Bill Gross, the Founder of IdeaLab, has a great TED Talk from a decade ago about “the value of timing.”  IdeaLab is an incubator much like Y Combinator and many others in that they help found and launch a large number of tech-based startups.  Gross’s talk discusses the study they performed on the success or failure of hundreds of startups against many factors that we would typically assume would lead to success, factors like: funding; concept; and leadership team.

The key finding: timing matters more than any other.  Nowadays we know there to be a huge difference in Facebook versus MySpace.  The biggest difference initially was a few years. 

I can draw upon my own personal experience.  When Diwakar, Kevin and I launched what became TUSK Partners in 2017, the industry was being driven by a wave of consolidation that was fueled by Private Equity firms and low interest rates.  The PE groups collided with a bunch of “Early Adopters” who were building group practices.  When seemingly everyone wanted to quickly learn how to build a group practice and those who had then wanted to sell their group, we found ourselves at a unique point in time.

In spite of a global pandemic, that four-year run from 2018 through 2021 was prolific.  What if we had launched the business in 2012?  Or in 2026?  I think the story would be written differently.  The timing mattered.  A LOT.

The time we find ourselves in has a lot to do with the potential we’re able to realize.  That being said, the hard part is realizing the time you’re in as the opportunity coalesces around you.

That may sound like a lot of word salad if you read it aloud, but now is a time to lift your head and try to read the winds of change in our industry.  There’s often opportunity in chaos.

I think “that time” is now.

What I Believe

I believe it’s prudent to build a business that is not dependent upon your skills exclusively for its existence.  This probably has a qualifier attached to it seeing as though I’m doing exactly what I’m advocating against.  The difference in what I’m doing versus what a dentist or healthcare professional does is magnified by the cost structure and the number of people required to deliver the service.  Yours is a business that requires face-to-face interaction with your customer and a support team to deliver the results.  Be sure that business can function if you decide to take a few months off.

I believe in Economies of Scale.  It doesn’t matter if you’re running a hardware store (Lowes & Home Depot); a dental distribution business (Schein & Patterson); or group dental practices (Heartland & Aspen).  Size matters because it increases your buying power in your cost structure as well as your ability to negotiate preferential insurance reimbursement rates for revenue.  You gain efficiencies that require fewer headcount to deliver and you are also able to amortize your investment costs across multiple business units for productive capacity (think: a full-time Associate split between two locations).

I believe that Leadership makes a quantifiable difference by creating greater results through people (especially in a services business).  The more experienced and effective that leadership is across every level of the business will ultimately be an indicator of future success.

I believe in Dan Sullivan’s “Who, not How” principle of either hiring or collaborating with people who have the strengths you need to build the business you want that creates the results to which you aspire.  Sounds simple enough, but is more challenging to pull off.  If you’re going to build a growing business, you’re in the talent management department.

I believe in engaging with people (both personally or contractually) who help you compress time through their wisdom and experience and/or avoid landmines, pitfalls and blind spots that will cost you money and the time you’re hoping to save.  To create a successful practice, you had to invest in your clinical development.  To create a successful group, you need to invest in professional development.

I believe that Private Equity firms aren’t “all good or all bad” and that they actually serve a function for growth capital that was previously facilitated by the banking industry…until we got things like; mortgage-backed securities and pick-a-payment or no-money-down loans that led to the Global Financial Crisis and the resulting Dodd-Frank Act of 2010.  The problem is that we now view PE firms as ways to either get rich or bankrupt the profession.  Five years ago, it was the former.  Currently it’s the latter.  Nothing is that black or white.

I believe in Timing, but I also believe in Luck.  I believe that Timing leads to Luck.

I don’t believe that “dentistry will be 80% consolidated in the next 6-8 years” as some are saying.  Which brings me to…

A Brief History: Dentistry’s Gold Rush

It’s June 2019 (pre-pandemic) and the 10-Year Treasury Rate (the benchmark used to decide mortgage rates across the U.S. and is the most liquid and widely traded bond in the world) is 2.07%.  “Credit Boxes” from non-bank lenders reach out as wide as 6X Debt-to-EBITDA, meaning that for a regional PE-backed DSO generating $20M in EBITDA, they could borrow $120M in funds to acquire practices at an incredibly advantageous rate.

A year later in June 2020, coming out of a global pandemic, the 10-Year Treasury Rate dropped to 0.79% and the U.S. economy was awash in cheap money courtesy of the Federal Government.  It’s the perfect storm: PE-backed DSOs have a bunch of hungry business development individuals that didn’t make their bonus the year before, so they’re highly motivated and fueled by the cheapest money the world has ever seen when they collided with a large number of dentists who were scared to death about owning and operating a healthcare practice in the COVID-era.  In a world of hyper-competition, selling prices skyrocketed and sellers were more than willing to roll equity into a fast-growing DSO that’s only a short time away from “recapping”…whatever that means.

The lifecycle of a typical Private Equity fund looks like:

• 10-12 years in length
• 6-18 months to raise a fund from investors and “go effective”
• 5-6 years to invest in new platforms, plus 2-3 years for add-on investments
• “Harvest” or exit deals in years 3-10
• Average hold is around 4-5 years

Most of this is predicated on a low-lending rate environment.  The last time the 10-Year Treasury was above its current rate of 4.68% was in June of…2007.

Current Outlook: My Opinion on M&A

We have a few factors at play right now that create interesting opportunities for sounds businesses.  The first is that the general pace of M&A has slowed dramatically for several reasons:

1. The cost of capital has basically tripled since the low-water mark in 2020. Dental practices have very thin operating margins to begin with, so a fast rise in the cost of borrowed capital on something akin to an “interest only” loan structure quickly translates into negative free cash flow.  This then leads to…
2. A significant number of PE-backed DSO groups were created quickly to take advantage of a market opportunity, but were “Aggregators, not Operators.” These business models were built to flip, but they couldn’t be flipped quickly enough, so now the cost of the debt has wiped out any equity on balance sheet.  The lender doesn’t want to own the business, so there are numerous “workout processes” in play between the PE firm, the Lender and their respective law firms.  This then leads to…
3. There are a lot of dentists at the end of their careers who have seen their colleagues sell their life’s work to a PE-backed DSO and have any rolled equity go up in smoke, so they’re reluctant to make the same mistake. The same “herd mentality” that led them all to sell to PE in 2021 has now caused the herd to run in the opposite direction.  This then leads to…
4. Quite a few true Enterprise-level PE-backed DSOs have lofty objectives to hit growth targets. For example, if you’re Heartland Dental and you have to grow EBITDA by the equivalent of 200-250 practices per year, is it easier to acquire one practice every day for an entire year?  Or would you be better off finding a few 50-100 location regional DSOs to “merge” with?  Probably the latter.  We’re on the precipice of “the consolidation of the consolidators.”  This then leads to…
5. Regional DSOs have seen their opportunities curtailed due to shrinking credit boxes from their lenders. What was 6X Debt-to-EBITDA is now – at best – 4X Debt-to-EBITDA.  Let’s be clear: for that $20M EBITDA DSO I mentioned earlier, they just had $40M in acquisition capital go up in smoke.  That’s a lot of practices not being acquired.  This then leads to…your opportunity.

Practice Economics & Timing

Dental practices are wonderful case studies in unit economics. The practice structure has reasonable fixed costs and a reasonable variable cost structure.  The biggest bogey in all of it is wages (headcount number and wage scale).  Insurance reimbursement can be problematic, but you have basically no customer concentration risk and you have very little procedure concentration risk.

If you’re a successful practice owner, I’d like to think you understand how to maximize the clinical opportunity of an Associate and I choose to believe you or someone on your team has sound operational experience.

If any of that adds up, then you have a sound opportunity for true “Value Creation.”  If you’re a true Operator at heart, then you probably also have the patience to focus on the fundamentals.  If that’s the case, then here’s your opportunity to “go long.”  Be methodical and be disciplined.   Offer to be the steward of someone’s legacy.

The Cold Reality

Don’t misconstrue this to be “Perrin’s Ice Bucket Challenge,” but we need to see things the way they are – not the way we want them to be.  Having lived the life of an entrepreneur over the last decade, I’m acutely aware of just how hard it is to own a small business of any sort, but you need to take some time to truly define what you want in a Safe Harbor for the next decade.

“Safe Harbor” could mean selling your practice or small group to a larger, PE-backed DSO and rolling equity to become a “partner” in that organization, but that means giving up total control of your destiny.  If this is your choice, my advice is to work with an M&A advisor and an attorney who have depth of industry experience in deal structure.  They both need to be able to clarify what happens to you from a debt and equity standpoint as the business evolves (positively or negatively).

“Safe Harbor” could also mean betting on yourself and accepting responsibility for your own ultimate outcomes.  There’s certainly risk involved in borrowing more money and creating a bigger business, but you still maintain control over what happens to a great degree.  As I’ve basically outlined above, my outlook is positive for the opportunity to build an emerging group through a methodical growth strategy that builds from strength.  If you get out of the short-term angst and take the longer-term view, then you can afford to be patient.

Ages & Stages

All of that being said, your age and stage of life matter.  A LOT.

If you’re roughly 5 years away from retirement, then my advice is to start a transition process that culminates in a transaction.  Don’t take the risk of borrowing more money at this stage of life.

Assuming you’re mid-50s and older, your kids are going (or gone) and your consumption will drop off along with a lot of “fixed” expenses.  Be kind to yourself and lower your risk and complexity as your energy, endurance and stamina start to wane.  If yours is a solo practice, then it’s pretty straight forward on your exit.  If yours is already small group practice, then it’s more complicated because you probably have a higher valuation, so your exit would be either multiple associates gradually buying you out or a one-time transaction with a group buyer.

If you’re 10+ years away from retirement, I don’t think you can afford to own a small business where you have no economies of scale and where you are the biggest risk variable.

Stay tuned for part 2 of this essay to see what I would build.  In the meantime…

Here are 10 Key Questions to ask yourself as a bit of a homework assignment:

1. What is your family’s monthly “burn rate” (consumption volume in dollars)? [Rule of Thumb: if that figure is over 90% of your monthly after-tax income, then you have almost no financial margin for error when it comes to reinvesting in your business]
2. What is your family’s total fixed debt?
3. How much do you have in retirement savings and how long would it last you? [Rule of Thumb: take your annual pre-tax living requirements and multiply by 20 to get the equivalent of a 25-year sum generating a 6% annual rate of return]
4. How much in cash reserves do you have to operate the business in a downturn or if it required any reinvestment? [Rule of thumb is to keep “2 X Your Monthly Operating Expenses” in liquid cash reserves, but this should be more if you’re in growth mode.]
5. Of the total annual revenue of the business, how much do your personal collections total as a percentage? [Rule of Thumb: if it’s more than 25%, then you don’t have a business – you have a job…]
6. Is your current business organically growing revenue at or above 8% annually, and is it growing operating income at a faster rate (%) than revenue? [Rule of Thumb: if you’re not growing revenue faster than the industry average, then you’re losing market share; and if you’re not growing operating income faster than revenue, then you’re not gaining any efficiencies in your cost structure…]
7. What is the total business debt and how many different lenders is it held by? [Hint: more than $1.5M is most likely a problem and more than one lender is a red flag…]
8. In a typical work-week, how many days are not devoted to providing clinical services? [Hint: you need a bare minimum of two, preferably three, days per week to reinvest your time in growth-related activities that will probably be un-compensated in the short-term…]
9. When you evaluate your current team, do you have people who currently fill (or could adequately fill) the following roles: Business Operations; Clinical Operations; Business Development (location buy or build); Associate Recruiting; and DR Development & Mentorship?
10. Who are the people you surround yourself with as a Board of Advisors to guide you in your decision-making process? [Hint: these are the scenarios we tackle every week in the Next Level Executive, so if you like this sort of subject matter or these types of exploratory discussions, you should enroll in the program. OK, that wasn’t really a “hint,” but more of a shameless promotion.  That being said, these essays take considerable time to write and the original question “with whom do you surround yourself” is critically important…]

I’ll let you “percolate” (that’s coffee talk for “ponder”…) over those ten questions for a week or so, then follow up with the second installment of this that will dive deeper into not only what I would build, but how I would actually go about it.

In the meantime, do yourself a favor and watch the Bill Gross TED Talk I mentioned in the opening paragraph and consider your own objective thoughts on where we stand in our collective industry at this point in time.

When we look back on it ten years from now, where would you like to be standing?

Go grind some beans.