DSOs: Friend or Foe?

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue that may not be safe for work.

Casey Hiers:
Hello and welcome. This is Casey Hiers, back at the Millionaire Dentist Podcast in the studio with co-host Jarrod Bridgeman.

Jarrod Bridgeman:
Casey, how are you? It's snowing again today here in Indiana.

Casey Hiers:
Winter wonderland in the Midwest. It's a-

Jarrod Bridgeman:
Nice.

Casey Hiers:
... balmy 15 degrees.

Jarrod Bridgeman:
Yep. And my son keeps wanting to go outside, and build snowmen, and do all kinds of stuff out there-

Casey Hiers:
You know, we-

Jarrod Bridgeman:
... which is good for him.

Casey Hiers:
... we played in the snow, did some sledding-

Jarrod Bridgeman:
Yeah.

Casey Hiers:
... throwing some snowballs, some tears.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
The usual.

Jarrod Bridgeman:
Were you throwing tears? Nice. When you're playing with your kids, do you add rocks to the snowball or anything?

Casey Hiers:
No, I just say, "Let's keep it clean."

Jarrod Bridgeman:
Yeah.

Casey Hiers:
"Nothing to the face or the bread basket."

Jarrod Bridgeman:
And no real fighting.

Casey Hiers:
And I have two little girls, so when I say, "No bread basket," all they do is want to throw it at my midsection.

Jarrod Bridgeman:
Yeah. I mean, it's the biggest part of you. Just kidding. All right, but hey, it's the new year. We got all kinds of new things going on, and I mention this every podcast about, but we've got a couple events coming up in Jacksonville and Fort Myers. We're going to be in Oklahoma City and Fayetteville, Arkansas. And it's a new year, a new kickoff, a new drive. And so at these events, you and your team, you guys present some really important, life-changing information, tidbits, and all kinds of stuff that really get either the docs thinking or the docs pissed off, that they haven't been doing this already. But I wanted to ask you, we're going to mix it up just a little bit. We're going to add some new information, some new stuff for the new year. And I wanted to talk to you, being the expert here, can you help me talk to our listeners here, and what can we expect for the new events coming up?

Casey Hiers:
Well, you've got to keep things fresh.

Jarrod Bridgeman:
Right.

Casey Hiers:
And we take that to heart. Now, for our older listeners, John Wooden was arguably the most successful college basketball coach, probably similar to Nick Saban in present-day football. Right?

Jarrod Bridgeman:
Okay.

Casey Hiers:
Nick Saban in football. John Wooden in basketball. Guess what they teach all the time? The fundamentals.

Jarrod Bridgeman:
Right.

Casey Hiers:
They don't change.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
The fundamentals do not change. And just because you have heard something once or twice doesn't mean you are executing it or fully understand it.

Jarrod Bridgeman:
Correct.

Casey Hiers:
And so the core of our subject matter doesn't change, because it's dealing with things that are challenges in dentistry and aren't going anywhere.

Jarrod Bridgeman:
No. And there are across the board, no matter what city, what rural area, no matter what's going on, we have, again, the fundamentals that are-

Casey Hiers:
Overhead.

Jarrod Bridgeman:
... part of everybody. Yeah.

Casey Hiers:
Overhead, cashflow, tax management, you name it, insurance adjustments, can go on, and on, and on. That being said, we wanted to add something useful to our audience, practice owners around the country. So there are a couple of lightning rod topics we had to choose from. And after some deliberation, we decided to, "Let's jump in and touch on DSOs a little bit more, dental service organizations."

Jarrod Bridgeman:
Obviously, anybody listening to this knows what it is, but it's corporate dentistry.

Casey Hiers:
Yeah. Dental service organization is the acronym, corporate dentistry. And we said, "You know what? There's people that love them, there's people that are indifferent, and there's people that dislike them."

Jarrod Bridgeman:
Right.

Casey Hiers:
"So why not just shake things up and hit a topic that someone's probably going to ... it's going to strike a nerve with."

Jarrod Bridgeman:
It's going to strike a nerve. And you probably know of one in your area-

Casey Hiers:
Well, it's an-

Jarrod Bridgeman:
... at least.

Casey Hiers:
... important topic because it's been more prevalent in especially the last 10, 15 years.

Jarrod Bridgeman:
Right.

Casey Hiers:
It's everywhere. You go to state dental meetings, and it's talked about, I mean, it's not just-

Jarrod Bridgeman:
Don't they usually have some kind of flashy booth?

Casey Hiers:
No. No, not necessarily. But it's not just some new thing coming. It's here.

Jarrod Bridgeman:
Yes.

Casey Hiers:
And so I think it's important for us to dive in and unpack it. We've been on both sides of the deals.

Jarrod Bridgeman:
Yep.

Casey Hiers:
Full disclosure, we try to help the ... We're entrepreneurial here. We like small businesses, we like practice owners. We want them to thrive and succeed. That's what we're here for. We're very upfront with that. But we've been on both sides of DSO transactions and have learned quite a bit about them, I'd say, over the last five or six years.

Jarrod Bridgeman:
Yep. Because for a while there was a bit of a mystique to it.

Casey Hiers:
Unfortunately, there still is. And that's why a lot of our presentation-

Jarrod Bridgeman:
It's why we're here.

Casey Hiers:
... is going to be important. We're not going to prop it up, and we're not going to trash it. We're just going to go through, very unemotionally, what we have seen through a national perspective of experience dealing with different wands. The first thing we always hear is, "Well, this one's different."

Jarrod Bridgeman:
Sure.

Casey Hiers:
Which then tells me, "Why do you even have to say that?"

Jarrod Bridgeman:
Yeah.

Casey Hiers:
There might've been a negative connotation.

Jarrod Bridgeman:
It's like your mom with her sixth boyfriend, "This one's different." Is it?

Casey Hiers:
Sure.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
But I'll hear that a lot. Right?

Jarrod Bridgeman:
Right.

Casey Hiers:
And so ultimately it's, "Let's peel the onion back from, you either love it, or you hate it, or it's different. You're already defending something. So that's an odd stance. Let's just get into the numbers and look at it." That's what we're going to do.

Jarrod Bridgeman:
Right.

Casey Hiers:
We're going to bring some objectivity to a lightning rod topic and get into some specifics.

Jarrod Bridgeman:
So, Casey, you've been in the trenches. You guys have been talking about this behind closed doors. Where do we start with this? Where's a good starting point for our listeners?

Casey Hiers:
Oh, it's that fun word everybody likes throwing around at a cocktail party after their second martini, "EBITDA."

Jarrod Bridgeman:
EBITDA.

Casey Hiers:
"Oh, look at me and my EBITDA." I even have friends who have different business ventures, and when I hear them say it, my first question is, "What does it stand for? What's the acronym?" And they can get halfway through, and then they just kind of start, "You know, EBITDA. You know, EBITDA."

Jarrod Bridgeman:
Start coughing.

Casey Hiers:
"EBITDA," It's like you can say-

Jarrod Bridgeman:
You can't use the definition of the word while you're defining it.

Casey Hiers:
That's-

Jarrod Bridgeman:
Right.

Casey Hiers:
You take the words out of my mouth.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
But that's what it starts with, and EBITDA is important. It's good to understand. We're going to unwrap that.

Jarrod Bridgeman:
What does EBITDA stand for?

Casey Hiers:
Well, this is earnings before interest, taxes, depreciation, and amortization.

Jarrod Bridgeman:
Okay.

Casey Hiers:
That's what it means. The earnings part, that's profit, revenues minus expenses, interest paid on loans and lines of credit, et cetera, taxes, any taxes practice pays excluding property and payroll tax, and depreciation. That's an accounting expense on taxes, Section 179.

Jarrod Bridgeman:
Yep.

Casey Hiers:
Amortization accounting expense, that's typically from an acquisition of the practice if purchased from another doctor. It's not really applicable if it's a startup. But that's high level earnings before interest, taxes, depreciation, amortization. It starts there.

Jarrod Bridgeman:
Man, that just rolls right off the tongue.

Casey Hiers:
I just like when people bring it up, like, you know-

Jarrod Bridgeman:
That's right.

Casey Hiers:
... friends and social settings. And I'm like, "Come on, dude. You're big-leaguing me here on my weekend, on stuff that I actually know about?"

Jarrod Bridgeman:
I'm trying to enjoy my whiskey here. Okay?

Casey Hiers:
Like, "Can we have ... " Yeah. "Come on, man." Anyway, EBITDA is important. If you're a business owner, it's good to know that. Here's why it starts there. Because what happens, just like with anything, "Ooh, wait. I can get six X, seven X, eight X, nine X, my EBITDA."

Jarrod Bridgeman:
Yeah.

Casey Hiers:
Okay, so that's kind of the starting point. I'm just going to give high level today on it, but that's the starting spot. Well, how about that magic calculator? "Well, my EBITDA is this, times 10 equals ... " And they see that big number, and they're just like, "Boom."

Jarrod Bridgeman:
Yeah,

Casey Hiers:
"That's it. My ticket has come in."

Jarrod Bridgeman:
That's right. Two tickets to paradise, right there.

Casey Hiers:
And listen, first off, anytime you're considering a DSO, it's a crossroads. That's putting it nicely. Unfortunately, it's a last resort for some.

Jarrod Bridgeman:
Yep.

Casey Hiers:
There are times when it is a strategic next step for a variety of reasons, but it is a crossroads. But that 10 X number that people like to punch into their magic calculator, here's a couple things on that. That's more in the past. Early on, when interest rates were lower, 10 X, much more common. I'd say it's closer to six to eight X. So that's-

Jarrod Bridgeman:
Ooh.

Casey Hiers:
... just, that's just-

Jarrod Bridgeman:
That's a dip.

Casey Hiers:
... at the start, if you actually know your EBITDA, looking at your financials, your taxes, and things of that nature.

Jarrod Bridgeman:
You've got to know a lot of numbers to know your EBITDA.

Casey Hiers:
They're right-

Jarrod Bridgeman:
That's part of the problem, too.

Casey Hiers:
They're right there-

Jarrod Bridgeman:
We've talked about-

Casey Hiers:
... on the documents that practice owners have. That being said, yes.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
I'd say a small percentage, maybe 30% actually know what the EBITDA is.

Jarrod Bridgeman:
Right.

Casey Hiers:
That's okay. You're a dentist or a specialist, and you won't bore people at a cocktail party. Anyway, but that's the first thing is now it's more like maybe six or eight X.

Jarrod Bridgeman:
Okay.

Casey Hiers:
So that 10 X, sure, there are always exceptions.

Jarrod Bridgeman:
Sure.

Casey Hiers:
But what we're trying to do is take a national perspective and generally cover a very complex topic. But what's your EBITDA? And then that six to eight X is more common now than that nine or 10 X. And interest rates have a big play in that, and it's become more saturated. Used to, they were a handful.

Jarrod Bridgeman:
Right.

Casey Hiers:
Now there are many, many, many, many, many more. And so that's something that a practice owner needs to be cautious of, is getting out the magic calculator, seeing a big number, and going all in.

Jarrod Bridgeman:
You could compare it to reselling something you own, something you thought was worth money. And I remember with my grandmother, what, years back, I'd be like, This is going to make me a big nerd, "This action figure is worth a hundred dollars." She's like, "It's only worth a hundred dollars if someone will pay that for you, you know, will pay that."

Casey Hiers:
Yeah.

Jarrod Bridgeman:
So-

Casey Hiers:
I think there's some similarity there. Right? I mean-

Jarrod Bridgeman:
So it makes me think of that whole years ago in college, I actually worked at a pawn shop. Loved that job, but people would come in and bring their stuff. And I would have to kind of guesstimate, "Here's what I think we can sell it for. I'm going to give you a third of what I think I can sell it for."

Casey Hiers:
Okay. I like the example of where you're taking this. The person with the thing they are pawning is worth a lot to them or potentially more than it is the business who's out to make a profit, i.e., the pawn shop, i.e., the DSO. They're in it for profit.

Jarrod Bridgeman:
Correct.

Casey Hiers:
And so what this leads into, again, typically if somebody actually knows the EBITDA, and does the magic calculator, and whatever, I would say we see it's 30% less.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
There are a lot of factors we're going to get into on a DSO calculation, but it can be 30% plus less than the practice owner thinks it is. So-

Jarrod Bridgeman:
A third less? Yeah. That's huge.

Casey Hiers:
So right off the jump, the excitement of seeing a big number, there are a lot of factors that play into this, the way things are structured, we get into that a little bit. What's up front? What's in a company stock? What gets paid out in long-term profitability bonuses, things like that.

Jarrod Bridgeman:
You have shareholder loans you're not aware of, all kinds of stuff.

Casey Hiers:
Well, that affects your EBITDA.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
Right? Because-

Jarrod Bridgeman:
Yeah.

Casey Hiers:
... you have to

Jarrod Bridgeman:
Account for it.

Casey Hiers:
Yes. There you go. So just at the jump, don't get blinded by the light. Don't get blinded by the big number, because there's a lot that goes into it. We're going to unpack that in what we're adding to our presentation, so people have a better understanding before going down the road. People may come to our event, and they're going to learn a lot more than just DSOs.

Jarrod Bridgeman:
Correct.

Casey Hiers:
However, they may come away going, "Okay, now I feel better educated on that, so I'm still going to sell out to a DSO or corporate dentistry, but maybe now I know what to look for, a couple of questions to ask."

Jarrod Bridgeman:
Knowledge is power. Having the information in your ammo won't hurt you. It's the opposite. People say, "Ignorance is bliss. Ha-ha." This is one of those cases where it's not.

Casey Hiers:
Well, a terrible outcome would be that you go down this path and then once you've finally learned and understand everything, the toothpaste is already out of the tube. It's almost too far down. And you're like, "Gosh, I wish I had known that."

Jarrod Bridgeman:
Yes.

Casey Hiers:
Now people are going to know that to maybe have those conversations before signing documents that are legally binding and all of those things. But-

Jarrod Bridgeman:
And if they're not the answers you're looking for, instead of wasting everybody's time, you can say, That's not for me now.

Casey Hiers:
Time and money are big resources.

Jarrod Bridgeman:
Yep.

Casey Hiers:
The reason people go down this route is for a big number. That's the money part. A lot of time can be put into this. So again, this can either help confirm, "Yes, I'm aware, and this is the route I want to go." Or, "Huh, I've not considered all of these things."

Jarrod Bridgeman:
Right.

Casey Hiers:
"Well, how do I make my practice better?" Well, that's the rest of our presentation is how we get into how to make your EBITDA better, not for cocktail party's sake or to sell to a DSO, but because you want a very profitable practice that's efficient on your terms.

Jarrod Bridgeman:
And you want more money in your pocket and in your bank account.

Casey Hiers:
Yep.

Jarrod Bridgeman:
Keep your spouse happy. Keep those kids happy.

Casey Hiers:
There you go. We're speaking at the Yankee Dental Congress later this month. We're not going to touch on this topic.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
We're going to stick to, well, the presentation we sent them-

Jarrod Bridgeman:
The fundamentals.

Casey Hiers:
... months ago. And yes, those fundamentals, again, the sports analogy, the fundamentals in sports do not change. You must master those before becoming an advanced player.

Jarrod Bridgeman:
Right.

Casey Hiers:
End up as a practice owner, unless you're okay being on the hamster wheel making and saving not very much, and being stressed out, the industry's not what you want. If you want to achieve something, the fundamentals must be executed.

Jarrod Bridgeman:
Yeah. That makes me think. I just wanted to bring this up. Last weekend, I had to fill in and coach my seven-year-old son's basketball team, and I'm undefeated as a head coach in basketball.

Casey Hiers:
Look at you.

Jarrod Bridgeman:
Just want to put that out there.

Casey Hiers:
Can-

Jarrod Bridgeman:
If any colleges want to hire me-

Casey Hiers:
... any-

Jarrod Bridgeman:
... and pay me a couple of mil.

Casey Hiers:
Now, did they have officials?

Jarrod Bridgeman:
It was, and the other coach-

Casey Hiers:
Well, I'll say that-

Jarrod Bridgeman:
... from the other team.

Casey Hiers:
Did you get along with the other coach?

Jarrod Bridgeman:
We did. I mean, I may have tripped his kids on, "accident," a few times, but yeah.

Casey Hiers:
Yeah.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
Did some dirty pool?

Jarrod Bridgeman:
This is all very fascinating because you and I sit here and we've talked, and I'm very aware of what DSOs are. And even I, in my infinite wisdom here, didn't know even some of this now. It's really great to see these numbers put into place. Besides coming to one of our events, which we're coming to a lot of areas this year, you really should come. Not only are you going to learn a lot of good, I'm going to say good shit, you're also going to have a good time with your peers. There's food. There's usually bourbon involved. If you don't drink, we've got all kinds of sodas, I'm assuming.

Casey Hiers:
Hey, mocktails are all the rage.

Jarrod Bridgeman:
Mocktails. Yeah, I do mocktails.

Casey Hiers:
No, we put on nice events. People are going to have a good evening regardless, and typically learn a little something.

Jarrod Bridgeman:
But this is one of those times that I think you're going to walk away with information that is, as we often say, not tied emotionally. If you go and talk to a DSO, yeah, they're going to talk up their own stuff and tell you that they're here to pave your roads with gold or whatever the case may.

Casey Hiers:
Well, and like we've said, our business model, we can't help everybody. We're not a volume shop. Our idea is to educate the dental community, turn that into action, and we'll help some people along the way if it's a right fit. But I mean, we talked to somebody recently, again, they were pretty convinced that the DSO route was where they wanted to go, and by the end of some basic conversations, they went, "Oh my gosh, I can't believe I almost did that." Now that being said, we have also had clients who we help them sell to a DSO because in their unique situation where you're a custom firm, that was the best option. And so when I say both sides of it, we are on both sides of it. We have seen this from both lenses, not just one.

Jarrod Bridgeman:
Right. Yeah. How many times have you spoken to maybe a retired dentist or somebody along those lines who sold to a DSO and said, "Damn, I wish I had met you guys well before." I'm assuming it kind of happens a decent amount.

Casey Hiers:
Yeah, that happens a lot. People that they've retired, they go to an event and they go, "Wow, I wish I would've had someone like you helping me during my career. Take the DSO out of it." Or, "Huh, I didn't know there were other options. I thought I just was sort of- "

Jarrod Bridgeman:
This is it.

Casey Hiers:
" ... last resort sort of thing."

Jarrod Bridgeman:
Casey, thank you so much for coming today. Again, if you folks want to hear more about this topic, as well as all the fundamentals and things that really need to be strengthened in practices, again, we're going to be all over the country. Go to fourquadrantsadvisory.com/events. Check us out there. If you have a friend who's also a practice owner or an associate, whatever, send them a link. Let them know we're here. Pass them the podcast, give us some reviews, anything you can do to help yourself and your family and your friends, that would be great. Casey, I know you're excited about going to Fort Myers soon. Get out of the snow.

Casey Hiers:
Yeah.

Jarrod Bridgeman:
Yeah.

Casey Hiers:
Yeah. It's going to be a nice little tease, there, a couple of days in and out, though. I'm not extending my trip.

Jarrod Bridgeman:
No, not too much.

Casey Hiers:
I've got some-

Jarrod Bridgeman:
Come back a month later.

Casey Hiers:
I've got to help coach some youth basketball.

Jarrod Bridgeman:
Yeah, we're the coach twins.

Casey Hiers:
Go over the fundamentals.

Jarrod Bridgeman:
That's right. Thanks, Casey.

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.