Author’s Disclaimer: The future has not yet happened. Anything is possible. My view of the future might be wrong, but then again, I might be right. This is just how I see it unfolding. You can either thoughtfully consider this content or immediately discard it. I am not the gatekeeper of your thoughts.
THE POST-COVID-19 FUTURE
In the post-COVID-19 future, the number of solo and small group practices that will be acquired by DSOs will dramatically increase. Why? Because several elements are coming together to create a perfect storm.
The negotiable value of solo and small group practices will sharply decline over the next two years. The negotiable value, what the practice is worth in the marketplace, is based on EBITDA. EBITDA, or earnings before interest, taxes, depreciation and amortization, is a measure of a company's overall financial performance and is used as an alternative to simple earnings or net income. EBITDA, however, can be misleading because it strips out the cost of capital investments like property and equipment. EBITDA is therefore basically cash flow.
Several predictive models now available show solo and small group practices suffering an estimated loss of 60 percent of revenues for the remainder of 2020, and a 30 percent loss in 2021.
An excellent cash business will no longer exist. Whatever cash is generated will go back into the practice to keep the practice and the doctor-owner alive. In addition to dropping revenues, expenses will markedly increase.
There will be a significant need for safety equipment, which will require additional money, along with senior personnel, to manage the inventory and usage. A responsible party that oversees new OSHA regulations, which I am sure are coming soon – must be installed in the future.
Air filters, PPE, masks, shields, gloves, new sterility and safety protocols, staggered schedules, spray catchers, pulse oximeters, l thermometers, bonnets, booties, teledentistry, special areas in your parking areas, and on and on, will significantly increase expenses.
With the implementation of staggered appointments, there will be less time for clinical delivery since fewer patients will be seen per hour. Time will increase per patient to accommodate the extra steps to screen and prep patients and operatories. Plus, added time will be necessary to get your team readied and safety checked each day. This added time is not billable. People. 3rd parties and government pay for procedures, not time.
What also absolutely will be required is a formidable digital strategy. This will cost even more money – money to hire the right people, people with deep experience in generating and managing a holistic digital approach. Professionals who will be responsible for the strategy’s implementation and performance will be needed.
The digital strategy can be outsourced at first but given the constant data streams that will require continuous supply, it will shortly be less expensive to bring this expertise inside relatively soon, but still another major salary added to the mix.
Less clinical and administrative staff will be necessary due to a decrease in patient volume. And large cosmetic and restorative cases most likely will be delayed or canceled because patients will be worried about their money. With unemployment hovering in the double digits, there will be loss of employee linked dental insurance.
The staff will need to have a strong behavior style that does well in relationships and communication which will increase trust with each other and the patients. This will require a higher order of maturity and professionalism. These hires will cost more, given the quality and skills of the people the practice now needs. Even though you might have less staff, you might have higher staff costs.
This is a lot, maybe too much, for a solo practitioner and small group practice to handle. Besides they have deliver the clinical care because the money is generated in the operatory.
THE STATE OF THE PRACTICE
The larger DSOs, backed by professional organizations such as the ADSO, have strong relationships with the capital markets. They have channels to money that are far deeper and wider than solo practice owners have with their banks. They have access to the capital to make an offer to solo or small group practices that would tremendously lighten the load for these stress-out owners.
As stated above, it is obvious the negotiable value of solo and small group practices will decline in 2020 and 2021. Bills, leases, mortgage payments, loans, taxes and salaries will become harder and harder to pay. Now add student loan debt to the younger generation of a dentist-owner. Pile on the personal income for the dentist-owner will take a major hit. It feels like an ever-tightening squeeze.
THE DSO PLAYBOOK – LEVERAGED BUYOUTS
Acquiring practices under these circumstances and conditions will be far easier than ever before. These acquisitions will be based on a buyout structure where little risk and liability shifts to the DSO. The dentist-owner-seller gets much of the strain and stress off their back – immediate debt relief, sufficient personal income, a greater sense of security along with a proven support system. But in this deal the seller also assume a great chunk of the future risk.
A buyout transaction is when a DSO procures shares of a practice to acquire a controlling interest or all assets of the practice. A leveraged buyout (LBO) occurs when the DSO purchases a practice using almost entirely debt.
The purchaser secures that debt with the assets of the company they're acquiring, and it (the company being acquired) assumes some or much of that debt.
The purchaser puts up a minimal amount of equity as part of their purchase. Typically, the ratio of an LBO purchase is 90% debt to 10% equity. That is, if the purchaser is buying a practice for $1million, they would borrow or get funded for $900,000 and then pay the $100,000 from their own cash.
It is straight forward. A buyout occurs when the purchaser believes a dental practice is undervalued, which many will be, and can become better valued under the DSO’s ownership. The DSO, with its strong cash position, proven management systems, executive talent, and recognized leadership, can bring both immediate relief to the dentist owner as well as better future than they’d have alone.
The perfect storm is arising. You can see it coming onshore. With ever-expanding issues and damaging emotions occurring for dentist-owners of solo or small group practices, sparked by the ever increasing complexity, chronic uncertainty, accelerating expenses, far less revenues - all heightened by significant losses in personal income, will alter how a practice-owner till now view a DSO. The dentist-owners’ state of being will be fragile. A DSO will be able to address their needs and soothe their anxiety with much less risk then they had in the past. Thus, the perfect storm.
Note – On the other side of the coin, DSO's will need to change who they are to be able to deliver the support these practices will need to succeed. A DSOs resources center has to become much more than it is now.
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