It’s been an interesting couple years. The orthodontic market has changed so radically that it’s almost unrecognizable and the opportunities for orthodontists who own their own business are many… but complex. As more and more orthodontists who swore they wouldn’t sell now consider selling their practices, I think it’s important to discuss the various topics and scenarios I’ve seen and discussed in recent months. To be clear I am not offering legal, financial, tax or any other kind of professional advice. I’m just an orthodontist and I’m giving you that perspective for what it’s worth. So let’s have a look at the key factors as I see them and then discuss in depth:

  1. PE – Private equity dollars eager to enter the orthodontic market
  2. Owner/operator vs multi-doctor and/or multi location practice
  3. Orthodontics only vs multi-specialty practice
  4. Practice revenue and EBITDA
  5. Practice location
  6. Penetration of local market by buyer(s)
  7. Cash vs cash/equity combo for practice purchase
  8. The looming economic downturn
  9. Prices being paid for orthodontic practices – now vs a couple years ago vs the future
  10. The price of orthodontics now vs the future
  11. New delivery channels for orthodontic treatment
  12. Doctor age, time horizon, goals and ties to current location
  13. Doctor debt level
  14. Age of current practice – especially important if rapidly growing
  15. Associate doctors and the associated issues
  16. History of large roll ups of orthodontic practices

This is by no means a complete list and I assume we will expand it in subsequent discussions but this covers most of the bases. Notice that “corporate dentistry” in and of itself is not a factor from my point of view. Sure there is tangential relevance but I don’t see corporate dentistry as a huge factor for the orthodontist considering their options for lots of reasons.

So let’s get to it!

Private Equity – I’m using this term generically as I don’t have a complete understanding of all the various forms investors/investments take and I certainly don’t want to claim any expertise here. All that really matters is that there are people with substantial amounts of money who know what kind of profitability orthodontics offers and they want a piece of it. Of course to do so they must form a DSO or similar entity to make it legal for non-dentists to profit from dental practices. Again I don’t claim to be an expert but in short most states forbid non-dentists from owning dental practices. Dental Service Organizations (DSOs) allow outside entities to contract with dentists for very long periods of time to provide most if not all non-clinical services and essentially siphon off all profits from a dental practice (other than what the dentist agrees to pay themselves and their employees) to the entity with the money who is investing in dentistry. In this way the dentist technically maintains ownership of the practice and makes the whole thing legal. There are still a few battles over this concept but the war is over and DSOs are here to stay no matter what your state dental board or dental associations may tell you. To my mind DSOs are neither good nor bad – they fill a space in the market and will continue to do so until a better alternative usurps them.

But back to PE. The biggest thing to remember about PE involvement is that the Golden Rule applies in every facet of the relationship. No, not that Golden Rule… The one to which I’m referring states that “He who has the gold makes the rules”. PE groups have very specific time horizons and rates of return they are pursuing and that will vary depending on the group. To that end, the specifics of their plans will weigh heavily on how they go about entering the orthodontic market. All this is well above my pay grade and beyond the scope of this discussion but it is important to understand what is driving this entire process.

Owner/operator vs multi-doctor and/or multi-location practice – When considering whether or not to sell, this topic is of vital importance. To my mind THE most stable and long term profitable practice model is that of the enlightened owner/operator with one or possibly two locations. In this model the owner understands what is important to consumers and has a progressive mindset that allows heretofore unprecedented production, quality, patient satisfaction, patient loyalty, patient referrals and rock solid stability in any economy. These practices vary in size from 2 MM to 10 MM in annual revenue, depending on things like the facility limitations, doctor personality, number of days worked, etc. but they are all very similar in the fact that the owners make as much or more money than they want, have all the family time they want and they all understand that they are the reason the office is successful. These owner/operators oversee every aspect of the practice and are very hesitant to bring in an associate (and if they do they are very particular about who/how they do this). Unlike other practices, these owner/operators can charge a relatively high fee and still get all the volume they want. A few of these superstars were born this way but most learned their craft and mindset through hard study, pursuit of other successful orthodontists and maniacal implementation (the take home message is that anyone can learn to do this). The other thing to remember is that many of these awesome owner/operators are killing it in towns where their less successful peers claim “it’s different here” and “you can’t do that” right down the street from them… The point of all this being that if you are one of these awesome owner operators then I’m not sure selling is a great idea given what you can do and will continue to do. If you are not and you have no plans to become so then perhaps you should take the money if someone offers you a sweet deal! How do you know if you are as good as you think you are? By evaluating your results of course.

Orthodontics only vs multi-specialty practice – There are some groups who are buying multi-specialty practices but it appears that ortho only is far more popular, desirable and valuable. It varies from company to company and from region to region but it is something to keep in mind when you are considering your options.

Practice revenue and EBITDA – Size isn’t everything but it doesn’t hurt. In the past you had to have 10 MM or more in revenue and have several million in EBITDA to get a multiple for your practice but these days I’m seeing practices in the 2-6 MM dollar revenue range get 4-6x EBITDA with larger ones getting even more. Again I’m not an expert in finance so be sure you have a clear understanding of exactly what EBITDA is, how it is calculated (with examples) what is excluded/included, what the long term picture looks like (are there penalties/clawbacks/etc for failure to hit your goals?). You’ll want an expert to help you figure this out. The larger your practice and net the more you’ll get paid. How much money makes selling worth it? I don’t know – it depends on lots of stuff like how much debt you have, how long you have to stay after the sale, what the practice and the economy do and what the specifics of your deal are. Only you can decide but I can tell you that having zero debt, not owning any single purpose buildings or having long term leases and having the flexibility to see what happens in the next couple years/create an optimum design/physical plant for that new reality while retaining all that you know about running an orthodontic practice has great value in and of itself. FWIW doctors who are selling these days are being asked to stay 2-5 years depending on the specifics of the deal and being paid well to do so from what I’m hearing.

Practice location – This one is counterintuitive. If you have a great location it should make your practice more valuable but it may discourage you from selling – especially if you are an awesome owner/operator. If you have a crappy location then consider selling sooner than later! A great location is not based on the opinion of an orthodontist it is based on the opinion of consumers BTW.

Penetration of local market by buyer(s) – Just like anything else, the less penetration the more valuable you are (assuming you are in a desirable market to begin with). PE groups will pay big bucks to get their foot in the door but may not pay as much for subsequent purchases in the same market. That being said, other groups may be a viable option as they may want to get their foot in the same door. Finally, if you live in the middle of nowhere it may be more difficult to get the attention of a buyer as isolation brings all sorts of logistical issues to hand (but it also limits your competition on the upside).

Cash vs cash/equity combo for practice purchase – When a group rolls your practice into theirs, it can be done in any number of ways with the most common scenario being a valuation is agreed upon and the purchasers pay you in a combination of cash and some form of equity in the parent company. This can range from all cash to all equity and depends on the deal but there are many considerations here:

  • What kind/tier of equity are you getting?
  • Is the equity/cash yours forever or is it possible that there will be penalties or a clawback based on performance of the practice?
  • Can your equity be diluted?
  • How certain are you that the parent company will thrive indefinitely?
  • Can you sell your equity in the parent company? Is there a market for it and what are the restrictions on you cashing out?
  • Are you liable for the actions/debts of the parent company by way of your equity?
  • What happens if the parent company is sold?
  • What happens if the parent company fails?

These may seem like terribly negative questions and orthodontists often get upset when I ask them as they are excited about their new deal but they are necessary and should be asked. This is not the first time in history that orthodontic practices have been rolled up by larger groups and we will discuss that later. If it were me selling I’d take 100 percent cash but I know other orthodontists who are smarter and better business people who see it differently. It doesn’t matter to me what you choose, it matters that you are aware of the issues at hand.

The looming economic downturn – Google the phrase “overdue for economic correction” or something similar and see what comes up. Look at the historical graphs. Ask any economist. We are due. I’m no prophet and no chicken little; just a realist stating the obvious while knowing that downturns are not all bad as they offer great opportunity for those with cash on hand. What this impending downturn means to you will depend on your unique situation but you need to understand that it is coming. I can tell you as someone who went through 2008 with five locations – three of which where I owned very expensive, very large buildings – that it was not fun. In September/October 2008 it was like someone turned off the spigot and new patients stopped showing up for quite some time. We survived it for lots of reasons and I’m not saying you should fear the next downturn, but you should be aware at least. The present day seems a lot like 2008 to me with one big exception. Back in 2008 we had new patients lined up to get into the practice to the point that it was hard to keep up and that’s just not the case these days for most orthodontists FWIW.

Prices being paid for orthodontic practices – now vs a couple years ago vs the future – While related to the EBITDA discussion this is a separate and important consideration. In the past only large group practices could get a multiple and regular practices sold for a fraction of a year’s gross receipts. Prior to 2008 the prices were very low as there were few doctors looking to buy and few associates looking for jobs relative to the practice owners. Back then you got 70-80% of a year’s gross for your practice in all but the most popular locations and were happy to find a buyer. If you sold your large/group practice for a multiple it wasn’t terribly high and you had to stay for 5-7 years after the sale. Of course there were exceptions for exceptional practices with exceptional owners in exceptional locations but there are always outliers! These days the prices being paid for orthodontic practices are much higher, smaller practices can get a multiple and 2 years seems to be the norm for the mandatory minimum for the seller to stay with options to stay longer. 4-6x multiples are common with higher multiples being the case for above average practices. Overall the prices and the terms for selling now are outstanding and I just cannot see them going any higher. In fact I’m beginning to see evidence that prices are starting to decline as market saturation occurs. I’m not good at it historically but the rule of thumb is to sell when the price is high! Given the falling price of orthodontic treatment, increased competition, new treatment channels and the movement toward decentralization of products and services I feel fairly confident sharing my opinion that we are currently at the pinnacle of valuations for orthodontic practices (or at least very close).

The price of orthodontics now vs the future – Prices for orthodontic treatment are going down. It’s a fact. Sure it’s happening faster in more populous areas and slower in more isolated ones. Of course it’s more pressing for multi-doctor, multi-location practices than it is for progressive, owner/operators… but it is happening and will continue to do so. I believe the next economic downturn will press many orthodontists to do things they have long claimed they never would and this will intensify the downward price pressure dramatically. To compensate for lower pricing, orthodontists will need to become more efficient, modulate service to fit price, work more, learn to live with less take home dollars or a combination of some/all these things. What do you think this will mean to practice valuations?

New delivery channels for orthodontic treatment – The marketplace has exploded with dozens of companies exploring new channels to increase access, increase convenience and lower the price of orthodontic treatment. Though many orthodontists and their associations/boards will rail against the fact, the result is a foregone conclusion – these companies and their products/services are not going to go away and they will revolutionize how most people receive orthodontic treatment. This is not a bad thing it is just the natural evolution of our profession. Orthodontists used to hand make bands and wires out of gold after all. The good news is that there will always be cases that cannot be treated with aligners, patients who don’t want aligners, patients who want to see the orthodontist in person and because of all the publicity/advertising, a much greater segment of the population will seek orthodontics in the future. This will have an impact on the price of orthodontics, the value of practices and the marketplace as a whole of course! Something to consider.

Doctor age, time horizon, goals and ties to current location – I hear all the time, “I can’t sell, I’ve only been doing this X years. I’m way too young to sell!” or “My family is here I can’t move.” While being ubiquitous, this answer is a product of our training and groupthink, has no basis in logic and is wholly stupid when you think about it. Since when is making big bucks early in life while you can still enjoy it as well as the free time that comes with success a bad thing? Since when is having options upsetting? Where is it written that we have to practice and live in the same place forever? Be rational. Put this stuff out of your head and think about what you can do if you have zero debt, all your knowledge and a couple million in the bank. Non-competes are not huge generally but even if they are there are lots of options. Plus you’ll have the money to move your family with you if that is an issue. Of course if you consider all this and still want to stay exactly where you are then that is your choice and the beauty of owning your own business. But this is a PERSONAL DECISION NOT A BUSINESS ONE. Again, it matters not what you do I just want you to consider your options clearly.

Doctor debt level – This is a big one and has a lot to do with how much you need to get paid for your practice to make it worthwhile to sell. On the other hand, if you are deep in debt, selling and getting out from under that debt/baggage/etc can be appealing as it will leave you free and clear with all your experience and knowledge after a couple years working for the purchasers.

Age of current practice, especially important if rapidly growing – As someone who has started, bought and visited more than a few practices I can tell you that they grow and change in very predictable ways. Single location, owner/operator practices are less volatile and thus not my topic here. I’m talking to those of you who have either started out with the correct mindset in the last 5-7 years and have grown like gangbusters and those who have recently achieved the right mindset and have seen exponential growth above and beyond your historical records. A few examples I know of are doctors who have gone from collecting less than a million dollars a year to collecting a million dollars a month in less than 5 years while adding locations and associates. It’s awesome to watch and even better to experience but I can tell you from certain knowlege that at some point in the not too distant future there is a world of hurt coming to these explosively growing owner/operator practices. The honeymoon phase with patients will end, the associates will leave, the overtime patients will accumulate, staff will become entitled… all of these things are very predictable and the result of the practice growing beyond the owner/operator’s ability to oversee every single aspect of the business. The point being that if I found myself in this situation with these market conditions I’d sell for BIG bucks and do so NOW. Those of you with this kind of revenue can do incredibly well given the current conditions while negotiating very favorable terms given your size.

Associate doctors and the associated issues –  Many successful owner/operators think “I’ll just hire an associate so I can handle the increased volume and/or take more days off and I’ll continue to grow and prosper as I do now.” This is rarely the case and associates are rarely the solution to any problem you have. As an owner/operator you can produce/collect 2-3 MM dollars a year for every day a week you work in a 7-8 chair clinic with a 5k average fee. To be clear that means if you work 3 days a week you can do great work and collect 6-9 million dollars a year. This is not theory. There are many practices in ProOrtho FE who do exactly this. After having multiple associates and seeing what happens with associates in other practices I cannot advise you owner/operators strongly enough to stick to what made you successful and figure out how to do more before bringing a wildcard into your business.

History of large roll ups of orthodontic practices – Not too long ago there were two big rollups of orthodontic practices where groups bought/started orthodontic offices, paid for them with cash and stock in the parent company (mostly stock) and proceeded to fail miserably. On the upside, after the dust and lawsuits settled, many of the orthodontists who sold their practices to the larger groups were able to get them back cheap or even for free after the parent company went broke. The point being that this is not a new or sure thing and you should be aware of the fact. Do your research. Be smart. Do what is best for YOU.

Again, this is not an all-inclusive list and I’m not giving financial, legal, tax or any other kind of professional advice. PLUS no one knows the future! This is simply my attempt to gather together the most important topics I see swirling around this issue in an attempt to help you make an educated decision. I look forward to discussing this in detail here on OrthoPundit and in Washington, D.C. at the AAO Annual Session. See you there!

PS I keep hearing of study groups and other groups of orthodontists trying to get together and sell as one unit. Discussions like these have gone on for as long as I can remember but I’ve never seen more than two orthodontists join forces to do so. Orthodontists rarely agree on anything but the biggest issue that keeps this kind of collaboration from happening seems to be the inability to agree on valuation. Meaning that if we put 10 practices together in one entity then the total percentage of ownership has to equal 100%. Because of this, the more you get the less I get. This point of contention and scarcity thinking is very difficult for human beings, much less orthodontists to overcome. I mention this not to discourage you as your group may be the one to make it happen. But I want to remind you that this window is not going to be open forever and a bird in hand is better than two in a bush so don’t squander your opportunity while hoping for something better.

 

2 thoughts on “Sell or Stay Put? Cash or Equity? Now or Later? A Discussion of the Orthodontic Marketplace 

  1. Excellent and concise summary. I can’ disagree with anything you stated. I am turning 60 and trying to think this through at this now, proactively. Your timely comments give me a much better perspective. Peace be with you.

    1. Good luck to you! Let me know if you have any specific questions.

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