The Transition Advisor's Corner - Random Musings from the Front
The Transition Advisor's Corner - Random Musings from the Front
The purpose of this blog is to share current, real world, experiences on the topics of practice valuation, practice transition, retirement planning, and building equity value - over time - in your dental practice.
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seanepp
seanepp

Keep It Simple Stupid (KISS)

Keep It Simple Stupid (KISS)

9/28/2026 11:41:00 AM   |   Comments: 0   |   Views: 20
We are amid yet another group dental economy evolution. 

While the debt monkey remains the seemingly obvious issue, an equal and potentially greater challenge is the proliferation of wildly complex and overengineered platform structures.  The term DSO has expanded to include DMO, DPO, MSO, JVs, Hybrid, ___, etc.  Simply “groups”, to me.

This has less to do with fundamentals than it does marketing optics and a historically low return environment for group practices.  While this started prior to COVID, COVID served as a powerful accelerant.

The most common elements of the newer group models seem to be i) a relatively “integration-light” approach, and ii) an often capital-light balance sheet.  In response to higher interest rates and lower overall credit availability, many groups have taken to creating increasingly complicated deal structures to eke out that Nth degree of financial return.  This is usually the beginning of the end of most industry cycles. 

Today, the group sector can be broadly characterized by excessive leverage, growth for growth’s sake, and overly aggressive projection models with little to no prior experience or outcomes to reliably support them.  Why?  Because dentistry is part of retail healthcare and still carries superior margin opportunities when compared to other verticals.  Also, you can very intentionally manage your exposure to publicly funded care.

At the doctor-to-doctor level, an increasingly common theme is to use group-style valuation techniques on one-off practices.  This is categorically unfair to any new partners considering buying in.  The only fair way to structure such transactions is a traditional – i.e. non-group - valuation.  Then, all partners can equally and equitably participate in a subsequent growth and future sale or recapitalization of the practice(s) down the road.  Otherwise, you’re taking advantage of your new partner(s) by asking them to pay for value that simply does not currently exist today.

Group auctions are stalling and failing across the country.  Outright sales have been shelved in favor of preferred stock issuances and/or debt restructurings.  Many holders of “junior equity” interests have come to realize just how illiquid their paper is.  Many dentists are experiencing low to no liquidity on their JV or hybrid interests upon recent “recaps”.  Regardless of what the operating agreements say, the new buyer is the one that actually controls this dynamic.  Please remember that.  They are trying to protect their prospective investment, and they will be laser-focused on de-risking all things doctors-facing as much as they possibly can.  This often starts and ends with i) limiting liquidity options for doctors, and/or ii) asking the doctors to extend employment commitments.

The most important point to remember is that the COVID era is one characterized by historically low sector performance.  Many new platform investments are being underwritten as low as 2.0x cash on cash, with hopes of bluer skies and an improved credit market.  If someone is suggesting a return opportunity that exceeds that, it simply warrants proper due diligence to analyze their assertions.  Financial "models" have become more spurious than ever in the current environment.  At the end of the day, that’s just playing games in Excel.

If something feels overly complex… 

Ideally, you want your ownership interests at the top of the equity stack, not the bottom.  The bottom is where the worst dilution and other shenanigans can occur.  Below the parent entity or “TopCo” is where rights and preferences of shareholders tend to fall off a cliff.  TopCo models offer better diversification for the doctors, they eliminate a variety of conflicts that naturally arise in more complicated structures, and they allow the platform to point its capital at the best investment opportunities, which may or may not be among their currently supported practices.

One thing I've yet to hear a doctor say when reviewing a group offer over the last several years is, "Wow, that was clean and easy to understand."  

Best,

Sean
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