From Fraud and Failure to Double-Digit Exit Multiples, Dykema Reminds Us All How Far the DSO Economy Has Come in Recent Decades.
Those who braved the summer heat of New Orleans to attend Dykema’s 4th Annual Definitive Conference for DSOs earlier this month left well informed about our ever-changing DSO economy.
Brian A. Colao (Director of Dykema’s DSO Industry Group, and his industry leading team hosted over 400 attendees to a 2-day information-packed survey of the DSO market. This conference had a markedly different feel than most that we have attended this year – it had both a reflective perspective from Colao reminding the audience how the DSO economy has evolved in recent decades as well as the feel of a Survey Class of the current market with profiles of 2 of the largest names in the space: Craig Abramowitz (co-CEO of Dental Care Alliance) and Dr. Sulman Ahmed (Founder and CEO of Deca Dental).
Overview of Event
Dykema did a remarkable job of collecting speakers from around the nation with differing ideas, business models and perspectives to offer up their insights and ideas on the DSO / Group Practice space.
The 2 days included the following: a DSO CEO Roundtable and a lively discussion about alternative DSO structures with Dr. Scott Leune, Founder and CEO, Breakaway Practice and David Lopez, Co-Founder, Tralongo LLC, along with information sessions on:
- Insurance reimbursements
- Accounting issues facing DSOs
- Bankruptcy issues in the space
- Operating efficiencies for DSOs
- Employment and HR considerations for owners
- New DSO growth in the emerging markets in Canada
- Legal compliance for Groups / DSOs
- Building a solid hygiene business inside of your business
On Day 1, I joined other M&A Specialists for a panel discussion on Mergers and Acquisition Trends in the space and on Day 2, I hosted a breakout session on Financing the Growth of Your DSO. If you would like a copy of the slides from that presentation you can find them here:
Although all the presentations and round table discussions were informative and insightful, the highlights for me included Brian Colao’s kick off presentation title “A Short History of the DSO Universe” and the CEO Roundtable that began the conference.
Modern DSO Economy: How Did We Get Here?
Brian Colao kicked off Day 1 with a walk down memory lane to remind us all of the evolution of the DSO industry in recent decades. Both entertaining and informative, Colao set the Way Back Machine to the late 1980’s when Orthodontic Centers of America (OCA) came onto the scene rolling up orthodontic practices at a rapid pace without checking with the regulators beforehand. He dubbed this time DSO 1.0: OCA was a profit-first business charging its practice owners 18-22% Management Fees while offering virtually no services in return. Despite the obvious issues with this business model, the company was taken public in 1994, then had dozens of lawsuits filed against them by their affiliated doctors along with a class action law suit brought against them by shareholders in June of 2005, where the CFO was sentenced to 3 years in prison for falsifying records and illegally inflating revenues of the company. Finally, the company was delisted in 2006 and the company filed for Chapter 11 later that year. Needless to say, the DSO world did not start well.
Colao continued the story of evolution with DSO 2.0 in the 2000’s: DSOs with a “friendly doctor” relationship. These businesses typically relied on a “friendly dentist” to act as a straw man owner of dental intangible assets (charts and records, etc.) to operate. Although this was a more doctor-friendly time, these businesses were often not regulatory compliant and as a result left a wake of State Dental Boards and other regulators filing lawsuits and DSOs adding a new line item on their income statements for “Political Action”.
Personally, I remember this time all too well. I was working for the McGill & Hill Group when we brokered the first North Carolina practice to Heartland Dental Care that caused the NC Dental Board to attempt to block DSOs from entering the state and led the Executive Director of the N.C. Dental Society Dr. Alec Parker to call the DSO ownership model an example of the “slow and insidious creep of corporations into the doctor-patient relationship.” A couple of years later, while working at Affordable Care Inc., I was in the car with my CEO, Doug Brown, while he was on a conference call with fellow DSO owners to launch the largest Political Action Committee (PAC) in the state of NC to fight for their collective right to continue to operate their businesses in the state.
While these battles still rage on in many states, Brian reminded us that a new regulatory compliant business model has emerged: DSO 3.0.
These are the new breed of DSOs – regulatory compliant, value additive and growing. Many of the attendees in the room fit this new model and it’s the model of the future. I do not think for a minute that the evolution of this industry is complete, but rather is on more solid footing to continue to grow and expand in the years to come.
Do What You Love
Following Brian’s walk down memory lane, he hosted 2 of the largest names in the DSO space: Dr. Craig Abramowitz (co-CEO of Dental Care Alliance)and Dr. Sulman Ahmed (Founder and CEO Deca Dental) for a roundtable discussion. Abramowitz is a seasoned executive in the space. He built NE Dental Management from 6 to 29 practices and $65MM in revenue before selling to the Private Equity Group (PEG) Sentinel Partners, then merged this business with Dental Care Alliance. He has worked with several PEGs in his career and seen the maturity of our industry from the front row. Ahmed is the poster boy for what a lot of emerging groups hope to become, having built a standardized, scalable de novo model that is “completely choreographed in every facet” (think: Ray Crock meets dentistry) and is credited with the highest valuation of any DSO upon the sale of his business to Blue Sea Capital in the summer of 2015 (estimated Enterprise Value of over 18x EBITDA).
Calao pushed the CEOs to reflect on why they sold to PE when they did. The answers were simple: “I realized that I was undercapitalized to achieved what I wanted to accomplish” (Abramowitz). Ahmed’s response was similar: he was growing at 7-8 locations per year and wanted to grow at 25 locations per year, but was undercapitalized to achieve this dream. Notice how both of these CEOs were looking for financial partners - not exit strategies. They stressed that PEGs need to be seen as partners and investors in your business. Abramowitz informed the audience that he “left a lot of money on the table by not taking the highest offer,” but instead took the offer from the better partner.
I think all too often emerging groups and new entrants to the DSO world view PEGs as the exit strategy when in fact it is quite the opposite. It is the beginning of a new chapter of the business – a chapter that will require more focus, attention to detail and a desperate desire for rapid growth. Although many in the room have built their businesses with the hopes of obtaining the double-digit multiple, Abramowitz and Ahmed reminded everyone that although the money is great, they both love what they are building and are proud of the results to date. This above all else is their driving force.
We Know the Past, But Will We Learn from It?
As I hopped in my Uber heading back to the airport, I reflected on how much has changed in the dental economy since my father opened his pediatric practice in 1976 in Montgomery, AL. During that time close to 100% of all dentists worked as solo practitioners; today that number hovers somewhere around 80% and is shrinking yearly.
Although DSOs had a rocky start back in the 80’s they have matured and evolved over time into the businesses they are today. The leaders in our industry are not just working hard to put more money on the bottom line but also to build strong cultures that elevate patient care through strong dentist relationships. DSOs have access to more capital than ever before and are building alliances and relationships to share knowledge and best practices across with fellow DSO owners. Founders and CEOs are speaking about their responsibilities to their doctors and are providing solutions to meet the new graduates high debt burden and the new business culture demands of Millennials.
I was sharing all of this with my father last weekend during a trip to Asheville and although I believe that he longs for the way things were, he admitted to me that the DSO model “is the future and everyone better get prepared for it.” I could not agree more. For those of you lucky enough to be at the Dykema event earlier this month you are more prepared than most.
References
To read more on the Orthodontic Centers of America (OCA) scandal see the links below:
- The Early History of OCA
- A glowing history of the business before the fall from grace from Funding Universe
- An early report from Forbes on the “fuzzy numbers” with a random reference to Warren Buffet (twice) for some reason
- Brief summary of the lawsuit against OCA
- Impact and outcomes:
- The announcement of the delisting of OCA from Business Wire
- Sentencing of the CFO, Bartholomew Frank Palmisano, Jr.
- Legal Ramifications to Management
To learn more about Dykema
- Summary of Dykema’s DSO Legal Work and Team
- Link to the Agenda for Dykem’s 4th Annual Definitive Conference for DSOs
