Episode Transcript
[00:00:00] Speaker A: A dentist produced $2 million last year, sold his practice for 3 million. Should be a great story.
It's not.
By the time he paid off debt, settled up with the IRS, and covered everything else involved in the sale, he walked away with about $600,000 in actual cash.
He still shows up every day, still deals with the team issues, still still runs the practice.
The only thing that changed is he no longer owns it.
T bone, what did that dentist actually sell?
[00:00:38] Speaker B: What he sold was his cash flow, his lifeline and all of that because honestly, he didn't check or understand exactly what the sale meant when he was selling to the group.
[00:00:54] Speaker A: Right. And I think that's the part most dentists never actually see spelled out.
So let's make sure the listener really feels this number.
Take me through the math on that three million dollar deal line by line.
Where does the money actually go before that dentist sees a dollar?
[00:01:14] Speaker B: Yeah, let's walk through this. Let's understand this. And this math is regardless of whether you're selling through a dso, whether you're selling to a private sale, and I want to be clear, I'm DSOs, that's not what this episode is about. What I am for is people understanding the realities of what's actually happening in the market. So let's go through the math. I got a practice that's producing the listener that the person that talked to me has a practice that's producing $2 million.
First question you should be asking is how did you get to a three million dollar sale? And that's where this, I call it funny math comes in when it comes to dental practice sales.
So number one, that $2 million produces a profit in the PE world or the DSO world, they convert that to what's called an EBITDA. EBITDA. And what that basically is, is profit. You know, before you pay off debt and different things, before taxes, depreciation and amortization.
And basically in this scenario, this dentist had a profit practice, EBITDA of around $800,000. Okay, on this $2 million.
Now that $800,000 gave him. Sorry, that $800,000 was used as a multiplier.
So the multiplier they had in this particular case was somewhere in the 7, you know, 6 1/2 to 7x ballpark. So that made his enterprise value, the sale value, around $3 million.
So that's how we came up with. That's how this particular deal had the sale price of $3 million. Now, so regardless of how you come up with the number, whether it's 2 million or 3 million, that's the sale price.
Now, in a traditional practice sale, when you sell your practice, you actually sell 100% of your practice. In other words, if I sell it to you for 3 million, you give me 3 million, I walk away with 3. $3 million on the sheet. And we'll get through how that math goes through here in a moment. In a typical private Equity or a DSO or a group sale, you're actually selling 100% of your practice, but you're not getting 100% of your money. In this particular deal, it was what termed a 60:40 split.
So the seller got a 60% of the money, quote, unquote, upfront, and he retained 40% ownership, quote, unquote equity, which is not really equity as you listen to this episode in the practice. Okay? And this is sold on as a. It's a partnership model. We're in this together. And the real sell here is going to be what they call a second bite down the road. So we got a $3 million sale. In this particular case, it's a 6040 split. So the dentist is owed 60% of $3 million. Let's call it $1.8 million in this particular case. So the dent getting a check for $1.8 million. But here's the reality. In any sale, when you sell something, you have to pay off all the debt. So in this particular case, you pay off the debt. Any equipment, any original practice loan, any, you know, lines of credit, anything you had on the practice, all of that has to get taken care of. So let's pretend in this particular case, that was around $800,000. So that comes off the $1.8 million. Now we have a million dollars left. Now, of that million dol, there's still some other expenses that need to go into. There's probably some legal fees, various fees, all these different things that go into selling a practice. Let's call that negligible $50,000. But it still adds up. So now we're at 950 of cash due to the owner. Now the owner gets a $950,000 check, but he still owes Uncle Sam capital gains and state income tax. Let's pretend this person lives in North Carolina. Capital gains, state income tax is work out to be about 30%.
So the dentist owes Uncle Sam roughly $300,000 of this money lacked. So really, essentially this dentist, after all said and done, sold his practice and ended up with a check that he could deposit for about $600,000.
[00:05:45] Speaker A: Okay, so hold on I want to make sure the listener really sits with that number.
You started at 3 million.
That's the headline. That's what he told his wife, that's what he told his friends. And after debt payoff, transaction costs and taxes, he's holding a check for $600,000.
That's roughly 20 cents on the dollar, but he still has that 40% retained equity.
Walk me through why that's not the safety net most dentists think it is.
[00:06:20] Speaker B: Well, it could be, but it's mostly not. And let's understand that. So now I've got a check. I keep saying I, it's not me, but I'll use me. I've got a check for $600,000 and I've got 40% left. And so what the groups, the PE, the DSOs, what the brokers are telling you that 40% is going to be worth $3 million when the group goes to sell. And you're going to walk away having sold it for 3 million plus 3 million, 6 million of which you only got 600 up front. And then you're going to sell for 3 million down the road. But here's the reality that 40% that you retain, it's stock, it's not real equity. Because if it were real equity, you would still get 40% of the profits that are in the organization, in the practice at the end of the year. So that practice, that was making $800,000 a year, you should be getting 40% of that or $300,000 a year. But the reality is, is most deals, not all deals, but most deals, vast majority of the deals are structured where you sell 100%, you give away all the profits, that cash flow, all the distribution rights, all of that, you're left holding 40% in equity, which is really probably only stock.
And you're a subordinate on this. You're not even a primary. And I'll get, as you asked me some more questions. But now they're selling you on the second bite of the apple, and it's not what it was. And so in the mid 2010s, these second bites were actually materializing 7, 8 out of 10 times. Now in 2026, these second bites have only been materializing 1 or 2 out of 10 times. And they're materializing with a lot of strings attached to them. And I need dentists. Again, I'm not against dso, not against selling your practice. In fact, there may be times where you should sell your practice. But I want us to understand that selling your practice is oftentimes not what you think it's going to be.
[00:08:35] Speaker A: And that shift, 7 or 8 out of 10 second bites materializing down to 1 or 2 out of 10, that's a massive change in the odds.
But before we get to who should and shouldn't sell, I want to stay on this structure for one more minute. You mentioned being subordinate that the 40% isn't even a primary position. You use the term preferential equity. Walk me through what that actually means because most dentists have never heard that term. And I think it changes everything about how you look at that retained stake.
[00:09:08] Speaker B: So think about it like, let's think about you own a house, okay? You go and borrow from a, let's call it a Bank of America. You buy a million dollar house, you go and borrow $800,000. Ten years later you borrow some more money again. But this time instead of him borrowing from bank of America, you borrow from Wells Fargo. That Wells Fargo takes a secondary position.
So in other words, Wells Fargo, if something were to ever happen, won't see what they lent you until bank of America, the primary is made whole. So oftentimes in a lot of these DSO private equity deals, when you hold 40% equity, number one, it's in what the practice level. So in other words, it's only in your practice, not in the entire group. That's how most deals are structured. And then the money has to flow down to the practice. There has to be money left over to flow down to the practice so that there is money to give you. So before the money can flow down, there has to be preferential equity. In other words, the people that put the money in, they want to say, hey, we got to get paid first. We got to get paid our interest, you know, if we collected money or not money, we got to get that along the way. If they ended up borrowing more money, they got to pay those debts off along the way. If they renegotiated things, all those things have to be paid off and made whole first. And then the individual dentist at the practice level, then they are made whole with whatever is left over, divvied out over how many ever practices and what order they were bought in and everything. It's, it's honestly, it is convoluted.
I'm trying to simplify it, but it's a convoluted. Oftentimes a scheme in which the individual dentist at the practice level, more often than not today, is not realizing the second bite. The other thing that dentists don't Understand is this 40% ownership that you Retain, it's really a stock. But unlike a stock in the stock market that you can go on Charles Schwab or Fidelity or Robinhood or wherever and sell, because there's a marketplace that's actively buying or selling these stocks. There is no marketplace for minority ownership. In a dental practice, there's no one to buy your 40%. So if something were to happen to you, your family's at the mercy of when this transaction goes to sale, if it goes to sale, if suddenly you say you want to walk away, there is nothing to sell. You literally just walk away.
And that 40%. And in the early days, the groups were doing 9010 deals where it was a 10% deal, you know, 10%. And a lot of dentists were willing to walk away for 10% or 20%. But the DSOs have gotten smart because they realized if the carrot wasn't big enough, the dentist, the donkey, the mule that's doing all the dentistry, would leave. And so they started moving to a 70, 30 split now to a 60, 40 split oftentimes. And so what this means is they're creating these handcuffs or this noose around you that makes it very difficult to leave because you're like, hey, I've got too much left in this for me to just walk away.
[00:12:29] Speaker A: So you're essentially illiquid. You can't sell that 40% to anyone. You just wait. And if the group never sells or goes under, that stake is worth nothing. I know of a situation.
A dentist producing $1.4 million sold to a DSO couldn't hit his earn out metrics and then watch the whole group go bankrupt.
What does that story tell you about the risk most dentists aren't pricing in when they look at these deals?
[00:12:59] Speaker B: Honestly, what that tells me is they think DSOs are run completely different from private practice. Here's the reality.
DSOs face the same operational pressures that we as private dentists face. You know, many of us, many of the people I talk to, they get stressed out. They're dealing with, you know, team challenges, profit challenges, insurance challenges. They're getting a little more tired, all of these things. And they say, hey, you know what, let me just sell to somebody. They'll run it better than me because they're a quote, unquote, business person.
And when you realize, if you look behind the curtain and many of these PE things are being run by 20 something or 30 somethings with minimal experience, they're just being, I like to call them bean counters. And I want to be clear. Again, not all Groups are run this way. I can list dozens and dozens of groups that actually mature, that understand how to operationally run practices. But these are the names that you've been hearing for. For decades or longer. You know, they've been doing this. They're not transacting where they're trying to roll up and sell and sell and sell and having somebody hold the bag. There's a difference in being a practice aggregator, where you're going to go buy 10, 20, 30 practices, bundle them together, and go sell it to somebody else. What these people have found, or the people that were doing that, is there's no buyer for these right now because interest rates are high, profits being squeezed, just like it's being squeezed for the individual person. The dso, those are facing the same thing. And now these groups are being left to run something that they never intended to run and that they're ill equipped to run. And this is where that dentist likely fell into. He got in with a group that was not mature, that had a different game plan, and then had to pivot, and they weren't ready to pivot, didn't have the infrastructure, or they overbuilt the infrastructure, had so much overhead. Because you also have to think about these DSOs. They often have, you know, just like any bureaucracy, layer upon layer upon layer, and somebody at the top's got to get paid a lot of money, and somebody along the way has got to get paid a lot of money. And there's just layers of people, you know, and. And that turns into overhead if you're not large enough and if you're not actually performing. And so I feel sorry for that dentist that ran into that. But that is one of the challenges you have to keep in mind when you're vetting the group that you're considering selling to.
[00:15:36] Speaker A: That's a critical point. Vetting the group matters enormously. But I want to pull on something you said, you mentioned the dentist who sells because they're tired, because they think someone else will run it better.
That's not a financial decision. That's an emotional one. And I think that's where the real trap is. You've almost sold three times yourself. 2006, 2017, 20, 21. Walk me through those.
What stopped you each time?
[00:16:06] Speaker B: Yeah, you know, 2006 was probably a little bit different than 17 and 21. 2006, I was considering moving from North Carolina. And, you know, I went through the exercise of selling and, you know, part of it was also I was. You know, I wasn't. I was. Wasn't equipped to operate my practice at the time.
I wasn't doing as well as I would like. I was did all the different things. And so we went through. I went through the exercise considering selling at the time. You know, luckily, I didn't go through with the sale. I ended up not moving somewhere anyway because if I had sold that practice, I would end up being working for somebody. It would be their practice, their rules, their things. And for sure, in 2006, I was definitively not in the mindset to be somebody's employee. 2017, at that point, you know, I become serious about trying to sell my practice. Everybody I talked to was selling the practice. It was DSO everywhere. It was the heyday of being early in a dso.
And I went through the process of getting evaluated. And what I learned was that my practice had a lot of gaps in it. And I looked at that time, it didn't make economic sense to sell. There wasn't as much to sell at that time. I looked at it as a learning lesson to find out how they evaluate practices and what I need to improve, what levers and things I got to improve to help boost the value. And then I went through 2021, and that's the closest I became post pandemic. It was a feeding frenzy. People were buying practices left and right. The valuations were high, the promises were super high of what all these practices are going to be worth. The second bite, I even heard third bite, you know, come across my desk.
And that one I ended up not selling for various reasons. And looking back, I'm glad I didn't sell because things that were promised didn't materialize. And honestly, my practice is in a much stronger position.
I'm in a stronger position because each time I've learned, each time I've gone to the grind and improved things, and I've gotten a better understanding of what it takes to run a business through the process.
[00:18:30] Speaker A: So each time you didn't sell, your practice got stronger. That's not a coincidence. But here's the pushback I want to give you, because a dentist listening right now who got a cold call last week. The number sounds good. He's been running this thing for 12 years. He's exhausted.
He's not thinking about 2006 or 2017. He's thinking about right now. And you said something earlier that I keep coming back to. You said some dentists absolutely should sell.
Who is that dentist? And more importantly, who's the one you lose sleep over when they call you?
[00:19:09] Speaker B: Yeah. So off the top of my head. I can think of three dentists that should be serious about selling.
Number one is you're a group already.
You know, you're four, five, six, seven practices in, you can't borrow from the bank anymore. You built it as far as you can take it. You're like, hey, you know what, I need to take some chips off the table. I need to sell, I need to cash out some things. I need to join a bigger organization that can help me take it to another level. Because they have some economic help, they have some operational help. That person should absolutely consider selling. The second person I think of is probably the close to retirement dentist. You know, I think gone are the days waiting till you're 65 or 70 to sell. I think probably the ideal time is 55. 60 is probably the time that you're thinking about retirement. You want to maximize your values. Because the reality is most dentists don't necessarily improve their practice revenue or bottom line. As they get a little bit older towards the end, they kind of coast. So those practices should consider selling their practice. Whether that's to a group, whether that's to a private sale or ideally what I would like that person to consider is doing a multi transaction where they sell a portion of the practice a few times, depending on the size of it over time to maximize their value. But that person getting closer to that five to seven year ballpark, wanting to get out, that's probably the best time to consider selling versus waiting till you're actually ready to sell. And the third dentist, the one I'm concerned about, that's the dentist who basically has a job, they own a practice, but there's no operating margin. In fact, they're probably negative operating margin because they can't, the practice can't afford to pay them. Their actual, their pay is 30% of, of their own collection. So this practice, if it were a true business, would actually be losing money as a business.
That dentist should consider selling because clearly there's something lacking there in terms of being able to run the practice. Now I worry about that because I think they're making the emotional decision to sell their practice versus putting their head in the grind and really working hard to turn around the practice. And I've talked about practice turnaround here on the podcast before, but that's kind of where I was at multiple points in my career is needing to do a turnaround. And I could easily considered selling and being like, not my headache anymore. But the reality is is it would likely have been my headache. And if I Had sold, I wouldn't have improved as a, as a, as an owner and I wouldn't have built the practice that I have today. And I would have left so much money on the table from an earning potential, from a freedom potential, from being able to call the shots potential. I just, in my opinion, it's not always worth it just because you're emotionally tired or things aren't great at this moment. It's certainly an important thing to consider and an exercise to go through, but that's the person I'm most worried about that considers selling.
[00:22:31] Speaker A: That third Dennis, the one with no operating margin, who owns a job, not a practice, that's the one who looks at a DSO offer and feels relief, not excitement, relief. And that's a red flag, not a green light. You mentioned greed earlier as a culprit in all of this and I want to push on that because you pointed at the both sides of the table. What does greed look like on the dentist side?
[00:22:58] Speaker B: That's a great question because, you know, it's easy to Frame this as DSOs are evil and they're not.
At the end of the day, they're doing exactly what they say they're going to do. They're going to enter an industry, they're going to maximize return and then they're going to exit. That's what private equities do. And I want to real quick distinguish between private equity and DSOs. They're often intertwined, but they're technically different.
DSOs, dental support organizations, the good ones, okay. And again, that's always relative. I know it's a hot button. But the good ones, they may have private equity money, but they're usually in it to operate the practice and they're doing it for a long time.
The private equity that's in it to bundle things together, package things up, make an exit in three to five years, they're there to maximize their earnings, their share value, so they have a different perspective. So there have greed again. And that's a strong word. I want to be crystal clear. I'm not trying to paint with a broad brush here, but there is greed. It's how do I get the most out of this? Because I know I'm walking away or I'm trying to get out in three to five years. I'm not worried about what the long term ramifications are. That's somebody else's problem.
Now, on the dentist side of this, they're equal culprits in this too, because they're often looking at the best Number on paper, they're not doing the right homework. They're looking at the best offer when it comes to dollar amount. They're not understanding that multiples can be manipulated, that profit can be manipulated. And they're oftentimes being greedy in the sense of, I want the best number and that's the most important thing that matters. Or they're being greedy in the sense that, hey, I just want to be out. I want it to be somebody else's problem. And that's a form of greed, emotional greed, if you ask me. So that's what I mean by they can be. Dentists can be greedy, too.
[00:25:12] Speaker A: Emotional greed. That's a phrase worth sitting with. And I think that connects directly to why Dennis keep believing a story that stopped being true years ago.
The deals that were done in 2017, 2018, 2019, those Dennis made real money.
That story is still being told at conferences, in Facebook groups, by brokers.
Why do you think Dennis keep believing it applies to them right now?
[00:25:41] Speaker B: Same reason we buy lottery tickets. You know, we all believe that we're going to win or we know this one person.
You know, it's like you go, you know, like I go to the sauna and I hear these guys talking about the gym Bros, talking about the stocks that they buy, but I never hear anybody say, you know, I bought. I bought three stocks that totally sucked.
You know, they only talk about their wins. And the dentist that sold for 3 million, he doesn't talk about, hey, I sold, I only got $600,000. Nobody wants to share their losses or their realities. They want to share the wins. They want to, you know, they want to pump themselves up and beat themselves, beat themselves on the chest. And I think people aren't sharing the reality of what's happening. And that's, that's part of why I do. What I do on this podcast is try to help people make informed decisions. I'm not trying. Of course, I'm biased towards individual practice, ownership. It's what I believe. It's what I believe is right. But at the end of the day, I want the listener to understand that at the end, I'm probably going to sell to a DSO or private equity as well. Hell, at one point, I may form my own private equity dental group, but I'll try to do it. And I hope I would do it with the long term dentist in mind, meaning to own and operate the practice, to run it like a business, to run it with the dentist in mind. Not just maximize profits. Because if the goal is to maximize Profits for the investor. I can assure you the individual dentist is not the primary concern.
[00:27:24] Speaker A: And that's the honest version of this conversation that most people aren't having. So let's get to the alternative. Because don't sell is not a strategy on its own. You work two days a week, your practice runs mostly without you. You're 50 years old. That didn't happen by accident. For the dentist who's burned out right now, who looked at that DSO offer and felt relief, what does building the thing that makes you not want to sell actually look like in practice?
[00:27:55] Speaker B: Yeah, it's a great, great comment and a great thought is the alternative is don't give away your cash flow. Because what I want you to understand is because not taking distributions means you're giving away your practice and letting them essentially self finance your practice from your distributions over the next five years.
It really makes no sense to do any deal like that, in my opinion.
So what is the alternative? The alternative is to build it right, to understand that just like I've understood dentistry doesn't look like what it did in 1993 when I went to dental school, in 1999 when I graduated from dental school, or 2010 or 2020 during the pandemic, dentistry looks totally different and we have to adapt. And what I think building it right means, and this is my opinion, my version of the story is a single location, multi provider, people with different expertises, not referring out much dentistry, doing most phases of dentistry in a single location.
That is to me is what I mean by building it right. Additionally, that means putting great team members around you, not just accepting people that have been with you for a long time, but making sure they're adapting and understanding that running a $2 million business is different from a $1 million business. Running a $3 million practice is different from a $2 million practice. Running a $4 million practice is different from a $3 million practice. It's not just double, triple or quadruple. It is a totally different animal. And as you progress, the people around you need to progress or the people around you need to change, just like you have to progress or you need to change.
And that to me is what I believe building it right means. And that's what we do at 3D Dentists. We help dentists build single location, multi provider businesses, businesses that can operate without them. You know, most dentists that are solo dentists, they're tied to that chair until they maybe reach a certain age where they've saved enough money taking a two week vacation is probably not realistic for them. Taking a month off certainly isn't realistic for them. But. And I'm not trying to make a humble brag, I'm just trying to give it context.
At 50 years old, I see patients two days a week. I can take two, three weeks off, maybe even a month off at a time. My practice still runs without me. There's multiple providers. Our patients are taken care of, our team members are taken care of. I'm not talking about building a practice that's, you know, people use the word business and they think you're, you're greedy and you're trying to suck every penny and percentage out of it. I'm not talking about that, but I am talking about learning from the DSOs. I think that's important because the ones that are it, well, the ones that are sustaining themselves, there's a lot to learn, there's a lot to understand, how they leverage financing, for example, how they leverage the hours that they're opening, how they leverage, you know, having team members do things versus having dentists do things. And that's part of the progression our profession has to make. We can't just say private equity and DSOs have ruined our profession because, frankly, we invited them in and this is what we get for inviting them in. Now it is up to us to control our profession and to adapt not just with what's happening our profession, but also what's happening to the consumers. Because at the end of the day, this is all driven by the consumers. Because without the patience, we don't exist.
[00:31:53] Speaker A: That's the real answer. Build something so strong, so well run, that selling it feels like a step down, not a way out.
Last question. Someone's driving home right now. They've been considering a DSO offer. They've been telling themselves it's the smart financial move. They haven't fully run the numbers until today.
What's the one thing you want them to sit with tonight?
[00:32:19] Speaker B: I want to figure out what problem they're trying to solve.
And is there another way to solve that problem?
Again, if you're in the older back 10th of your career, not even the back half, the back tenth of your career probably makes sense. Okay. You know, if you're about to go bankrupt and you got somebody to save you from that, maybe it makes sense. But I would say, what problem are you trying to solve? And does that group, does that DSO that you're selling to actually solve that problem? Have they done it before?
In other words, have they been doing it for more than three or four Years. Have they been doing it for more than four or five years? How deep are they? If you ask, hey, if my assistant doesn't show up today, can I get another. Can we get an assistant from one of your other offices? How often have you actually. Because they'll say yes. Okay, they may say yes, but how often has that actually happened? Ask them that question. Hey, when it comes to distributions, where are the distributions held? What determines practice profit? Because it's easy to hide that your practice makes no money. What is the cost that the DSO charges the practice for operating? Because that comes out of your profitability. If there is a distribution model, you gotta ask more and more questions. You just gotta keep asking questions until they tell you you're tired of them tell you they're tired of you asking questions. And you gotta understand the why. Why are you considering this?
And talk to People have no skin in the game. The broker has skin in the game. The DSO has skin in the game. The, the dentist they refer you to within the DSO to tell you how great it is, they have skin in the game. You know, talk to somebody non, you know, non, non biased that can look at the deal, look at the numbers, look at the reality, look at the track record and tell them that.
And if you say, you know what, this doesn't work, then I'll encourage you pick a different path.
Recommit to your practice, recommit to being a leader, recommit to accountability, recommit to the next 10 years being the best 10 years of your career. Because being a dentist, being a practice owner is not the dead end that they want you to think it is, that others want you to think it is. Don't stop talking to people that hate dentistry. Start getting around people that love dentistry. Start coming to 3D dentists if you must, so that you can be around people that are peer confidence that are helping the practices grow, that are excited about growth and then see what you're capable of.
[00:34:54] Speaker A: Recommitted anon. Stop talking to people that hate dentistry. Get around people that love it and are building something. Because if selling sounds like relief, that's. That's not a financial signal. That's a sign. You need the gps, not an exit.
Patient building the single location juggernaut. That's exactly what T Bone and the team do inside the 3D Dentist Mastermind. If today's math changed how you're looking at that offer sitting on your desk. The link to learn more is in the show notes. T Bone, thanks for walking through the real numbers today. This is the conversation a lot of dentists are needed to hear.
[00:35:36] Speaker B: Thank you, everybody. And I look forward to seeing you next week. And if you have questions, if you've been burned by DSOs, send me a message. Let's talk about it. Let's spread the message. I'm not talking about bashing. Okay? That's not what I want to do. But let's spread the reality of what's going on so more of our profession can make informed decisions. Because, by the way, the DSOs have the same thing. They get sold a bag of goods and the practices, too. So it goes both ways. Thank you guys, for listening to Dentistry Made Simple.
