Consolidation, Private Equity, and DSOs: What Does it Mean for Orthodontic Practices?

Alison Werner 0:02
Hello and welcome to the Orthodontic Products podcast. I’m your host Alison Werner. Joining me today is Dr. Greg White. Dr. White may be familiar to some of our readers as he was featured in our February 2023 cover story. Dr. White has been in practice for more than 25 years and is one of the founding partners of White Greer and Maggard Orthodontics, a pediatric and orthodontic group practice located in Lexington, Kentucky. More recently, he is the founder and president and CEO of PepperPointe Partnerships, an alternative to the DSO model for practices that are looking to self consolidate. Dr. White, thank you for joining me.

Dr Greg White 0:36
It’s my pleasure. Great to be here, Alison. Thank you.

Alison Werner 0:39
Great. Well, so the reason you’re here is you recently wrote a white paper called “The State of the Dental Industry.” And it looks at the rapid consolidation in the field led by private equity and kind of offers predictions for the future. And that’s what we’re going to focus on for this conversation. So I want to start with, what was your motivation for the paper?

Dr Greg White 1:00
Well, the primary motivation came as a result of me being invited to and speaking on a panel at the DSO summit in Austin, Texas, back in October of last year. And during that panel discussion, it was called Point Counterpoint. Really, the whole idea was private equity against other alternatives that were out there. And so it really became obvious to me during the course of that panel, and then the conversations that I had afterwards, that there were a lot of people in dentists, dental industry that really do not understand all of the nuances associated with private equity backed DSOs. And what that model looks like and what the the end result of that can be and mean for all of the primary stakeholders in dentistry, primarily the dentists themselves, the communities that they serve and the patients that they treat.

Alison Werner 2:01
Okay. So your thesis is that the dental industry is undergoing a lot of change, if anything, it’s constant in the industry. And one of those changes is that rapid consolidation of practices. But before we get to what is happening today, can you talk about how consolidation isn’t necessarily a recent phenomenon? This actually goes back to the 90s, correct?

Dr Greg White 2:21
Yeah, it does. And I can remember back in the mid to early 90s, actually exploring it to, there were a few different companies that had popped up, I can think of, I can think of OCA, Apple Orthodontics, Castle, there were several of them. And I even went out and visited one of the corporate offices just to try and get an idea of what it was simply because anything that comes in new to my profession, I’m curious about it. Because, you know, so many things can be positive, and you can have disruptions positive or negative nature. And so you had a lot of different issues that occurred with some of those and many others that tried to start in the 90s. But the primary thing I would say, is that those disruptions were minimum and minimal and it really didn’t take off. Because number one, there wasn’t a ton of private equity in it, there wasn’t a lot of momentum behind it, there weren’t that many of them, and they never really got the critical conversations going in a big way. The second thing was, is the dental profession in the early 90s really had not experienced many disruptions and have been pretty much the same for years. I remember the biggest disruption that we saw was when Invisalign came out by Align technology, that was the biggest change we’d seen in orthodontics, and maybe since the since bonding materials to go from bands to brackets. And so people just did not see these disruptions as being anything that they needed to take part of, or there wasn’t a critical enough reason for them to make a change from the status quo. And so those pretty much kind of died out or went underground for a long time until the recession of 2008.

Alison Werner 4:18
Okay, so let’s talk about that recession and how it changed the trajectory in terms of consolidation.

Dr Greg White 4:28
Yeah, so there were several different things that came to bear at that time. When the recession hits in 2008, you saw a lot of discretionary income that went away. And you saw the top line of dental offices start to diminish, and you saw the bottom line start to diminish as well. So dentists are very conservative by nature. And when we run into economic downturns, we generally look immediately to the expense columns on our P&L and we try to say have ourselves to prosperity. So what we’re not going to do is buy dental offices that are for sale, we’re not likely to bring on associate doctors at that time. And we’re likely to try and cut costs such as marketing and other items, look for less expensive supplies in order to kind of hunker down and make our way through the downturn. So what had happened at that point was that you had the DSOs that had started, as we discussed in the 90s, many of them, they only gained about 2% market share, up until 2008. But now all of a sudden, you saw a dramatic seismic shift, as a result of that recession, and the doctors that were not buying practices and not expanding through associate recruitment. And so you had practices that were for sale that no doctors were buying, and you had dental students coming out of school that needed jobs. And that was very much exacerbated by the fact that the student loan debt had doubled over the seven years leading up to that time. And so these kids coming out of school, had a lot of debt, much more so than their predecessors, they needed a job, and the DSOs were there. And so the DSOs started hiring these kids coming out of school and started buying these practices that were for sale. And you saw a growth from 2% to 13% of the overall dental market, general dentistry, being consolidated during those years from 2008 to 2013.

Alison Werner 6:39
Okay, so then can you talk about how the growth pattern of DSOs of the dental industry and what is spurring that growth, so because I know in 2015, there was about 12%. But now, in 2023, we’re at about 34%, you wrote.

Dr Greg White 6:54
So, in 2008, through 2013, you had these platforms, these DSOs, which are basically platforms to be able to handle many of the administrative services of the practices that they had purchased. And these platforms became very intriguing to private equity. Private equity started looking at this fragmented industry dentistry, they started taking a look at the balance sheets of these practices and realized these practices have like a 35, 40% cash flow, profit margins are enormous in there. If we can somehow figure out a way to grab a hold of some of that profitability, that could be a really, really good investment for us. So what’s the best way to get to as many of those practices as possible? Well, the best way to do it is to invest in primarily majority interest in the DSOs that own the non clinical assets of those practices, which is where all the monetary value is held. That’s the furniture, fixtures, equipment, the names of the practices, the leases, the accounts receivable, the profits. If we can go in and buy majority interest in the company, that is a platform for managing those and owns those assets, we can now pay a pretty good amount of money for that, in order to be able to have a great little return on investment. So they started looking around private equity started looking around because there was a lot of cash that certainly started starting to come into the economy, and what do we do with it. And so PE went out to institutional investors or family funds or whatever, created the PE fund and then went to these DSOs and said, Hey, we would like to partner with you. And we’re going to put this on a three to five year trajectory before we recapitalize which means sell out to the next private equity group that then will take majority interest in the DSO. And so an example of that would be they would pay X number of dollars in order for to get majority interest. And then the DSO with the backing of private equity and private equity would usually arrange this for them would arrange mezzanine loans and say, Hey, listen, if we can get this money from you, we’re going to invest it in buying additional dental practices here and expand this footprint greatly. And we’re going to, we’re going to they’re going to sell it to us because we’re going to offer them a higher multiple than traditionally than dental offices have traditionally sold for. So instead of the three and a half multiple they started offering 5x and 6x and beyond multiples of EBITDA in order to buy those practices, meaning buying the nonclinical assets out of those practices. And we can discuss the difference between clinical and non clinical assets later, but we’re going to buy those and offer them more money than that doctor would think they would ever get for their practice; but we’re going to also put that doctor on an employment contract so they’re going to stay, we’re not losing our provider. So that shifted the manner in which doctors retired, because in the past, doctors would generally bring an associate doctor and associate for a while, could be six months, it could be 10 years, they would then sell that associate interest in that practice, and then eventually sell the practice out. In many cases, they would bring an associate and say, I want to be out in six months, I’ll sell it to you, we’ll do a transition six months and gone. In this scenario, the doctor is now working for the practice in the DSO for a much smaller income, and they’re doing it for a period of years, really hoping that the partial value of their practice that they rolled into stock is going to pay out at the next capital as a recap event.

Alison Werner 11:10
Okay, because I was going to ask you were stock plays into that, because you do mention it into the paper as kind of one of those cons to private equity funding this growth.

Dr Greg White 11:23
Yeah, so what happens and the best way you did this in the paper gave an example of a $2 million practice that has $1 million of profitability. So say you have an orthodontic practice, it’s two year $2 million in revenue, $1 million in expenses, and that doctor is taking home before taxes a million dollars a year. DSO would come to that doctor and say, Hey, listen, if you’re willing to work for $300,000 a year, we’ll sign a contract with you for three or four years, you get the same results that you’re getting, now we’re better, we’re going to take that difference between that million that you used to make and the 300,000 that you’re going to make as an employee of the company, and that’s a $700,000 difference, we’re going to take a five multiple of that 700,000 and say your practice is worth 3.5 million, we’re going to give you $3 million in cash, we’re going to give you a half million dollars in stock, be sure to go out and say some really good things about what you’ve done, so that other people will do likewise. And when we have this recap event in three to five years, your 500,000 will grow to some unknown number. So what’s interesting is that doctor’s really given up $700,000 a year income for four years, which is 2.8 million in order to get $3 million up front. So they really have just gotten a cash advance on the money that they own on the profits they were going to take anyway. What’s really interesting is about how the finances play out in that practice, though. The private equity company is that the money that they put into buying the majority interest in the DSO is very rarely the money that actually goes to that doctor, that $3 million to pay them for their practice. That is that mezzanine loan. So the growth really started taking off when interest rates were low at 3%. Because that doctor gave up 700,000 of income that now the DSO was getting in one form or another through managed service fees or profits or whatever, for the $3 million, but they were only having to pay 3% and interest only on that mezzanine loan. So 3% on 3 million is only 90,000 a year, that doctor gave up 700,000 of income for that $3 million check. And the DSO is only having to debt service 90,000 of it. So that gives them 610,000 of profits in that practice to be able to use as managed service fees distributions to the institutional investor or profits for the DSO. And the doctors in total, all of the doctors combined in that DSO, usually own a very small percentage of the DSO. It’s the institutional or it’s the private equity company that usually has majority interest in it. And then the founders of the DSO have a piece of it. So most of the time, you will find that it’s around 18 to 24% of the entire DSO that’s actually owned by the doctors themselves and there could be hundreds of doctors and a handful of people in the PE and when one investor.

Alison Werner 14:45
Okay, okay, so what is driving doctors to turn to DSOs today?

Dr Greg White 14:53
That’s a question I asked myself a lot and I think I can only think of two reasons why anybody would take a four year cash advance, work the four years and just give up their entire practice, the monetary assets of the practice and the value, for some unknown number that they’re going to get on this little piece of stock that they have in the DSO. So outside of not understanding basic math, or they owe somebody money that they have to get to them fast, I can’t think of a real legitimate reason. But if you ask me why I think they’re doing it is I think that that presentation that is made by the salespeople within that DSO and the way that they present these huge numbers, make it look so good, that I think the doctors get married to that number, and they hope that that big payout occurs. Because what they would show, what I’ve seen shown is, they will show you the 3 million you’re going to get in cash, they don’t show you the 700,000 that you’re going to lose each year over the next four years, they show you the 300 that they’re you’re going to make. So now they’re adding 1.2 million to the three. And then they’re saying that 500,000 could be worth a four or five or six multiple. So now you’re looking at this number. And it looks like it’s like $7 million for my practice, but you’re only getting three, and you’re giving up 2.8 to get it. And I think that gets so excited about that number. Now that ties into, they’re also probably tired and fatigued. And they also probably haven’t located an associate that’s going to come in and and buy them out. And so they finally, or maybe they’ve had a couple of associates that haven’t worked out, and they think this is the best option I’m ever going to have. And so why not. But the biggest problem that I see with that long term is that they’re not just selling their practice, they’re also selling all the future profits out of their practice. And therefore the next doctor that replaces them, when they do retire, is now has been commoditized. They’re going to come in at entry level. And they’re going to work at that entry level or what the least amount that can be paid for that doctor until they thence that group sells it to the next group. And it really turns the dentist into the equivalent of what we’ve seen happen in pharmacy and medicine, where you don’t have the corner drugstore, where the proprietor owns it and the business, but rather you have the third shift worker at Walgreens or Rite Aid or whatever. And and that’s, you know, exactly where this is heading as this snowball continues to roll.

Alison Werner 17:50
Did you find any trends in terms of age or point in career in terms of who is interested in DSOs at this point, that option?

Dr Greg White 18:02
Yeah, so it’s changed. And and you saw this change really starting to occur just before but really accelerated by COVID. Most of that growth from about 20% to 32% of the the consolidation of general dentistry and from about 2% to 10 to 12% in ortho and pedo occurred between nine the end of 19 and the end of 21. Okay, so that was greatly accelerated by COVID, as a lot of people just said, Hey, I’m, I’m tired of this, I don’t want to ever go through this alone again. And so bring me the paperwork, I’m signing it. It was also exacerbated by the scare that when President Biden came in that capital gain tax and capital gains taxes, were going to double and this is your year. So every single year, I’ve heard this is a year to do it. This is a year to do it. And so they’re you know, they’re still around every single year saying this is a year. But if you go back to where this really started gaining momentum, you saw more of the doctors were on the end of their career spectrum. This was their exit plan. I’m not going to find a doctor that’s going out of school is going to be able to afford this. They owe so much in student debt. They’re basically coming out of school with the equivalent of a mortgage. They’re not going to be able to take another mortgage to do this. They’re certainly not going to be able to pay what these folks will pay. I’m going to be working the next four years anyway. I might as well just do this and and retire. So that’s what happened with those folks. Now, what you’re seeing a lot of is the younger folks that are starting to do that, and they’re doing it for a few different reasons. One is they do have the student loan debt and this is an opportunity to get some cash upfront to be able to pay that off and get that burden behind them. They’re also promised these multiple recapitalizations, or the opportunity for them that you’re going to be able to cash out some of your stock, roll it into the next one rolled into the next one, instead of taking the full $3 million, take 1 million of that plus the 500,000. Roll that in. And now you don’t have 500,000, that’s going to be that’s going to yield you a 4x or 5x. But you’re going to have 1.5. And so they’re buying into that. And who knows how that’s going to pay out a play out, it’s going to play out well for some and not well for most suspect. But it is a really good way of keeping folks in what I called indentured servitude long term. Because if they make the wrong play on that, and it doesn’t pan out, what are they going to do now? What’s the next move? Are they going to go out and start all over again, they’re not going to really have the funds to be able to purchase a practice. So they’re going to be there either way, is my thought. And so I think you’re gonna have a lot of disillusion people that are going to come through this. How much you’re going to hear about it, I don’t know, because I think it’s going to be very embarrassing to talk about it much.

Alison Werner 18:03
Yeah. Well, you talked touched a little bit there about what this means for younger doctors selling their practices. But I’m curious, what does it mean for younger doctors who are coming out of their residencies and looking to get started their careers? What does the growth of DSOs do to them?

Dr Greg White 21:40
So what’s happening right now and I have been to probably 18 to 20 dental schools, mostly the residencies in ortho and paedo over the course of the last six months. And very few of them are going to be able to buy practice, very few of them, if any, are going to be able to start a practice because of the amount of student loan debt they’ve got. And so they are definitely ripe for recruitment by the DSOs. And their thought in their, their minds at that stage of their career is well, I’ll go work for DSO for a little while while I’m figuring it out. And I’m always really a little bit intrigued about that. Because I talk to these residents and talk about how much effort and energy and thought and planning and discipline it took for them to get from being one of many in their high school to being someone that got accepted into an ortho or pedo program. It takes a different type of person with a different type of discipline and a lot of planning. So I’m always very congratulatory of them for making that accomplishment, reaching that goal. But I’m equally little bit perplexed by how little thought has gone into the next move, which is the one that’s going to greatly impact their life, probably more so than any that they’ve made to that point. And that is, what next? What am I going to do? So I think they see that DSO as being kind of a mezzanine step when they graduate. And they also I find that a lot of the residents, they have a different mindset than maybe I did 30, 35 years ago, in what they’re wanting out of life at this point. They seem to have a very distinct idea about where they want to live and what they want that to look like. A a survey that I saw that was taken by Shannon Patterson of Bentson and Copple about five years ago, had roughly about 80% of all the ortho residents that year wanting to live in the same six states. So I think that if you’re coming out of school, and your mindset is I want to live in Dallas, Texas, you have a number of opportunities to go to work for DSOs in Dallas, Texas. And so that’s the next step. The big question is, how do you get out of that? And where do you go from there? Because if I’m getting out of school with $750,000 of student loan debt, and I’m taking a job for a DSO in Dallas, Texas as an orthodontist for 300,000 a year, where do I go from there? It’s not like I’m making enough money to be able to save up to buy a practice. Probably not going to be offered an opportunity to come in as an associate paying that much in a privately owned practice. And if I do, take a little bit of a pay cut or go make a lateral move, what makes me think that doctor is going to sell that practice to me at a discount and not sell it to a DSO, and here I find myself working for a DSO again, all of a sudden. So I don’t know that there are many ways out of that once you get into it because of the financial chasm between the student loan debt and the higher multiple that is being offered for valuable practices. So what you end up finding is some practices that the DSOs aren’t interested in, they do not have much of an EBITDA, maybe the doctor is taking home 300,000 a year, and so they don’t want to buy his practice, because there’s no value in it, they’re going to have to hire somebody for 300,000 to come in and replace this doctor. And there’s no profit. So when will you pay anything for something that’s yielding no profit? The same question I could ask why would the resident go out of school and buy a practice that’s only cash flowing 300,000, when they can go to work for a DSO for 300,000. So you end up with these practices in the middle that nobody really wants. And so what do you do, and chances are they close down; or you have a very successful practice in a very rural area three hours away from the nearest airport an hour away from the nearest interstate, it might be cash flowing a million dollars a year, but it’s completely worthless to the DSOs because they are not going to be able to get a doctor to replace them. So, you know, if that doctor is really young, and they’re willing to sign a long term contract, and maybe they’re interested, but if it’s somebody looking to exit, they’re probably not going to find a doctor to replace them. The DSOs probably not going to buy them for the very same reason.

Alison Werner 26:40
Okay. Well, I want to talk about what it means you talked a little bit about this before, but what does it mean to be owned by a DSO? Who owns what? And who owns the practice? And what do they own? Basically.

Dr Greg White 26:54
Yeah. So you’ll very seldom ever hear a DSO talking about owning a practice. In fact, they’re very proud of the fact that they don’t own the practice. Okay? The doctor owns the practice, and we partner with the doctor, this is a partnership. So I’d started digging into that. And I thought, well, partnership sounds good. I’ve been a part of partnerships for many, many years. Great partnerships work out real well. I’ve been married to the same woman for 34 years, and that’s a partnership. And I knew exactly what it looks like. I was a part of a orthodontic group practice for a quarter of a century and I knew exactly what that partnership looks like. So in my mind, I’m thinking, okay, this is going to be exciting. So what this partnership looks like. So I looked at it and said, Okay, when you pay the money to the doctor, what, what are you buying? And what are you not buying that? creates this partnership? They said, Well, we’re not buying the practice. I said, alright, well, this define for me what exists in the practice after you partner with them? Well, the patients and the patient records. I said, okay, well tell me what part of it that you own, either all or a majority of, when you pay that doctor the money to become a partner of theirs? I said, Well, we own anywhere from 51% to 100% of the non clinical assets. That’s it. All right. So what are those? So well, that would be the furniture, fixtures, equipment, the accounts receivable, the names of the practices, the leases on the offices. I said, so, and the profits. So you own everything to its monetary value, and they own everything that’s not of monetary value. So how are you partners? They said, Well, they’re still doing the dentistry. I said, Okay, so the partnership is that they do the dentistry, and take on all of the liability associated with doing that dentistry, for entry level pay. And you guys get all of the rest of the profits out of the practice through one form or another. And that is what they mean by partnership.

Alison Werner 29:16
So what does that mean? Say there was a case where a doctor got kicked out of the practice or somehow was removed, they wouldn’t own anything, and they could just install another doctor in there. Correct?

Dr Greg White 29:32
Well, that doctor who’s the partner if they once they leave, they’re not getting anything anyway except for whatever value they have in that stock, that they did not take in cash up front. And we’ve just described that, you know, there are literally DSOs out there that have well over 1000 doctors, okay, that are partners, by that definition that I just gave. Those 1000 people are all splitting 20 to 25% of the money that comes into that DSO when they recapitalize and that money when I say that money, I mean, after they pay off all of the debt of all of those doctors that they bought the practices from, since the last recap. So you could you could get, let’s say, you have you sell, you have a large DSO, and they sell majority interest that the private equity company sells their 60%, for example, to the next private equity company, and they do it for $100 million. Okay. But let’s say that, since the last recap, there were $60 million that was borrowed in mezzanine loans that they’ve just been paying interest on interest on at of what used to be the profits of all of those practices. So that debt gets paid off. So now you’ve got 40 million left. Well, those doctors if that DSO is owned 20% by all of the doctors, of that, what I say $40 million, that’s left? Yeah, only 8 million of it gets divided out among those doctors, all the rest of it either goes to the private equity company that has majority interest, or the the administrative group and or the owners of the DSO itself, meaning the people that founded it, and the people, you usually get a big carve out to the executive team, a lot of times that’s 10% of the whole transaction that keeps them on to get to the next recap. So the doctors are getting pennies, maybe nickels on the dollar out of that after it’s all said and done. Okay, so they don’t care if that doctor leaves, that doctor is going to stay until that recap. And that’s all that private, that’s all that DSO cares about because it’s not their problem after that, it’s whoever bought them. Now they’re going to try to have them looped in for a period of time after the recap, because if they’ve got the doctors in place, the longer they have them in place, the better off that is for what the value they’re going to get at the recapitalization. And what’s happening with the younger doctors now is the younger doctors who have a growing practice and who are willing to take less cash up front. And within those documents, it says that they can only cash out 20% of their stock at each recap. They know that they’ve got those doctors for about 20 years; and a lot of doctors are willing to sign on to that agreement because they know they’re going to practice 20 years anyway, and they can get a higher multiple for that. So instead of a five, they could be looking at a nine, ten. If you listen to the podcast on group dentistry now, that was late last year, with Chip Finster from Large Practice Sales, he talks about double digit sort of multiples in scenarios just like that.

Alison Werner 33:22
Okay. Okay, so what does this all mean for the patient and the community?

Dr Greg White 33:29
So I don’t think you have to look too far do much guesswork. This is private equity once they entered through the medical service organizations in medicine, and once Walgreens and Rite Aid and CVS started buying out or, or placing the local independents in such dire financial straits that they had to shut down, you get a real good sense of what that looks like. So even in the DSOs, you know, you’re seeing 30, 35% turnover rates, and a lot of them, if not most of them. What does that do from continuity of care for a patient. So if I’m a doctor, and I get out of school, and I take a job for $300,000, a year, or 150,000 if I’m a general dentist or whatever, my commitment is the length of that contract. I’ve got no investment made in that. I’ve got no ties to it. I can take a look around and see where I want to live next, and Florida sounds good. If I can get get a dental license there or I’ve got you know, reciprocal opportunities for licensing in other states, I just throw a dart on a map and take a look at the DSOs and see who’s hiring and what they’re offering because they’re all trying to incentivize people—signing bonuses, 25, 50,000, moving expenses. So you could do that every two years and take that signing bonus and take the job that’s going to pay 10, 15,000 more and see the world rolled that way. What that ends up being is a lack of continuity of care for the patient long term. And if you don’t have ownership in that practice, meaning control of the profits and the dollars and the P&L, you’re not going to commit any resources to the community and community involvement. So you have a deterioration of commitment to community and continuity of care to the patient, and high turnover rates. And all that goes with it. We’ve seen it in medicine. We’ve seen it in pharmacy. You’re going to see it in dentistry as well. As consolidation is going to continue to occur, you’ll get people that will say, well, it’s only going to be about 50% consolidation. No, it may be 50% consolidation, but it’s going to be near 100% of all of the practices that they want. You’re right, you know, I grew up on a farm and we didn’t pick 100% of tomatoes out of the garden, we just took the 50% that we wanted, and the rest of them weren’t good enough to eat. So that’s kind of what you’re gonna see. It’s a little bit misleading when they say that, I think.

Alison Werner 36:10
Okay, so what are the alternative practice models then to a DSO? What’s what exists at this point? Because I know pepper point is one of those.

Dr Greg White 36:19
I looked around with this. You have to realize Alison that, you know, I had 19 orthodontic offices me and my partners did and we were absolutely ripe for to sell. We had a back office platform that basically performed the same functions as a DSO. And in fact, that’s what PepperPointe was. It was simply a location where all of the administrative functions for White Greer Maggard’s 19 offices were performed. It was part of the whole, it was all the same thing. And so we had PE groups that wanted to use that as a platform in order to this was easy come right in the platforms already built. The technology’s in place. The systems are in place, We’ve got 19 offices here. Let’s rock and roll, let’s go. And I explored that, and came to the same conclusions that I’ve just covered with you today about what that true value was. And it didn’t make sense financially, it certainly didn’t make sense through my core values of settling out to the next generation of doctors, especially given the fact that I have one daughter that’s a pediatric dentist and another is graduating from dental school this May. I didn’t want to leave the profession worse than I found it. And so I started looking around. And you have to be really careful when you when you listen to what people say about well, this is doctor owned, this is a partnership. We’re never, you know, we don’t, we’re going to always maintain majority ownership in it, those types of things. This is what I’ve come to realize. No private equity company or family fund or any venture capitalist is ever going to invest large sums of money into purchasing a DSO without having control of when it’s going to sell. You’re never going to see a situation where it’s like an institutional investor calls up the PE group and says, Hey, we would like to exit this, when are we going to be able to get, you know, get our investment back, we’ve gotten nice returns, but we’re ready to kind of shift into another direction. And the PE group says, let me get back to you, I need to go and ask the dentist when they’re going to want to sell. That’s never going to happen. They have control—either through majority ownership or they have control through the board to be able to sell that when they want to. So I looked at all of that, and I didn’t like the fact that it made no sense from financial perspective, core value perspective. And so we decided to do something different. And that’s what PepperPointe really was, was, hey, it’s the idea that nobody needs all of this cash up front. Or if you don’t, then, but you want the protection and you want to increase your income going forward, and you want an exit strategy, and you want to be able to transition ownership from one generation to the next and you would like passive income in retirement and the equivalent of a 10x multiple when you add that together and leave the profession better than you found it rather than worse than you found it then this could be something you would be interested in. So it was founded out of the idea that we wanted to protect our legacy here in Kentucky. We wanted to protect what we had built. We wanted to be able to create a transition for the next generation of doctors, but one that they could afford, and would protect them and help them grow in this economic environment that we’re in, and this in this consolidation, environment, and create the best, and this is what this is what a model has to be, in order to be the most successful model, in my opinion, and to be the best model: It has to produce the absolute best financial outcome for the incoming doctor and the outgoing doctor. It has to have great alignment for all of the stakeholders, and the stakeholders are the communities, the patients and the doctors, and it has to be the most sustainable. So the question is asked, well, what’s the most sustainable model? The most sustainable model is the one that can attract the next generation of doctors. No model is sustainable if you have doctors retiring, or dying, and no one to replace their work. That’s it. So which is the most sustainable model, given that definition? It’s going to be the one that is going to provide for those incoming doctors, the best possible financial result and the most security and the best long term plan for them in both of those realms. So it’s easy for us to win that from that perspective, because this is about ownership. It is about absolute transfer of true ownership, clinical and non clinical assets from one generation of doctors to the next, as my daughter became a partner in the group on January 1. And when you don’t have all of the hands in the pot, such as private equity, and the institutional investor, and all of that money stays in the company to be distributed to the partners, of which 100% of those partners are the doctors. So PepperPointe does not own any of the practices. Doesn’t own any of the clinical or non clinical assets at all. We simply unite the doctors together, and then guide them forward in a group because they do not have the experience to be able to manage a group practice of 30 or 40 locations. So we have brought together four of those such groups. One was 50 locations, one was 42 locations, one was 20 locations, and one was 24 locations. And so what PepperPointe does is help strategically manage those four. So the actual managed services, but also the strategy and the tactics in order to grow. And we have been able to produce in those first two groups, anywhere from 20 to 35% growth since 2019; and we’ve been able to increase profitability between 27 and 40%, for those groups, since 2019 and 2020. And when you think about the headwinds during those times, we’ve had COVID supply chain shortages, and the highest inflationary year in 40 years. So we beat the industry and the industry was probably down one to 2% in those years, not 21, but if you take a look at 22 and 23. And during 22 and 23, we were having double digit growth in both profitability and revenue while the rest of the industry was stagnant. And one of the reasons for that is there’s no, we’re not capital intensive because nobody’s getting these big checks that we’re having to borrow up front. They’re getting increased income as time goes on. They’re getting the transition from one generation to the next, and they’re getting the passive income in retirement. So it’s a different model for a different time for a different type of people. These are not about quitters, these people that we helped bring together, these are fighters wanting to fight for their backyard. They don’t want to give up their income. They want a path forward. And they need guidance and want guidance in getting from here to there.

Alison Werner 44:29
Well, before we wrap it up, I’m just curious, what’s your message to orthodontists who are in private practice and looking at the road ahead?

Dr Greg White 44:37
So one of the things that we’ve seen since interest rates have gone up and the early adopters have already jumped on the DSO bandwagon is you’re now seeing a more tentative group, a more thoughtful group of people that are taking a look at their options. And I think that’s good, I think that’s really good. I believe that anyone that is in practice right now, should absolutely start contemplating their exit. Okay, whether it’s three years from now, or 30 years from now, they need to start thinking about what is that exit strategy, because I can tell you one, that’s not very good now, nor will it be and that is the one that’s worked for all the years in the past: When the time comes, I hope I find somebody that’s going to come in, that wants to buy the practice and is willing to pay what it’s worth. That is not going to work in the future. So there’s going to need to be some strategic planning right now about what that exit strategy is going to look like. So you got to figure out who are you going to team up with? Are you going to get together with some of the other folks in the area and team up in order to be able to combat the inflationary effects that are going to absolutely hit the independent doctor more than anyone else, as you’re going to see the big supply companies and vendors, they’re not going to come out to the local doctor five years from now. They’re gonna go to the procurement specialist at the 100, 200, 300, 400 unit DSO. They’re not going to go to a sale, they’re going to move from a sales force to a service force, servicing large accounts, not selling to small practices. So that’s going to be death by 1000 paper cuts. You can do it and you can go on forever. Practices that have been going for 20 years, you’re not planning on retiring for 10 more, you’re probably going to be fine, because you’ve built a reputation. But you’re going to be hit by this inflation. And you’re going to be hit by the shift from sales to service. But still, you haven’t figured out your exit strategy; what’s it going to be? And so that was really what we were thinking, we brought that first group together. We want to know what that exit looks like. We want to know that it’s the best financial outcome, we want to know that we can retire when we want to retire. So I think those are the questions that people need to be asking themselves: Which model is going to be best? Staying it alone, teaming up with a traditional private equity backed DSO, or something more innovative? All right, and do the homework. You know, what I ask people all the time is they will call them inquire and I’ll give them you know, 30 minutes, 40 minute overview of it, and then they might say, Okay, well, thanks a lot. Appreciate it. And that may be enough for some but for many, I wonder, are they doing that same thing are you you’ve put your put more time into deciding where you’re going to go for dinner, than you’re willing to put in to how you’re going to dispose of the biggest asset that you have created in your entire lifetime. So I would say, go in and engage, engage with DSOs, engage with whomever you want to, us, anyone. Go through the process of truly understanding what it is, so that you will have an idea of what’s on the menu out there so that you can determine which one is going to get you where you want to go, and allow you to exit in the way that you want to exit at the time that you want to exit.

Alison Werner 48:19
Great. Well, Dr. White, thank you so much for taking the time to expand on your paper and for fleshing out this topic and giving some really helpful advice for orthodontists as they look to the future. I really appreciate it.

Dr Greg White 48:30
No, it’s my pleasure. It’s always great talking to you. And you can probably tell I’m pretty passionate about this. I care greatly about what happens to dentistry. It has meant so much to me and my family. And I want it to continue in its very best form possible with a great alignment for all those stakeholders. So thank you so much and you have a great day.

Alison Werner 48:51
Thanks you too. As always, thank you for joining us. Be sure to subscribe to the Orthodontic Products podcast to keep up with the latest episodes. And be sure to check out orthodontic products online dot com to keep up with the latest industry news. Until next time, take care.