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Welcome to Fink Oral.

Speaker1:
Where we connect the unconnected between oral and physical health.

Speaker2:
I’m your host, Dr. Jonathan Levine.

Speaker1:
And I’m your host, Maria Filipova.

Speaker2:
Let’s get at it. Welcome to Think Oral and we are so excited to have the guest Maggie Jarrett from Tusk Advisors. Maggie Jarrett has a wonderful background of investment banking. She is here to talk to us a little bit about some of these new trends that we’re seeing in dentistry, the dental service organizations and the need for dentists to be represented by people who understand the landscape you’re dealing. The dentists are going to be dealing with these organized businesses, usually backed by private equity firms. And this sophistication for the professional is greatly needed. So with partner in crime, Maria Filipova, we’d like to welcome Maggie Jarrett to our Think Oral podcast.

Speaker3:
Thank you for having me. I’m happy to be here today.

Speaker2:
Yeah, we’re excited to have you.

Speaker1:
That’s right. We’re very happy to have you. And we are bridging two of my favorite topics today health and investments, the business side of health and the capital side of health and dental care. So couldn’t be happier to have that conversation. Yeah.

Speaker2:
So let’s start off maybe as we start off with this first question, Maggie, give us a little bit about how you as an investment banker, your background is at Tusk. How did that all happen? And really, what’s the mission of Tusk organizationally?

Speaker3:
Sure. So I spent my whole career in health care across sales strategy, business development, private equity roles, and had come to the dental industry through my former work in a private equity firm based in Denver, where I live. And that firm invested in a dental business. I sat on the board of that dental business and got to know the industry and got to love it. Soon after had the opportunity to come to work for Tusk, which is an M&A advisor, and really switched from the buy side to the sell side, where I am really enjoying getting the opportunity to represent founder, owner, dentists and executives in this transaction and that’s often the biggest transaction that they will make throughout their lifetimes. So Tusk is a sell side advisory firm focused exclusively on the dental space. We work across all specialties within dentistry, across the entire US and represent clients with anywhere from a million of EBITDA up to 10 million of EBITDA. So doing deals ranging from call it 5 million, a total enterprise value up to north of 100 million and clients who have a range of goals, right? So some of our clients come to us looking for administrative burden relief, right? They are just tired of managing the clinical side and the business side themselves and they want some support so they can work, focus on clinical care.

Speaker3:
Other clients are looking for a path to retirement. Other clients want additional resources and support to help their business grow more quickly, and others are looking for growth capital. Maybe they have reached the limit of their lender relationship and that’s slowing their growth and they’re looking for equity capital who can allow them to grow with their footprint more rapidly. So we serve all different types of clients. Our clients sell to different types of buyers. So we work with their north of 100 private equity backed DSOs in existence today. We work with all of those buyers. There are also many private equity firms that don’t yet have investment in the dental space and are looking to make one. So many private equity firms will invest in one of our clients businesses and have that business serve as the foundation for a new DSO.

Speaker2:
Yeah, it’s really amazing. Having been in the industry myself for three and a half decades to see how the industry is evolving. So working with these dental owners and their practices, what is their capability gap that they have as professionals that they need to build and to be advised to with the need for an M&A firm? Because it’s my thought that the dentists don’t really understand kind of the need for this advisor and really what an M&A firm is all about dentistry because the dental industry has been so fragmented and now is moving in this direction. So yeah, what are those areas?

Speaker3:
So the value that we add to our clients is not only making sure that we’re maximizing value for them by running a competitive process. A lot of dental practice owners have already been approached by buyers, right? They may have received one or more unsolicited offers from those buyers, but it’s hard for an owner, a dentist, to know whether that offer is a competitive one. Right. Because they haven’t shopped the deal. And so we want to make sure that we’re running a competitive process, that we are taking their maximum EBITDA to market, which can really only be done through bottoms up analysis of the general ledger, making sure that we’re identifying every add back that we can to get their valuation based on the highest number possible, Right? So their valuation is effectively EBITDA times the multiple that the buyers offer. And so we want to maximize the EBITDA that we take to market. We also want to maximize the. While running a competitive process and creating tension. The last thing that we really focus on as a firm for our clients is the structure in terms of the deal. So just because the valuation is very attractive and the numbers are compelling for the client doesn’t mean that he or she is going to want to do the deal if the structure and terms are not right. And so we focus on all three elements to make sure that the ultimate deal that our client decides to choose and move forward with is one that’s a great fit for them from a strategic perspective, financial perspective, cultural alignment, all of those things really need to be in place in order for the deal to make sense.

Speaker1:
Yeah, as a recovering banker myself, I really appreciate the breakdown of the how do you create value and capture value that you just provided for us? How could we talk a little bit double click a little bit for us on that whole number we’ve seen in the last couple of years in health care wide ranges and we all know when the cycle goes up and when we’re in a bullish market, we’re seeing multiples of ten X and that pendulum swings the other way in a bearish environment. So talk us through some of the trends that you’ve seen in valuations over the last couple of years. And is what we’re seeing in health care or digital health as it has experienced a huge boom in the last couple of years. Are you seeing some of that increased attention to the space that you’re in? And it could be reflected in the multiples or in another number or part of the valuation or the deal structure as you complete them?

Speaker3:
Yeah. Great question. So the multiple really only matters if it’s based upon a true EBITDA, right? So we will sometimes see buyers put forth a ten x multiple, but the EBITDA that they’re valuing it on is actually artificially suppressed. So we don’t and there are a lot of doctors out there who think they want a ten x multiple, but that really only matters if it’s based on their true EBITDA. So that’s the first place where we start. But you’re right, multiples typically tend to increase as EBITDA increases. But it’s not it’s not always the case. So there may be many reasons why a buyer would be willing to pay a high multiple for a smaller practice than they would for a bigger practice. For example, geographic footprint payer mix, typically Medicaid practices, trade for a little bit of a discount, specifically adult Medicaid, Right? How much upside opportunity is there within the practice? Are there open shares that can be filled by a new hire, a new associate hire? Is there an opportunity to add days, expand hours, improve payer contracts? All of that upside will manifest in the form of a higher multiple doctors willingness to stick around and close close. So there are really two consistencies that we have across all of our deals, regardless of geography, size, specialty. That’s number one.

Speaker3:
All of our doctors are committing to stick around post-close typically for five years, and all of our clients are typically rolling between 20 and 40% equity. That ownership that they have in their business, they’ll sell 70%, 60 to 80% of that equity to the private equity firm, and then they will retain that remaining equity either in their existing practice or they can roll it into the DSO. They have a small piece of a bigger pie. Those two mechanisms decrease risk in the buyers eyes. So when there’s less risk in the deal, the buyer is going to be willing to pay a higher multiple. All of those things come together to impact the multiples that our clients are receiving, not to mention how many buyers are there competing for the deal. Right? That’s always going to drive up the multiple and improve the terms. And there are a number of reasons that a buyer might bid higher on one business or the other just based on timing. Maybe they lost out of the last few deals. They just don’t want to lose another one. Maybe they just got a new infusion of capital and they have more money to deploy so they can pay a little bit more for deals. So all of those things impact the multiples that you see.

Speaker1:
So how would you factor I’m going to connect the dot here that we started on in one of our earlier podcasts. And Jonathan, you’re going to be a recipient of that question as well. How do you factor in the valuation practice that is more innovative than another practice? And again, that’s one of those squishy qualitative metrics, right? A practice that is open to technology, that has cleaner, more streamlined workflow. In an ideal world, that would translate in higher satisfaction scores, retention, scores of patients and revenue. But maybe there’s a situation where that practice is in the cycle. They just invested in those technology. So how do you factor that in your valuation? And Jonathan, I want to hear your perspective, too, because you’ve spent a lot of time and and resources investing in in some of those more innovative technologies and practices in your practice. So from oral physician’s perspective and an investor and a banker perspective, I want to get into that question a little bit.

Speaker2:
I love that question. Maggie, you go first. Okay.

Speaker3:
Oh, the innovation in investing ahead of growth, for example, those are all points that we as an advisor representing our client will highlight the pool of buyers. Right? It’s very important for us to be able to articulate what makes one practice unique. Over another and easily allow the buyer to understand those unique aspects of the practice so that they can factor that into their valuation. Typically more innovative practices with great reputations in the community. Great employee retention. Patient satisfaction will manifest in the form of higher multiple. But there are many cases where practices have invested in so that innovation is not yet reflected in their EBITDA. Right. So what will happen and this happens, this became really common during Covid is that businesses were down, they’ve been closed for months. The buyers were asking them to value the business based on their most recent 12 months of financials, but their 12 months of financials are not there. Very atypical. So buyers got very comfortable structuring true ups and earnouts these creative mechanisms to give the seller value for the deal, not only at the close of the transaction, but in the next 1224 months post close. So it would look something like we’re going to pay you an eight x multiple on your EBITDA as it is today. We’ll pay you that same eight x multiple for any incremental EBITDA. That’s generated within your business in the next 1224 months post close. So that’s called a true also earnouts, which are a little bit different, but address the same issue. And those structures have just become more and more common in our deals in in in broader deals across the industry.

Speaker1:
Very helpful. Jonathan, how do you think about that?

Speaker2:
Yeah, you look the innovative dental practice is when you really translate it should mean higher EBITDA even though your investment and your investment spending ahead of maybe where revenue is going to come through efficiencies, through better communications, through a better tech stack. And eventually if they’re operationalizing these innovations, whether it’s salivary diagnostics, airway cbct cone beams, which are the Cat scans for the mouth and the jaws, and all of that technology coupled with you need the team, the talent to be able to drive those innovations. If you have that in order, that’s going to translate. If you bring in a new innovation in your practice and you don’t really use it. So it’s still not a majority percentage of all of dental practices in the country use scanners. Now, this is close to 25 years old at this point. And so we know how slow adoption is with innovation in all of health care and dentistry legs, medicine on that. Finally, this digital workflow is coming in a bigger way to dentistry. The practices that are adopting it, whether it’s an older dentist, bringing in a younger dentist that understands this, that will translate to higher revenue and more efficiency. So greater EBITDA and eventually does come out in a positive in a positive way.

Speaker1:
Yeah. Yeah. I hear what it sounds like. What both you and Maggie are highlighting is avoid the temptation to do the shiny new toys of innovation. Oh, there’s another tech stuff that we could do and making sure that innovation, as we call it, is a technology or different workflow or maybe an integrated care service, right? The dental practice now offers sleep health options, right? That will ultimately either translate in operational efficiencies or some top line metric that whatever we decide to look at.

Speaker2:
That’s exactly right. Look, it comes down to the same thing in every business, every organization, every medical practice, dental practice and any other industry. It comes down to leadership. And if the dentist owner’s leader drives new innovation, you also have to, in the training and the time for your people. And if you have the right people and you’re making that investment from a dentist owner leadership perspective, it’s going to translate. It’s going to translate in a positive way. Otherwise you can bring in that shiny new toy comes in and doesn’t get utilized properly. And it’s look, it’s like that across the board.

Speaker1:
Yeah. For all those listeners, our listeners who are practice owners grappling with the question what’s the right balance of investment and how does especially if they’re considering being in that stage of the of their practice or their career where they’re considering bringing in a partner or selling that some of the some of the key questions to have a strategic leadership answer answer to. Yeah, Maggie, you did go down the path. You mentioned something and I think our listeners may have picked up on it. Some practices that have a majority mix of patients are on Medicaid. You mentioned that might be a lower multiple. Could we just dig into a little bit more because there’s in in these conversations, Jonathan and I like a lot to talk about access and equity and the innovations and highest quality of care reaching all kinds of communities, all kinds of patients, irrespective of what their insurance coverage is. And so tell us a little bit more about what you’re seeing in the market. And as an advisor, how would you advise some of those practices who see it as part of their mission to take care of some of the patients that are in their communities? And so is are they going to have to live up with the lower valuation or how do you advise them in that situation?

Speaker3:
Yes. Well, to be clear, there are some DSOs that focus on Medicaid, right? They want Medicaid practices because. They are experts in pair Right.. They know how to submit claims. They have really tight operations around the Medicaid business. So it’s not it is not every so that does not want medicaid. There are some that do. Well, we have ours. Our clients run your business as if you were not selling it, right. Make you make the best decisions for your business and your patient base that you are treating and supporting. So we would never encourage a client to totally change their pyramids just for the transaction, right? We will look to make sure we’re bringing in buyers who are comfortable with the payer mix that anyone in any given practice has. So that’s the first thing. But the reason buyers are hesitant, right, and sometimes is because there is increased risk, right? You can be audited. It is just you have to really understand the operations and support. So if you are a medicaid practice, you really want to make sure that you are very rigorous around your claims submissions and that you track your performance with Medicaid so that you can then demonstrate that to the buyer, right? If buyers feel like you have a good handle on your Medicaid business, then they’re going to be more comfortable and more willing to pay up for your practice.

Speaker2:
Yeah, Yeah. Really interesting. Let me switch gears real quick, Maggie, I want to ask you, you’re in this M&A role. You’re meeting with the business owner, doctors looking to either take those that those dollars off the table or retirement being part of maybe a bigger thing by getting equity in this larger company. What is the opportunity today in the DSO industry? When we think back when it started north of 20 years ago and how it’s evolving and how these new DSOs are going into some new white space and landscape, where are they going and what is the big opportunity for the and I would say with an objective of I’m going to put it out there, better patient care, better outcomes. What is that opportunity?

Speaker3:
Well, historically, DSOs primarily consisted of general dentistry practices, right? And they were aggregated at general practices within their region of focus. What they recognized, though, was that these patients at these GP practices still need the specialty care, right? And the patients were having to go elsewhere for the specialty care, couldn’t get it within the DSO. So number one, that’s less convenient for the patient, right? The patients have to go elsewhere. There’s a communication lag when you’re communicating from doctor to doctor, making sure that the care is comprehensive and integrated. And so these DSOs started to invest in specialty practices because not only were they able to capture that revenue, but they were also able to provide a better patient experience. And so that was the first thing we started to see. And then we started to see DSOs being formed around specific specialties. So their DSOs out there that only consist of orthodontic practices or oral surgery practices or pediatric practices. And so those are growing very rapidly. Tusk is a firm when we found we were founded about five years ago, the vast majority of our deals, 80 to 90% were GP. Now it’s 5050, right? Gp And specialty is that ebbs and flows over the years. A couple of years ago we actually had more specialty deals than we did. Gp So there’s a lot of that going on. There are also mobile DSOs out there, there are DSOs that are specific as we referenced earlier. Then there’s this new term that’s a hot topic, which is the DSO or the invisible DSO, and that has caught the interest of a lot of dentists. I love that.

Speaker1:
I love that idea. So I was going to venture to be an innovative DSO, but my brand, those things. Right. Tell us what an invisible DSO is. First of all, for those of us who are just finding out about the idea.

Speaker3:
So historically, DSOs had built the reputation of being very heavy handed. They would come in, you had to change the name of your practice. You had to change your practice management system. You had to change your payroll systems. You had to go onto a strict formulary. And that rubbed a lot of doctors the wrong way. They had never had a boss. They had always run their own business and had the freedom to run it as they chose. Yet they wanted a partner. They wanted that support, that additional capital, that path to retirement, whatever it may be. And so what we started to see was DSOs lightning up their techs a little bit. Right? And so DSO, you can’t just name a list of of DSOs out there. These are the ideas. These aren’t everybody’s been moving in that direction, which is they want to allow practice owner to have a little bit more freedom in how they run their business Post-close And those gases have to move in that direction in order to compete. If we got a handful of DSOs that are saying you can keep your name, you can keep your practice management system and you don’t have to go onto a strict formulary, well, they’re going to win all the deals. So everybody has moved in that direction and it’s just made for better partnerships. Post-close Right. There are.

Speaker1:
Those ideas. So running an DSO model come with a higher operating cost because presumably, at least theoretically, you’re giving up some of that standardization or not. Or does it?

Speaker3:
Great question. I think it depends. Certainly it’s easier to brand to market one brand. It’s universal, right? But when you do that, you’re kind of losing that kind of local reputation, right? Patients might be confused, might be concerned. Would they see their dentist practice change names and the dentist is using different supplies on them. And so you might have increased marketing expenses, for example. But, you know, some of the other things are going to go a little bit more smoothly today. There are all of these technologies can sit on top of disparate practice management systems. So to be able to aggregate the data that a DSO needs in order to best support the practices that are a part of it, that’s become a lot easier historically. You’ve had to all be on the same one to get the reporting you needed. That is not true today. And then with regard to formularies, yes, of course, it’s maybe a little bit more expensive if you allow your doctors to to use what they want, but that leads to better patient care and happier partners.

Speaker1:
Great insight. Love that, Jonathan. Well.

Speaker2:
Oh, I got a lot to talk about it. I’ve got.

Speaker1:
To. But I’m.

Speaker2:
You know.

Speaker1:
You get through your list.

Speaker2:
Well, I would just jump on what Maggie was talking about in the big question. Look, the dentists, they built this reputation over decades. So the excitement of the Ipsos is the dentist seller is saying to themselves, I still have my name, I still have my patient relationship. We still have that trust. The buyers are leveraging that trust. And so to be invisible and behind the scenes, to help them do the things that they don’t want to do, could be administrative, could be helping with HR or payroll and all of these type of processes. But also and where I want to go, Maggie, is the future. What I’m hearing from these CEO DSO owners is not only is acquiring these practices and arbitrage for these multiples, but really what they’re looking to do is to get into organic growth, which at the end of the day could be better patient care and you share your thoughts.

Speaker3:
That’s always part of every transaction is an assessment not only of historical EBITDA through growth and acquisitions. Right? You can grow by acquiring more practices, adding more doctors, adding cheers. It’s about how are you able to grow with what you have right within your existing core walls of any given location. How has that revenue changed over time? How has that EBITDA grown as a result? And so organic growth is a big part of the valuation assessment for the deals that we represent and also for broader, larger DSO deals. When you’re representing when you’ve got a private equity backed DSO, selling to another private equity firm or another larger strategic. So it’s not just about growing EBITDA through acquisition, you have to become more efficient and better support the patients within each practice in order to truly be successful and truly be adding value. Yeah, exactly.

Speaker1:
And when we mean love that first of all, I’m so impressed by your operational knowledge of the business of the DSO, and these are my favorite types of bankers who go into the not only the operations but the clinical side. And what is it what does it take to build a thriving practice that’s part of a thriving community based on the patients around it? And so, Maggie, if I could ask you to take off the advisor to a DSO hat and put on an advisor to a startup or a company looking to do business with a DSO, what are the types of services or where do you see the gaps currently that are not being met that a company, an entrepreneur or a CEO of a company looking to create a business in that space with a DSO as a customer should focus on? We touched on data interoperability. We touched on patient care. Are there some gaps that are currently not being filled? A lot of our partners, a lot of the folks who are listening to this podcast are startups. We both know that VC funding, early stage funding in dental care has been lagging the VC funding in overall health. So let’s give them a hint and help here in terms of their ability startups ability to engage with users.

Speaker3:
Yeah, I mean, the owners that we connect with are trying to manage a million different things within the business, right? First and foremost, they’re focused on their patients. They also are focused on hiring and firing of their team, right? Making sure they have the people in place to help them deliver the care that they’re trained to do. And so it is really possible for them to have a good hold on every single aspect of the business. That’s what many of them want to transact, right? They’re just overwhelmed and they’re working 100 hours a week just to keep the business going. Some of the biggest gaps that we see when we look at our clients financials is a lot of them have never even tried to negotiate their payer contracts. Right. They’re just taking they’re just accepting the rates that the payer gives to them. And so there are a handful of payer negotiation firms that are focused on the digital space those groups are overwhelmed with. Because there’s such a need there. It’s so helping them manage their peer contracts, which is directly impacts obviously their revenue and profitability, is a big opportunity. We also have often clients who just don’t even know what they should be spending on any given line item as a percent of total revenue. So, for example, they’re not really sure where their rent should be, where their supplies expense should be. So just giving. And we will do this for clients as well, giving them a sense for here’s kind of market. Now, there may be a good reason for you to be above or below market on that line item in your spend. Just understand, this is where everybody else is. And so a conscious decision about whether you want to be at or near that level or not. And so because they’re working in a silo, right. And they are, how could they know what normal supply spend is, the percent of total revenue and things like that? So those are some of the things that we see, just helping them develop the strategy, how to expand, where to expand when they’re looking at growth as well.

Speaker1:
Fantastic. Great feedback and great.

Speaker2:
Insight, Maggie. Well, one last question I wanted to throw at you. So where is the DSO industry going as a percent of all dental revenue? Is it going to continue to grow? Is it going to start flattening out? Well, and so we think about the trends, the young dentists coming out of dental school with 350 K plus and the opportunity to join one of these versus having to spend more capital starting their own practice and the fact that dental partnerships usually don’t end up well because of the lack of knowledge of the dentist owner, truly understanding how to bring a partner in. And they need a lot of help for that. So where are these trends going on as we see the convergence of all of them?

Speaker3:
Yeah, the dental industry, anywhere between 20 and 30% consolidated, depending on who you talk to. So there is still a ton of room for continued consolidation and growth within the industry. And as you mentioned, Jonathan, what we see is these graduating dentists are coming out of school with hundreds of thousands of dollars of debt. That didn’t really used to be the case. It’s much harder for them to buy into a business where they may not have the ability to buy in. And so a lot of them look at a DSO as a great opportunity, as a great training ground. It’s a great place for them to cut their teeth. They can start to pay off their debt through that. And many of these DSOs, if not all of them, offer a path to partnership for associates, right? So for high performing associates, they’re still going to be able to be an owner in the DSO case. They’re going to be an owner of the entire DSO, a small piece of the entire DSO, which represents many practices. So the way it’s de-risking that very large investment that they’re making, but still giving them an opportunity to be an owner and a decision maker within the business. So we will see continued consolidation. It’s never going to get to 100%, but I think there is a long runway and what we are seeing, we’ve got 40 deals in market right now as a firm and we have seen continued healthy multiples, many buyers coming to the table on each of our deals. And so there has been no slowdown from our perspective in the equity markets, dental space. What a great way.

Speaker1:
To end the conversation on that happy note. Yes. Thank you, Maggie. Thank you for all the ground we covered. I mean, we took you to varying levels of topics and depth of of dental care and dental market. So thank you for coming along on this journey with us.

Speaker3:
Thank you for having me. It’s been fun.

Speaker2:
It’s been great. Thank you, Maggie. Thanks for listening to the Think Oral podcast.

Speaker1:
For the show notes and resources from today’s podcast.

Speaker2:
Visit us at our outcomes Rocket dot health slash think oral.

Speaker1:
Or start a conversation with us on social media.

Speaker2:
Until then, keep smiling.

Speaker1:
And connecting care.

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