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In this Orthodontic Products podcast episode, Chief Editor Alison Werner interviews Greg White, DMD, MSD, president and CEO of PepperPointe Partnerships, about a recent white paper he authored. “The State of the Dental Industry” looks at the rapid consolidation in the field, led by private equity, and offers predictions for the future.
In addition to his role at PepperPointe Partnerships, White is an orthodontist in private practice for more than 25 years and a founding partner of White Greer and Maggard, a pediatric and orthodontic group practice located in Lexington, Ky. Through these two lenses, he explains the nuances associated with private equity backed DSOs, what that model looks like, and what the end result can mean for both dental professionals and the communities they serve.
White explains how consolidation in the dental industry isn’t a recent phenomenon. There was movement in the 1990s, but it wasn’t until the 2008 recession that the trajectory of consolidation ramped up—with its biggest jump coming with the pandemic. In the 1990s, only 2% of practices were owned by DSOs. By 2013, it was 13%. And by 2023, it was 34%, according to White.
Given this, White talks about the need for dental professionals, especially orthodontists, to understand what it means to sell your practice to a DSO that is backed by private equity. He talks about who owns what; what a doctor is really earning; and what role stock plays into a potential payout.
In this episode, White also talks about how this consolidation affects associates today and future generations of dental professionals. Younger doctors are struggling to buy or start a practice due to high student loan debt. Many are unable to afford the upfront costs of a practice, which leads them to DSOs to start their careers. But what happens when they want to start their own practices? White argues that their options are limited.
To round out the conversation, White talks about the importance of knowing your exit plan whether you’re 5 years or 30 years into your career. There are options, but you need to do the work to understand all of them.
Creators and Guests
What is Orthodontic Products Podcast?
Introducing the "Orthodontic Products Podcast", a journey into the dynamic realm of orthodontic innovations. Each episode dives into fresh research, transformative technologies, and the methodologies redefining the field. Expert interviews seamlessly blend with in-depth analyses, offering listeners a comprehensive look into the ever-evolving world of orthodontics. This isn't just a podcast—it's a portal to the future of orthodontic practices and breakthroughs.
Alison Werner: 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: It's my pleasure.
Great to be here, Alison. Thank
you.
Alison Werner: 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: 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: 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: 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: Okay, so let's
talk about that recession and
how it changed the trajectory in
terms of consolidation.
Dr Greg White: 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: 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: 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: 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: 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: Okay, okay, so
what is driving doctors to turn
to DSOs today?
Dr Greg White: 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: 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: Yeah, so it's
changed. And and you saw this
Alison Werner: Yeah. Well, you
talked touched a little bit
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
there about what this means for
younger doctors selling their
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
practices. But I'm curious, what
does it mean for younger doctors
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
who are coming out of their
residencies and looking to get
to pay that off and get that
burden behind them. They're also
started their careers? What does
the growth of DSOs do to them?
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.
Dr Greg White: 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: 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: 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: 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: 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: Okay. Okay, so
what does this all mean for the
patient and the community?
Dr Greg White: 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: 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: 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: 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: 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: 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: 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: 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.