they're probably gonna make some good money on that.

I had a doctor who, a client who sold to a a DS specialty, DSO, I won't give the name of the doctor or the DSO, uh, he was the, I think fifth or sixth doctor. He eventually got to 150, uh, doctors and all said and done his roughly. A $2 million valued, uh, practice. He ultimately walked away with somewhere around eight to $10 million from that sale, but he was the fifth or sixth office in A DSO that eventually aggregated over 150 offices.

That hundred 49th doctor is most likely losing money. And lemme share a couple reasons for this. These DSOs will come in. And they'll say, Hey, a normal buyer would offer you four times your ebitda. EBITDA is simply your profit in the practice. After paying the doctor as an employee, that's your ebitda.

It's like, it's like the, the return to the buyer. If I bought your dental practice after paying all your overhead and paying you the doctor, as an employee, what's left for me? That's my ebitda before my debt, before my amortization, before my interest, before my depreciation. That's what EBIT is. Earnings before interest.

Taxes, depreciation and amortization. But basically it's your cashflow profit. Just simplify it to think of it that way. Cashflow Profit. After paying the doctor. If I go in and offer you 4.5 per uh, times your ebitda, so let's say your EBITDA is, I don't know, 200,000. I might go and offer you 900,000 for your practice.

If I were a private buyer, A DSO will come in and they'll say, I'm gonna offer you six times, so I'm gonna offer you more. So that's six times, so that's 1.2 million. So instead of 900,000 in a private sale, you're getting an offer that's 1.2 million. Now that right there piques a lot of seller's interest.

Wow. $300,000 more. That's like a 33% increase from my $900,000 private offer. Why would I not do this? Okay, so you start to look at the offer letter from the DSO and it says, okay, we're gonna offer you 500 or $600,000 down 200,000. You have to earn out by working for three years and collecting X amount so you can't drop your collections.

And in fact, doctor, you're not able to retire or slow down. This is not a slow down strategy. We need you to lean in. We need you to work harder. And guess what? In the first year or two, there's gonna be a lot of bumps because we're gonna be changing your payroll system and your, maybe your practice management software, and we're gonna be doing all these things and it's gonna feel bumpy.

Now they don't tell you that, but that's often how it goes. Not always, but that's often how it goes. And, um, and then the, then the remaining amount of, I don't know, few hundred thousand, uh, of the practice sale gets rolled over into that DSO. And so you have to stay there for three to five years, and then after the three to five years, you're welcome.

To walk. And, uh, at that point they will either buy out your rolled over equity into the DSO or you can hold onto it. Um, and eventually when there's a, what, what's called a cap event or capitalization event, that that d that private equity company, uh, sells to another private equity company or invest more money or gets debt financing, then there may be money that you would receive from your equity rolled over.

Now what's happening is in these offer letters, there's a lot of smoke and mirror. When you really look at it. These DSOs are keeping your accounts receivable. Sometimes they're even keeping a certain amount of cash in the bank as well. They do the math. These are not dumb people. They're very, very articulate with their numbers, and they know that if you collect what you are collecting for five years.

And if they're paying you, let's say $250,000, where before you were taking home $450,000, they know that ex, that extra $200,000 over five year period is a million dollars, which allows them to offer you more. But guess what? You're essentially paying for it yourself because you are not getting the profits of your practice anymore, and that's going to somebody else who's then gonna use that later to pay you.

And so you're, you're giving up all this income in the meantime. So what I always do is I do what's called a net present value analysis, and I say, if you don't sell your practice to the DSO and you keep a hundred percent of your profits and then you sell to a private buyer in five years for let's say 70% of what the DSO is offering you, what is that?

At a 2.5%, I mean, at a, at a discount rate of a discount rate is just the rate of return that you would get. On the money had you invested the difference, and this is a finance term, don't get too, too far into it, but my main point there is if you present value back into today's dollars, what is the sum of all the, the earnings that you would've kept and then the sale to a private buyer after five years and you take that number and you compare it to the net present value of the money you get down on day one from the DSO and your employee income over the five years and.

And, and you leave out, you leave out the equity rollover as if it were zero every time. The private sale is gonna be way better. You are way better off keeping it private and selling it private. If that DSO rollover equity grows by around 40%. Then there's a parody. Now you're about the same. If that DSO equity grows to the tune of 40 or 50%, if the DSO doesn't grow or it falls apart, or it only grows by 10%, you're still a lot better off to not sell to that DSO.

So will the DSO grow at a clip, a very significant clip in order for your rollover equity to mean something? I have found most of the time the answer is no. And I have also found that a lot of times doctors regret that decision. Now, you may have doctors trying to sell you into MB two or sell you into some other DSO.

Just remember, a lot of these doctors are incentivized because they get an extra payout when they bring in doctors. So just vet people's authenticity when they're giving you a recommendation. Also, since they have rollover equity in the DSO, they want the DSO to grow. Because they're in their equity in that DSO Gross, so they're incentivized to sell economically for them.

And so there's a conflict of interest there sometimes when one doctor recommends a DSO to another doctor. Also, DSO brokers love the commissions from selling. DS O2 DSOs. They are big, fat, chunky, heavy commissions, and so they will also attempt to align with the DSOs to sell the value proposition of A DSO as well.

A lot of the industry, honestly, is ganged up against the private practice these days. You got a lot of vendors. Practice management, consultants, brokers, bankers. You got a lot of people telling you that this is this great, phenomenal thing, and so this is why dentists are so peaked when they hear about DSOs, they feel fomo.

Fear of missing out. Am I missing out? Should I be partnering or selling with the DSO? My friends are doing it. I heard about MB two. I heard about this doctor through the grapevine who made $10 million by growing a few practices and selling to A DSO. It's all this like cocktail party talk that makes people get interested, but the reality is, and I see.

At least A DSO offer every week. I have analyzed hundreds of these, and I have a tool now I've created because I've done so many of these. And although there are some nuanced variation across these DSOs and their offers, generally speaking, they have the same components to them. And those components can be very difficult for a private doctor who hasn't had experience in these complicated calculations to understand what's happening.

Now, why do I think a lot of practices from DSOs are gonna get unleashed into the market to sell that a lot of DSOs are going to fail is because after five years, a lot of doctors are gonna now walk away. They're gonna say, I did my time. Five years, I'm ready to retire. I committed that. I lean in during that time, I'm gonna retire.

And it is extremely difficult for A DSO to find an associate who will step in and care as much and produce as much as that former owner, seller, doctor. It's very, very difficult. Dentistry is a difficult business to scale. It's not like software. Once you have the programming in place and a good marketing team, this thing can grow.

With no, with no limit because it's so leverageable. It's so just simply process and computer driven. And the more something is process driven, assembly line driven, robot driven, manufacture driven, the more scalable it is, the more that it's dependent upon the skillset of a person, particularly. Physical skillset, then it's, it's difficult to leverage.

This is why I don't think AI is coming for the job of a dentist. And I don't think AI is coming for the job of a welder, or AI is coming for the job of a carpenter. Those types of jobs are very, very difficult to, difficult to platform and scale. It doesn't mean that PE isn't gonna try to do that, uh, 'cause they will.

But it's very difficult to do so, and what PE does is they go in and they want a short term flip, like flipping a house, let's buy it, let's restore it, and let's flip it for 50% increase in the market value and walk away with a few hundred thousand bucks. That's the name of the game. Most of these PE companies are not intending to hold those dental practices for 10, 15, 20, 30 years called evergreen companies.

Most of them, the vast majority of 'em aren't. They want to, they want a quick. Buck. They want the shortcut to wealth. And so they buy it and they buy it at an, at a, at an EBITDA multiple of let's say five or six. And then they aggregate it and they, a lot of times they don't even centralize the processes.

They just get a bunch of practices, and I call that assembling ebitda. They're just assembling ebitda. And then they'll go and they'll sell it to a bigger pe. At a higher multiple than they bought it for. So they bought it lower than what they're selling it for, but they didn't fundamentally go in and change the economics and the processes and the culture and the nature of those dental offices.

So in reality, there is no true intrinsic economic value that's been created. It's just a game. It's a pyramid scheme. That's why pyramid schemes come and they go, because the first set of people are very. Incentivize for it to be successful because downstream is paying for upstream and in time the true economic economics are gonna present themselves and the music will stop and people will be found without a chair.

And that's gonna happen. And a lot of DSOs and my strong prediction over the next few years are going to fail. There's already been a ton that have failed and there's gonna be a lot more that are going to fail. And so what I would do is as a private buyer, just wait. And by patient records down the street of some DSO that failed.

That's a great way to grow your practice. One location, get a bunch of ops, buy patient records. Get to two, $3 million. Manage your overhead. Good marketing, good operations, good financial systems. You're gonna crush it. You're gonna take home a million dollars a year or more. You're gonna be retired early, you're gonna feel great.

You're gonna own your life, you're gonna have autonomy. You're not gonna work for pe. You're not gonna work for the suits. Alright, so where does a PE. I mean, where does A-A-D-S-O possibly make sense? There are some practices that are just so remarkably profitable that a buyer cannot get a loan or step into ownership.

It's too big, it's too much of a behemoth and it needs institutional money in order to get the, or extract the full value out of your practice. That's one I just had that sold in January. A client of ours been a long time client sold, and uh, and it was a practice that on the private market by private valuations.

Probably would've been worth somewhere around 2.5 million. This DSO, who I think was a bit desperate, they hadn't had a single acquisition in over a year, was my understanding, came in and offered 7.5 million for that practice. Very profitable specialty practice, bought it 7.5 with $5.1 million down on day one.

They're never getting that back. That is in the doctor's pocket period. If on day one. You can get more cash than you can from a private sale in, in this case, two x twice as much. I, I, I don't know how to say no to that, to be honest. I don't know how to say no to that. Maybe if you wanna say, I don't want my practice to get sort of fed into the system of private equity and institutional dentistry.

Maybe if, if you're really passionate about kind of the private practice space and protecting it as, as I am, but at the same time. If your practice truly is worth 5 million and there's only a certain type of buyer who can afford to pay 5 million, then I sort of get it. I don't know. I honestly, I don't know how to say no to that one.

And the doctor also got a rollover of, uh, X amount into the, into the, into the DSO, which I always say may or may not become something I wouldn't count on it. If it does, great, but I wouldn't count on it. Now, even then, here's the crazy part. In those insane numbers of that offer. When I did the five year net present value analysis, she, this doctor was better off not selling to the DSO.

Why? Because this doctor was taken home, $2.2 million a year after overhead, two point no debt, I mean no debt. This doctor was saving ridiculous amounts of money. Incredibly profitable practice. What a, what a phenomenal business owner she was. Credit to her. It's super rare to see that had she kept now and now she was gonna be paid about 750,000 as an employee over the five years.

So you're giving up. You're giving up, what is that? About 1.4 million. 1.3 million a profit every year for five years that if you kept and you invested it, and you let that grow at, let's say seven to 8% per year, and then you sold to a private practice, even if significantly less, and a doctor came in and paid 2 million instead of the.

The, the 5 million on day one for even in that crazy analysis, the doctor would've been better off to have maintained the full profit of 2.1 million per year, sold after five years at a significantly lower amount, and financially would've been better off. The only reason this doctor decided to do that is 'cause the, the, the DSO said, Hey, if you can find another doctor to come in and replace you over.

During the three year, during the three to five. Oh, and we only require three years in this case. So over the three to five years, you find another doctor to come in and replace you. You can then retire. So the doctor was thinking, okay, I can get the, I can get the 5.1 million down on day one. There's a rollover equity, which may turn into something.

It may not, but it may, and I have the chance to back out over a three year period. If I find another associate to come in and I train them, then they can, uh, uh, get the, that financial sort of windfall of that deal while not having necessarily to commit to five years of the grind. And so the doctor ended up pulling the trigger on that.

That is the exception I would say. Very few dentists are gonna see that. But the key things to look at are this, if you're really intent on considering A DSO, contrary to my advice is how much cash are you getting down because that's chips off the table. Less risk. How many, how? How much money are you getting down?

How is the earnout reasonable? And here's the next big thing. How early are you in that DSO if that DSO has really good leadership and. My preference would be it's, it's a, it's a doctor led DSO. The founders are doctors. The main people are doctors. There might be some PE people involved. There might be some business people involved.

But at the head of that ship, leading the culture, leading the clinical autonomy are doctors who truly believe that. So that there's still culturally an element of private practice. And there's a lot of cash down on day one, and the management seems very promising, very sophisticated, very competent. And you're early on in the, uh, early stages of that growth of that DSO.

There might be some opportunities there, and I don't want to deny those opportunities. I'm just saying that 19 outta 20, I don't know, 49 outta 50, it's a very high percentage of those. Uh, doctors are less off profitably speaking wealth, wealth speaking than keeping it private. So we'll see. We'll see if my prediction pans out here over the next three to five years.

That is my take practice. CFO and I are huge believers in the private space. I love it when doctors can curate their practice, grow their collections, come up with a wonderful culture, control their schedule, and really enjoy the experience. Uh, being a practice owner as well as a dentist and see their personal wealth grow by doing that effectively, that is the optimal state of a dental practice owner to date.

In my very strong opinion, I witness it every day here at Practice CFO. We are out here to support, love, and nurture the private practice in every way we can. We are white carpet. Boutique, highly caring, set of team, uh, uh, team here, professionals of CPAs and financial advisors. And, uh, we love what we do. We love working with you, all of you, Dennis.

So thank you. If you're a client of ours, I just wanna send my personal thank you for trusting us. We are constantly trying to get better where there's areas that feel uncomfortable. We are always getting feedback and trying to become the best that we can be here at practice CFO. Alright everybody, so that episode on who owns Dentistry Today and Wes', personal thoughts on.

DSOs hopeful. Hopefully it was helpful. Until next time.