Three months ago, I dropped a podcast episode titled “The Era of the Zombie DSO.” It was intentionally provocative and created some backlash – as well as some unexpected accolades from a few industry titans.  Not so humble brag…

I’m not backing off of anything I said in early June around the causes or the effects of where we collectively find ourselves, but I do have a bit of an update on what’s going to happen as we roll into 2027.

Maybe more importantly, I have an opinion on what you need to start preparing for…right now.

 

Embracing Operational Execution

By the time you’re reading this, my Executive group and I will have come off of two very full days of our annual CEO Working Group Session, which this year I titled, “Leading a Business that Executes.”  In the 15 years I spent running three different businesses for Patterson, I grew to be an operator – not because I loved it or even because I wanted to, but because I knew I had to.

Your group dental practice and every business I’ve ever run before create above average results through superior execution.  Full stop.  You can either choose to embrace this (much like I did) or you can delude yourself into believing that you’ll create superior outcomes through lackadaisical engagement, but the results will not lie.  Operators execute.  Superior results follow.

 

Are You Getting a “High Return” on Luck?

One of the books I asked my group to read in advance of the CEO Session was “Great by Choice” by Jim Collins.  You’ve probably read “Good to Great” multiple times, but I doubt you’ve read “Great by Choice.”  You should.  It’s more applicable to the world you live in, which is why I asked my group to read it.  While “Good to Great” dives deep into the companies that created superior results over time, “Great by Choice” is about the leaders of the companies themselves and the choices they made that led to the greatness that ensued.

One of the aspects that Collins points to is luck – but not luck in the way that you and I often think about it or, God forbid, hear the sophomoric refrain “luck is when preparation meets opportunity.”  No, Collins is much more specific in employing the phrase, “Return on Luck.”  Everyone and every business has a degree of luck, but it’s what you do with it that counts.

He states emphatically: “The evidence leads us to conclude that luck does not cause 10X success.  People do.  The critical question is not, “Are you lucky?” but “Do you get a high return on luck?”

There’s another book that many of you have read from the Founder of Strategic Coach, Dan Sullivan, and his co-author, Dr. Bejamin Hardy, called “Who – Not How.”  As motivated, achievement-oriented entrepreneurs, we’re pre-disposed to see opportunities and think to ourselves, “what do I need to do to achieve that and how am I going to going about doing it?”

 

What and How versus WHO

We tend to think “what and how” when there’s often a better, faster way to a greater outcome: “WHO can I find who already knows how to do it?”

In his chapter on “Return on Luck,” Collins speaks directly to this in saying: “We tend to think of luck as a ‘what’ variable…but one of the most significant forms of luck comes not as what, but in the form of who.”  He concludes by saying, “Of all the luck we can get, people luck is the most important.”

In this case, “people luck” doesn’t refer to the people you currently employ.  It refers to those roaming the halls of the Zombie DSOs…

You’ve got a great opportunity in front of you.  Jim Collins would say that “you’re lucky” in fact.  It’s up to you as a leader to choose what you do with that opportunity to create your greatest return on luck.  And as he also said, “…the most significant form of luck comes not as what, but in the form of who.”

 

Think Critically and Presciently

Go back and listen to the podcast episode I shared or the essay I wrote on Zombie DSOs.  In it, I noted that there are between 50 and 70 Private Equity-backed DSOs that can’t get a recap done because the valuation multiples are so low that the transaction value wouldn’t yield enough equity to both payoff the debt and return any meaningful amount to investors.  At the same time, these DSOs have maxed out their credit facilities due to contracting leverage ratios, so there was no more available capital for acquisitions.  A shark that cannot swim drowns.

For a quick second, ponder the question: “how do we create more EDITDA?”  Well, you might say that we grow revenue at a practice level – and that would be correct, but many of these PE-backed DSOs aren’t real operational companies, so they can’t recruit and develop young associates or even run quality marketing campaigns to attract new patients.

You could also say that you can cut costs, which is true – but how much more can you take out of the cost of supplies, lab, professional services, etc.?  Probably not much. Another answer might be to actually divest of underperforming locations that are a negative drag to EBITDA.  That’s a good answer, but hopefully there are not a lot of them to sell off – or else you have a much bigger problem.

What’s the one piece of a Private Equity-backed DSO that doesn’t really add much value?  It’s the DSO itself – the management company.  Depending upon the size of the group, the management company could be a cost structure of several million dollars’ worth of corporate overhead.

 

Addition through Subtraction

If you liquidated that total overhead, you’d immediately have a much more valuable business.

How much more valuable?  Most enterprise accounting firms will tell you that corporate overhead runs in the 6 to 9% of revenue range for most established DSOs.  If you take a small DSO that generates around $100M in revenue, it’s probably reasonable to assume that it has management company overhead of at least 6% – which is $6,000,000.  Liquidate that on a recap valuation of 10X and you get an immediate equity payout increase of around $60,000,000!

Here’s the point that I wanted to hammer home from the Zombie DSO podcast episode: if we have 50 to 70 PE-backed DSOs that cannot get a recap done, then we have WAY too many underperforming companies with WAY too much unnecessary corporate overhead that is a drag on value creation.

Liquidating the management companies unlocks shareholder value, and the only way you can justify liquidating the management company is…if the acquirer already has one in place.  Friends, you’re about to have a ringside seat to the consolidation of the consolidators.  The big fish eating the small fish.  It’s going to happen…and you just got lucky.

 

You Have to Be in the Talent Management Business

“…The most significant form of luck comes not as what, but in the form of who.”  Over the next 18 to 24 months, you’re going to most likely see 30 to 50 management companies get closed down and a LOT of highly qualified, experienced operators looking for jobs.

Let me see how this sounds: you’re not sure if your home-grown COO is really the right person for the job and you’re pretty sure that your business has already outgrown his or her abilities.

How about this one: your business has grown incredibly quickly over the last few years and now you’re finding yourself in some awkward HR-related conversions almost daily – and you don’t know the rules and regulations.

Or even this scenario: you like your accounting firm, but you think you need to bring some of this work in-house – and you don’t know the difference between a bookkeeper versus a controller versus a CFO.

And I love this one: you’ve got an office manager who likes to dabble in social media posts and a little bit of Google ads, but all of sudden this feels like a pretty big budget for her to be managing in addition to her full-time duties, so should you bring some of your marketing spend in-house?

Getting a high return on luck means understanding your business’s current foundation as well as its future potential and then determining what your future needs are going to be.  My bet is that 100% of you in this audience have basically outgrown your home-grown capabilities and now it’s time for you start thinking “Who – not How” in terms of creating your own return on luck.

Your luck is that there are going to be a LOT of highly qualified people looking to find a job where they can make an impact.  Your return will be calculated on whether or not you’re able to bring them on board, then get them pointed in the right direction to execute on the opportunity at hand.

 

Adding or Increasing Productivity

I’d be remiss if I limited this to only administrative leadership.  Yes, associate dentists typically have job security due to their volume of clinical work; however, most of these young associates are not owners of the DSO they work in currently – or the one they will end up working in post-acquisition.

All of this churn will create its fair share of anxiety, so you need to be prepared to capitalize on that.  Figure out the DSOs in your area, then figure out who the associates are who are working in those practices.  Connect with them.  Grab a coffee or a sandwich or a beer.  Tell your story.  Figure out if they’d be a good fit for your organization.

Remember that phrase I hate?  “Luck is when preparation meets opportunity?”  Well, this is the “preparation” part.  This is where you create your own return on luck.  Your time is now.

Go grind some beans.a

 

PS – If you think this is something a friend or colleague should read or know about, please share it with them.  And if you think this is something you need to act upon in the coming year, let’s find a time to talk.