Are DSOs Still A Safe Bet? A Real Talk Breakdown With Mike Baird & Kyle Welch

Jonathan Moffat is joined by Mike Baird and Kyle Welch for a candid look at the current state of Dental Service Organization (DSOs) and private equity in dentistry. They break down what is really happening behind the scenes, from debt structures and recap risks, to why some DSOs are thriving while others are stalling out. Whether you are already sold, still considering your options, or just want clarity in a shifting landscape, this conversation pulls back the curtain and offers a grounded perspective on what’s next.

Find Jonathan at jonathanmoffat.com

Learn more about Aligned Advisors at alignedadvisors.com

Connect with Mike Baird on LinkedIn: linkedin.com/in/bairdmike

Connect with Kyle Welch on LinkedIn: linkedin.com/in/ktwelch

Find Jonathan on LinkedIn: linkedin.com/in/jonathanmoffat1

Weekly insights drop at dentalwealthmultiplier.com

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Are DSOs Still A Safe Bet? A Real Talk Breakdown With Mike Baird & Kyle Welch

Welcome to another episode of Dental Wealth Multiplier. I’m excited to have two guests with me. Interestingly enough, we’ve known each other since childhood. I’ve got Kyle Welch and Mike Baird joining me. Thanks for being here, guys.

Thanks for having us.

Introducing Mike Baird And Kyle Welch

Why don’t we do brief introductions? Kyle, why don’t you go first? Tell us a little bit about yourself and what you’re up to before we jump into our topic.

Among other things, I help run a chain of ambulatory surgery centers that focus on dentistry. These are hospital cases in dentistry. I’m also a professor of accounting at George Washington University. In a prior life, I used to do investment management at Stanford for the endowment. That’s a brief background.

Thank you. Mike.

I ran a couple of healthcare companies. I was the CEO of Henry Schein One, which got me into the dental space. From there, I decided to start an alternative DSO-type structure that I think is the antidote to DSOs called Accelerate Dental. I am currently involved with 35 or so practices in the Mountain West.

Breaking Down The Demands Of Private Equity

You’re both very busy and successful. I appreciate both of you being on this and making time for this show. There’s going to be a lot of value here. Kyle and I were talking before. I have a feeling it’s going to be the first time that we’re going to be talking to each other here. There’s a lot of valuable insight that both of you bring. You’re in the trenches. You’re going to meetings. You’re talking. You’re doing. You’re in there doing. You’re not just somebody who’s up on stage talking. You’re in the trenches working and fighting the fight. I appreciate you guys being here. You bring a really interesting and different perspective and a lot of transparency to what’s going on in our industry, which is important.

It’s always important. Especially at this time and what’s happening, you often talk about the demographics. Mike, you brought up some slides that were interesting. It is the demographics of where we are in the industry with this aging population of doctors who cannot afford to retire. You’ve also got these dentists coming out of dental school who don’t want to own practices, but I think they’re confused.

They like dentistry. I talk to so many third and fourth-year students. I’m sure you guys, too. You’re talking to them, and within five minutes, they’re like, “I can’t wait until I can stop practicing dentistry.” You haven’t even started yet. You’re already talking, “When can I step away from it? When can I be done? When can I step away from the chair and have passive income?” You still have $600,000 worth of student loan debt you haven’t even dealt with yet.

Because of that, it has created this perfect storm for private equity and for DSOs to come in and go, “We have a solution that can make everybody happy. We’re going to pay doctors who want to exit and can’t afford to, because your practice is your biggest asset. It’s the only thing that you have set aside for retirement. We’re going to pay you more money than you ever thought possible for that practice. Associates, we’re going to create this perfect environment where you come in and you don’t have to worry about the administrative stuff.” Kyle, why don’t you start us off first? Talk to us about what could go wrong with that scenario.

On the operations side, I’m pretty sure Mike can speak more to it. Let me talk a little bit about the demand side of what’s happened with private equity. I can speak to it well because at Stanford, I saw this, and when I was getting my doctorate, this is what I did my dissertation on. It was on private equity and how it provides this illusion of diversification for investors. Hopefully, I don’t put anybody to sleep with this. If you could put your brain on a little bit, that’d be great.

How about we preface it with this? You better be paying attention to what Kyle is saying because your financial future depends on this. Go, Kyle.

Here’s the thing. If you are an investor of a large pool of money, like a pension fund or endowment, or a large pool, the price of all your assets in it goes up and down with the market. It’s always good when it’s up. It’s always bad when it’s down. As a manager, you want fewer downs than ups. That volatility is part of the process. Private equity burst onto the scene in the 1980s and started providing exposure to what we call illiquid assets, assets that didn’t trade on the market. For pension funds and endowments, what this provided was a steady valuation.

Here’s the thing with this. You go shopping at Toys R Us on December 23rd. Why? It is because it’s before Christmas. That’s why you go shopping at Toys R Us, not because it’s going to be owned by Bain Capital. The same is true whether the market is liquid or illiquid. There’s a theory behind this called the Modigliani-Miller theory. The capital structure of a business doesn’t impact the actual economy of people showing up to buy things and how much things cost across the globe. What’s happened is there’s been a rush to capital because there are a lot of pluses to private equity. You don’t have SEC oversight.

You don’t have this mark in actual markets. It’s marked for valuation. Even with the onset of fair value in private equity, it’s still incredibly smooth. What’s happened is that over the last many years, there has been a huge push to buy up anything that people could consolidate and roll. There were a lot of companies doing great work before this, but there’s been a lot of push for that. Because there’s been a lot of push for that, every 4 or 5 years, they’ve said, “We need to sell again. Let’s find new investors in a private equity firm. We’ll sell to a private equity firm.” It’s funny because they all say they’re adding value every step of the way.

The question is that if you’re adding value every step of the way, why are you selling to another PE shop? What’s going on there? What’s happening is pension funds and endowments, top-endowments. It was announced that Yale and Harvard’s endowments are going to the secondary markets and selling their private equity portfolios. In the past, managers have been okay with slightly lower returns than levered equity and slightly less liquidity.

What’s happening in private equity is that there’s very low liquidity, nothing is selling, and lower returns. The market is freezing up. People know that others are going to try to make calls. Other things are going on. Assets aren’t trading. I took a call with another dentist who was involved in it. He sold his company to a DSO. He thought he was going to get a big payout. He built a huge house. He’s like, “What’s the chance of payout?”

The horizon is not looking very good for liquidity. There are not a lot of options for these managers who have 4 or 5 times the equity-to-debt ratio on these assets. There’s a saying that Warren Buffett says that’s great. It says, “Only when the tide goes out do you discover who’s been swimming naked.” We see the tide going out in this market. We’re going to see who’s levered. They’re going to be in big trouble.

Thanks, Kyle. Mike, do you have any thoughts around that?

I’d hit on a couple of real quick follow-ups. Like Kyle said, there’s an enormous amount of money that’s been concentrated in private equity. You have a lot of what’s called dry powder. They’re hunting for deals. That means virtually every business segment in the country is being “rolled up.” If you look at barbershops, chiropractors, car washes, HVAC companies, veterinarians, or dentists, private equity is saying, “If I buy 20, 50, or 100 of these locations, if you get scale, then in theory, there’s profit to be wrangled.” I say that because this is impacting every segment of the economy.

The second thing I would highlight is when Kyle talks about leverage. Sometimes, that sounds like a foreign word to folks, but I would describe it this way. If you want to go buy a new house and sell it to make a profit, and let’s say it’s a $3 million house, you don’t go pay $3 million for that house, then a year later sell it for $3.5 million and make $500,000. What you do is you pay 10% down. You’re only out $300,000. You own a $3 million house. You sell it for $3.5 million. You pay off your debt, and you make $500,000.

Those are two very different situations. In one, I spent $3 million to make $500,000. On the other, I spent $300,000 to make $500,000. One is way more levered than the other one. It illustrates a little bit of where some of the challenges come in here. If you introduce debt, you can buy a whole bunch more than you would have otherwise. Part of the challenge that we’re going to talk about here is because debt has been historically low rates all the way through 2021 and 2022, a lot of private equity firms use that moment to go buy lots of things, assuming that that debt trend would continue.

They’re very over-levered, if that makes sense. What gets scary is if suddenly those rates go up, and you only put in $300,000 in my example, you have a debt thing that even though you own the house, you have $3 million worth of debt, or $2.7 million in that example. That’s an important term and framework that will matter as we go through this discussion, and why there’s exposure in some of these markets.

To build on that analogy, if I were a dentist at a shop that’s part of a private equity portfolio, a question I would have is, when do we need to roll our debt, or when do we need to trade our debt? What’s happened is to use your analogy, a private equity shop might have purchased your business or purchased all the businesses on what would be the equivalent of a five-year arm for a mortgage. Eventually, that debt needs to roll, and they need to re-up it. You can think about this for your house. If you have a home mortgage, and you could afford the mortgage at 1% or 2%, but you can’t when it’s 6% to 8%, you have a problem. The same thing is happening in private equity shops across the industry.

How Doctors Should Deal With DSOs

I was going to say that too, Kyle. That’s the situation we’re in. What does that mean, or what impact will that have? We have a number of doctors who sold to DSOs years ago. There are groups that they sold to. They cannot recap. They can’t do it. They’ve tried. They can’t do it. What does that mean for these doctors? On one hand, you’re like, “If you’ve already sold, I don’t know what else you can do other than you’re in it.” If it’s going to happen, it’s going to happen.

You hang on for the ride.

If you’re considering it and you’re having these conversations around talking or selling to a DSO, as a doctor, what should you be looking for? Kyle, I love that. Here’s a question I would ask. What are some more of those questions that these doctors should be asking? Everyone has been to a nice steak dinner. A lot of times, Mike, you’re buying the steak. We’ll get into how Mike’s structure is very different than what we’re talking about, which is exciting for the industry.

You go to the steak dinner. You hear all the great numbers. This is how much money you’re going to make. It’s enticing. “I never thought I’d make this and get this much money from it.” At the end of the day, this is arguably the largest financial transaction these doctors will ever have in their lifetimes. If it goes wrong for a lot of these doctors who are in their 60s or late 50s, you’re not going back on it. You’ve made that decision.

Let me give a little bit of context. DSOs are not new to the market. They’ve been in play for years. Some of the early folks, like Mark Workman, Heartland, MB2, and others who have been at this for a while, have had some pretty substantial returns because they were first movers in the market. They were able to buy small groups of practices, find efficiency, and grow them. What was interesting is that up until about 2018, there were fewer than 10% of doctors who had joined private equity groups. We started to see some great initial recaps where private equity bought it from the first private equity firm. They made a lot of money. People started getting excited.

At that stage of the market, most dentists were not interested. They were scared of DSOs. They thought about the control factor. They didn’t know someone who had done it. If it’s one out of ten doctors, you wouldn’t know someone. What happened is that in COVID with the three-month shutdown of virtually every practice in America and a lot of strain on labor costs because 10% of hygienists quit, et cetera, a lot of practices got terrified of their long-term future practice and started to sell to DSOs that were more than happy to buy them.

We went from 10%-ish penetration to almost 20% to 25% penetration in a very quick period of time. Coming out in 2022 or so, we started breaching that 20%-ish. When it’s one out of five dentists, odds are you know someone who’s joined a private equity group. Some of those have been quite successful. It’s important to point out that not all DSOs are evil, and some have had some phenomenal success. I would also highlight that it’s like when you’re at the gym talking about stocks with your buddy, you always mention that you made a bunch of money on Tesla or whatever. You don’t mention that I lost my shorts on something else. The stories that you hear in the market tend to be selective. You’re only hearing the wins.

What then happened at the 2021-2022 phase is because of these fantastic returns, the quick run that’s coming in, and the combination of super low debt, the market got flooded by what I call fast followers who wanted to take advantage of this. When we say private equity, that ranges from everything, firms like Blackstone and KKR, which have multi-billion dollar funds, to family offices, wealthy individuals who want to come in. I don’t know where the starting point was, but I know what the ending point was. Probably, 100-plus different private equity groups started DSOs between 2020 and 2022.

It was a flood of money into the market to take advantage of those cheap rates, with an assumption that this is easy. “I need to buy 50 practices. I’ll sell to somebody else. I’ll make a quick hit.” Then, a couple of things happen. Number one, with all that demand, that means that the price is being paid went way up, which is good in the short term for docs. Interest rates were low. The assumption was that it would continue forever.

It’s good if they don’t have to roll directly.

That’s exactly right. None of these deals gets 100% cash out. Every deal says something like, “You’re going to get 50% today, but you’ve got to hit these certain targets over the next three years and grow. If you don’t, we’re going to claw it back.” No one wants to tell you the hard parts of this, but then interest rates went up. Back to my house analogy, if you put in $100,000, but you bought $1 million worth of stuff, you’ve got $900,000 of debt. You have 90% debt leverage on some of these things. When your holding cost goes from 1% or 2% to 6% or 7%, that gets scary fast.

A couple of those trends are happening, and a lot of people have flooded the space. They use the data from the first twenty years to say, “These first guys that did it made a three X return.” What’s the first thing you see on any investor website? Past performance is not indicative of future results. A lot of dentists jumped in, hoping, “I’m going to get this great return.” Let me tell you what else happened. There were a hundred recaps and changes, etc., prior to 2022.

In 2022, it completely stopped. There was one recap, which means another private equity firm is buying from another private equity firm, where they get a chance to cash out their investors. Nothing happened from the end of ’22 all the way until mid-’24 because interest rates were so high. People were realizing it’s not enough to bundle them together. You have to find operational savings. If you bought another group, like Jonathan was saying, you’ve got to make it even better if you want to sell something. We hit this pause. There are many groups. By the way, in the near term, I’ve heard estimates. The lowest I’ve heard is that one-fifth of DSOs have gone bankrupt or into receivership because they couldn’t make their debt payments.

This gets scary because more likely, you got 50% or 60% of that cash up front. The rest was in equity or wait and see. If your DSO goes into receivership, that means that the equity gets wiped out. What you thought was going to be a nice $2 million check for your practice ended up being a $1 million check after your taxes and other things. By the way, you’ve given up on all future returns that you could have gotten as a profit owner in that practice. That’s not to say that that happened in every case, but it gives some context on the run on the bank of people trying to buy in. A lot of the popular pitch is, “You’re not going to have any autonomy. You’re going to make a ton of money.” Everyone likes that pitch. It sounds amazing. In reality, I don’t know that the outcomes have equaled that.

You’re right. I’ve had two conversations, one with the doc and another with the PE shop, to talk about what they’re doing and what’s going on. If I were a doctor in that situation, where I’d sold and part of it had rolled, first, I would want to get an understanding of the debt structure. When does my debt need to roll? When are we going to have to refinance this debt? The next thing I’d want to know about the debt is, does it require a sweep?

I talked to a dentist. He says, “We’ve been growing 30% year over year. We’ve been growing like crazy. Why can’t I get a dividend from this?” The reason why you can’t get a dividend is that, typically, in the agreements, the debt structure requires a sweep of any profits. You have to get approval to do a dividend as opposed to paying off the debt first and then doing a dividend, which means that everything that you’ve been earning year over year, the bank has the first right to those.

The next question is going to promise you that this is going to be a thing. Everybody is going to be talking about what’s called a dividend recap. Instead of what Mike said of a recap associated with another firm buying, they say, “We’re going to recap and issue dividends, and find a bank to recap us and issue dividends,” but that’s only a short-term solution. That’s not a long-term solution for a recap of it. You might be able to get some of the dividends out, but you’re not going to be able to get all that equity out associated with it.

The last solution that nobody ever talks about is that if you don’t have to roll and you don’t have that sweep, then you could maybe do something with dividends. There’s also something never talked about, but it would be interesting if private equity ever tried this. It would be more ESOPs, more employee stock ownership plans, where the people that run the company can buy the company back from the private equity shop. It all comes down to the debt and what situation you’ve been put in. Finding the information around that will help the doctors understand what the future holds.

Impact Of Employee Stock Ownership Plans

We’ve talked about ESOP. They have another fascinating show for us to go do a deep dive into because that’s a really interesting solution out there. You’re now starting to hear a few people talk about that. What about this? You have these private equity groups who have these obligations. They’ve got these commitments. In some cases, they’ve maybe not managed or not had that same store growth, which they were telling everyone.

“That’s why you should sell to us. We have the same store growth.” The practices are not in better financial shape. They’re in worse financial shape. You’ve got to go back and say, “We’ll buy this back from you through an ESOP.” The private equity is going to be like, “We need X, but the practice only does revenue of X.” You’ve got this inverted valuation that doesn’t even make sense.

Here’s the thing. The biggest problem with all this for these PE shops is that they weren’t buying idiots. They were buying entrepreneurs. All these guys have started their businesses before. Faced with a bad situation as a dentist who started their own business, they’re like, “I’ll go do this again. I’ve done this before.” It’s a huge problem.

It is, unless that person is 60 or 65. A lot of doctors I talked to, and I’m sure you guys, too, are burned out. The last thing they want to think about is, “I have to go start another practice again.” That’s the last thing that they want to go think about. To your point, which is interesting, and I like it a lot, they are entrepreneurs. They could go do that. When I’m speaking, I’ll often say to these doctors and even our clients, “You hold more cards than they’re going to lead you to believe that you do. You need to remember that you hold more cards. Their business doesn’t work without you. When you’re negotiating and going through this, remember, they need you almost more than you need them. It’s a partnership. It should be a good fit.”

Uncovering The Truth About DSOs And Retirement

A lot of times with the doctors, part of it is fatigue or burnout. They’re over it. Someone says, “I’ll give you 9X for your practice, which could be $20 million if everything goes right and if you win the lottery.” They go, “That sounds good,” and sign up for it. Given where we are and what we see with the mix of interest rates higher, Mike, going back to your analogy, that $900,000 mortgage is not 2.8% anymore. It’s 6% or 7%.

You’re like, from an affordability, “I don’t know that I can afford this house that I’m now obligated to.” What options are there for these doctors? Kyle, you brought up an ESOP, which is an interesting option. If you’re a doctor sitting here at the sunset of your career, do you go, “I guess I’ll sell to an associate as a traditional sale and be done,” like what we used to do years ago? What options are there?

Which doctors are you talking about? Are you talking about the ones in DSOs or outside of DSOs?

Let’s talk about the ones outside. We’ve pretty much decided that if you’re in a DSO, like Mike said, you’re along for the ride at that point. There’s not a lot you could do.

There’s not going to be an outcome that is either bankruptcy or waiting for several years. Most outcomes in a DSO are that you’re going to have to wait for markets to free up, for growth to free up, for a lot of things to free up, and for a real thing to change.

It is also for your group to decide whether they’re willing to take a discount to roll it. That’s the other alternative.

Private equity shops will never take a discount on their purchase price.

Their option is either that the LLC dissolves, walk away from the debt, and it goes bankrupt, in which case the bank takes in the receivership and figures out how to resell it, or they will always rather run at it as hard as they can and see if they can eventually get the return than take the discount.

It is why we’re seeing so many DSOs not recapping. They should have recapped a year or two years ago, and they’re not. They’re holding on.

I’m going to put the plug in. I don’t want to say that all DSOs are bad. I’ll point to a few. MB2 has grown from 200 to 750 practices. There is growth there. Doctors can be happy, and things can work out. I worry when so many other practices promise the same results without a track record. All I can say for folks that are considering that is make sure you’re talking to players that are proven in the marketplace. You need to go search out, find on your own, 5 or 6 other docs that have worked with them, and get their real experience, not two that they tell you to talk to. Go talk to the folks, ideally ones that have been through a recap or seen what happened. “Did you get the results that you were promised?” That’s helpful.

I would also say stop and think about your biases, because you’re only hearing the ten data points of success. You’re not hearing the 90 data points of absolute failure because nobody wants to share that. You’ve got to search those out on your own. I am switching back, Jonathan, to your point. Where does the dentist go? This is where it gets a little bit trickier. There are a lot of places we could go with this. You still have the choice.

There are DSOs out there. There are some that are decent. You can stay solo and sell to someone else. We’re starting to see a couple of alternative models in the middle. I’m happy to chat about what we’re doing, but there are other group options there. Some of that depends on age and stage of where you’re at. Let’s talk about what normal is. If you are a solo dentist selling to another dentist, I would tell you that the market is usually that you’re going to get between 70%, 75%, or maybe 80% of collections for your practice.

I’m in the middle of the fairway here because the average dentist is doing $800,000 in their practice. If you’re a $3 million practice with 25% margins, you’re going to have very different numbers, but you’re in the top decile of practices. That’s not what the norm is. That’s your base case. It’s been the base case for 100 years of dentists’ selling practices. There is no big deal there. I would say the base case for when you go sell to a DSO is probably what I like to use, the 5X number.

It is five times your profit. That only works if you’re over about a 12% or 13% profit margin, which most dentists that are sub $1.2 million aren’t going to be there. You’re still going to end up at that same revenue multiple of 75% off of your collections. It is a different story. If you’re 25% margin practice, we’re talking about 150% of your collections. What I would say to folks is that multiple in simple math gives you your years. Remember, every DSO is going to want you to work back for a couple of years. You can’t say, “Buy this. Take the keys. I walk away the next day.” It doesn’t work that way. They’re paying you for your profits. They want to make sure those profits continue, which means your patients stay.

Almost always, you’re going to have at least a two or three-year work back. If things change over that timeframe, they’re going to claw back some of those profits. Let’s assume that everything continues like normal. Your multiple is your years where you care. It means if I get five times my profit for my practice and I can somehow work for less than five years, I’m on the good side of that curve. I made a little bit more than I might have. If you’ve only got 2 or 3 years left in your career, it’s all sunset this way. Especially if you’re going with a reputable DSO, you’re getting a fair price, and you’re getting most of that cash upfront, it’s not the worst thing in the world.

On the flip side, if you are a 40-year-old dentist who’s got 25 years left to practice and you’re taking a 5X multiple on your practice, that means you’re taking the next five years of profit because that’s all it’s worth the risk to them. In the next twenty years of your life, they’re getting the profit, and you’re only getting the production. That is generally not a good answer for you. Mike’s generic rule is to look at the multiple you’re getting and how many years you want to work for. It is a very simplistic way of looking at it.

Let me do a distilled version of this in a way that the common man can get. First of all, I think retirement is overrated. I do think working hard on dentistry inside a mouse is hard to do for the rest of your life. Your brain has been trained to be a doctor. What you want to do is to be active to a certain extent. I would look for partners that will take away the parts that are not licensed parts for your brain to do, but the headaches that you deal with. There is the headache of onboarding, the headache of managing collections, and the headache of different things.

If you can find a dental group that you could partner with, where you can somehow maintain a little bit of control of what happens in your practice, outsource the part that is not about dentistry and not about practitioner care. You’re seeing these dentists who end up working. They’re not practicing dentistry in the sense of doing work. You see people who are in their 50s and 60s. I know somebody who’s in the 90s, down in Southern California. He doesn’t do any work, but he is part of the diagnostics and plans, helping doctors and coaching doctors along the way.

The best partners are the ones that take away the parts of the business you don’t like and let you do the parts of the business you do like, with a shared path for growth. You don’t sit there and wonder, “Are the rates going to change so that I can buy the boat or the house that I want to?” I’ll tell you what. As Americans, the most valuable thing in our country is the fact that we can chop down trees, make them into paper, put ink on it, and the rest of the world thinks it’s valuable. As soon as that goes away, it’s a problem.

With currency going down, rates are not going to go down. People always talk about rates going down. You need to plan for rates going up. You want to set yourself up in a work environment where you like what you’re doing. You might think retirement is years on the beach. You built a practice. You like to work. You want to take away the things you don’t like, keep the things you do like, and maintain some control. I would look for partners that do that.

I love that answer, Kyle. That’s great. Mike, are you going to say something?

That’s pretty fair. Maybe I will share a couple of stats, Jonathan, because this is helpful as to why people are looking at this. Dentistry is a little bit harder in some ways than it’s ever been before. I have charts we can share, but I’ll give you some of the highlights. If you go look at the American Dental Association, they have what’s called the ADA Health Policy Institute. They put out fantastic data every year on the state of dentistry. I’m going to rattle off a couple of quick stats.

If you looked at the data from their 2024 study, 37% of dentists say they’re overworked. If you look at the data on how many hours they work, dentists are working on average 100 hours more a year in 2023 than they were for the twenty-year period from 2000 to 2019. By the way, that’s two hours a week, which we would all love to have back. They’re working harder than ever, and they’re super busy.

If you look at staffing pressures, 32% of dentists are looking for a hygienist, 36% are looking for an assistant, and 27% are looking for administrative help right now. If you ask them how challenging it is to find them, 90% say it’s extremely challenging to find that hygienist. Seventy-one percent say it’s extremely challenging to find an assistant. Part of that’s because we only have enough hygienists to cover two-thirds of our offices. Ten percent of hygienists retired during the pandemic. It is incredibly hard on staffing pressures. I’m overworked. I can’t find the staff.

If you ask them what the economic conditions look like, 53% of solo dentists say that they’re not confident, skeptical, or very skeptical of future economic conditions. These are not positive trends that we’re hearing from dentists. The worst one is if you look at the average salary of a dentist from 2010 to 2023, and this is using both ADA data and the Department of the Bureau of Labor Statistics, the average salary for a dentist in 2010 was $237,000. Today, it’s $186,000. That’s a 22% decline. They are working more but being paid less.

Are those the same dollars, too?

That is inflation-adjusted, which is even scarier. There is a big decline in how much you make. It’s no surprise that over that same period, we’re seeing DSO ownership depending on the data that you use. The ADA says it’s about 15%. Other sources say it’s as high as 25%. There’s no wonder people are throwing in the towel on this. What I think is more discouraging is that between 2005 and 2023, for ownership of practices, in 2005, 85% of dentists owned their practices. In 2023, it’s 72%. It’s a big drop off. That’s the average.

It’s way less on the senior population. If you look at the younger cohorts, at the 30 to 35-year-old cohort, they’re down 41% in ownership over that timeframe. The under-30 cohort is down 65% in ownership. The 2023 ADA study said that 60% of new dental grads go straight to a DSO. I get it. They’ve got student debt. This is a stable paycheck. What we’re seeing is that ownership is going down because this is hard. Forgive me for all the statistics.

I say that because it paints a picture of, “This can be a little bit hard.” Nothing against them, but let’s talk about business trends. I always call this the Walmart story. We’re all familiar with how Walmart gobbled up mom-and-pop shops. You don’t go to the little hardware store. There’s Walmart. It’s at scale. On the one hand, we benefit from cheaper goods and services. On the other hand, there are not ten mom-and-pop shops in your store in your community anymore.

That same thing is coming to dentistry. Part of why these trends are happening is this. You’re next door to generic big-box dentistry. They have 30% lower supply costs. They get 10% better insurance reimbursement. Some of these DSOs are building their own hygienist and dental schools. They have first access to the labor supply. It’s no wonder that they’re getting more profit. Just like Walmart does, they’ve got scale. That’s part of that pressure. You could take from that that Mike is saying, “The industry looks pretty sucky. You should sell out.” I’m not saying that because dentistry is still a fantastic industry.

There are the same number of teeth. Teeth are still here. There are more teeth.

We want dentistry. People are finding more and more correlation between oral health and their long-term health. By the way, there’s interest in things like cosmetic dentistry. In other ways, there’s never been a better time to be in dentistry. The challenge is that you have to be built for the right scale. Forgive me for that long lead-up, Jonathan, but that leads us to, “What other options do I have?”

If you’re in a three op dental practice, your ability to compete with the fixed cost that you have versus the number of patients that you can see is incredibly difficult. There’s a reason why almost all DSOs won’t even talk to you if you don’t have at least five operatories and at least $1.25 million or $1.5 million in collections. There’s nothing they can do with it. They’re telling you you’re screwed. That doesn’t mean that you can’t still have a good exit to some other doctor or start to combine.

What it means is, “Let’s talk about the middle option.” To compete, you have to do some of the same things others do. While our model is less focused on being a true DSO, that doesn’t mean it’s not focused on scale. The difference between a ten-op practice and a three-op practice is massive. You still pay one office manager. You’re going to have more assistants and more hygienists, depending on the number of people that you have.

Your ratio of fixed cost to what you can bring in changes pretty dramatically, and your profit goes up. How do we create that as an option for doctors? When you get the statistics on DSOs, and you’ll hear anything from 13% to 30%, they’re not distinguishing between DSOs and groups. One thing that we don’t talk about is when you hear the 30% number, what that means is roughly, and this will be ballpark, there are about 40 DSOs that have more than 75 locations. Remember, there are roughly 200,000 dental locations in the United States, and only 30,000 have been rolled up. There are a few that are very big. There are about 150 DSOs that have groups between 35 and 75 locations.

There are about another 100 or so that have between 10 and 35 locations. It is a very long tail. That probably represents around 15% to 20% of the market. That’s what we would call DSOs. When you hear the 30% number, they’re referring to what is roughly 1,000 groups that have somewhere between 2 and 10. That’s a big range difference. What that’s telling you is lots of dentists are figuring out that if we combine in a group, a group practice, we can start to have some of these economics. We can have a shared office manager. We can share our accounting team. We can have a shared collections team. We can start to negotiate a little bit more on our supply costs.

Sorry for the long-winded answer, but one of the answers here is that if you are a practice that has more than five chairs and more than $1 million or $2 million in collections, you have a pretty good future as a solo dentist. There are other solo dentists who would be interested. If you’re not, I’d start thinking about how do I combine with others in a group. Even for those dentists who are on the margins, starting to look at group options means I can start to look for scale. There’s a lot more value.

Just think, if you were a new dentist, and you want to buy a practice, would you rather buy a three or four op practice that’s doing 5% margin, and who knows what my future looks like? Would I rather buy into a group where it’s much more predictable? There are other dentists. The likelihood of patients leaving or staff leaving is extremely low because of the stability there. That ends up being the option. If I could do a shameless self plug, part of this is that there are going to start to be DSO-like groups that look more like groups instead of a private equity-controlled option.

What you mean by that is essentially groups that take away the parts you hate about running an office. History is not something you hate.

It is partnership versus acquisition. You have a partnership model versus an acquisition.

If three of us on this call are business guys and none of us are dentists, we understand and recognize the value that an accounting degree, a management degree, or something has. Every dental practice is a small business. If you’re a million-dollar practice that only has 2%, 5%, or whatever margins, you can’t go hire a CEO for $5,000 a year of profit. It doesn’t work. When you’re in a group, you take ten of those practices, the profits are a little bit better, and suddenly, you have $150,000, then you can start to hire some shared staff.

You’ll often see that groups will get to 2, 3, 4, or 5. They start to collapse in their own way because there’s not enough business expertise. The ones that thrive tend to bring in a solid accounting partner and a solid marketing partner. They start collecting resources. They start to get scale where you could hire higher-quality resources that spread across practices, and let you benefit from some of the same knowledge. They can go negotiate your rates, negotiate your supply costs, and help you manage your labor costs. That’s where some of these group models start to look a little more attractive.

Thanks, Mike, for that. I know we’ve we’re coming to the top of the hour here. We put a short little cap on that, Mike. The thought I kept having is that what got you here isn’t going to get you to where you want to be. In other words, the environment is different. The way that practices are being bought and sold is different. Even in the DSO market, the DSO landscape has changed. It’s not what it was, even a couple of years ago. There are so many of these factors that are playing into this, many of which we’ve talked about with student loans and all the stuff.

Kyle, you mentioned this partnership model of which we tell our clients all the time. Bring someone who does stuff you don’t want to do. Delegate that out. How long could you do that for? The answer is probably if you knew you could show up to work, make your own hours, and do the things you love to do, how long could you do that? I’ve asked this question to a lot of doctors. Do you know what the answer is? I can do that for a long time.

Most Important Pieces Of Advice

The reality is, Kyle, if you have as far as retirement, being bogus, most of us as entrepreneurs can’t shut this thing off. It’s constantly going nonstop. As we wrap up here, Kyle, let’s start with you, then we’ll go to Mike. Kyle, what’s one thing that you think practice owners should be aware of? What would be one piece of advice, like a parting advice, that you could give to anyone reading this?

I don’t have anything positive to say. It’s going to be worse for longer. I would say you’re in a good situation if you’re part of a DSO that can survive the next 3 to 5 years. I would budget myself and my income. With that in mind, I would not be taking big risks personally, with my income, buying a big house, or buying the other stuff. That’s what I would do if I were in a DSO. If I were outside of DSO, I would look for partnership opportunities with partners that are going to enable me to still be master of my office and in control of doing a great job, translating into income in my pocket.

It’s tough for these doctors who are in this situation. They’ve been working harder than ever. They don’t see the change in income. They’ve been promised a carrot. I don’t think that carrot is going to come in the next year or two years. Everyone I know is trying to sell their DSO. My parting thought is that I hope it goes well. I want to not be negative on this. I look at what’s going on with market indicators. It’s hard for me to see the alternative to this.

I’ll try to strike a more positive tone on this. There’s the African proverb, “If you want to go fast, you go alone. If you want to go far, you go as a group.” One of the things that I would say to dentists is that this is an incredibly lonely profession. It’s to talk to the people, to join some masterclass groups, to talk to your friends, to get more data points, and to look at group options. Are there other people you can partner up with and work together? From an information-gathering perspective, far too often, we want to believe the one data source, which is the one DSO that is promising me some big thing. Go do your research. Learn more and hear about it. It could be a good option. I don’t think they’re all bad.

Getting that data is helpful. It could also be that you find, for the dentist, and you all figure out, “Wouldn’t this be great if we all hired one accountant to be full-time to support us all and help us run our business better?” It could be that there are alternative groups like what we’re doing at Accelerate Dental that make sense. My advice would be to talk to others. We look at the personality profiles of our dentists, and 80% of them have the same personality profile. It tends to be a more introverted, passive profile where they’re afraid to go out, get data, and afraid to ask questions because they feel out of their domain of expertise.

They’re good at fixing teeth. They’re scared of the demo concepts. Finding good advisors, Jonathan, working with guys like you, talking to people who know the industry, and listening to podcasts, you become educated, and you get the information that will help you do well. I’d also say, as I say to dentists, there’s a reason why there are 250-plus DSOs out there. It’s because at its core, this is still an awesome business to be in.

People need their teeth fixed. It’s a good cash-generating business if it’s done well and optimized well. We have to, like all businesses, adapt with the times and not keep insisting, “I don’t have to charge my patients, watch my supply costs, or do anything. I’m going to magically make money because they all like me.” That era has passed. There are ways to get there when you work with a broader group of team.

We’re all smart. I’ll go out and say the three of us are pretty smart guys. At least the two of you are pretty smart guys. There’s a reason we’re in dental. We wouldn’t be in dentistry if it weren’t a good place to be. I think we can all say that, whether that’s a negative or positive outlook. The last parting thought that I had was burnout. Burnout is normal. We haven’t had this conversation with the three of us, but I’m going to go out on a limb and say that all three of us have experienced burnout at some point.

Get In Touch With Mike And Kyle

You have a choice. When you feel that burnout, you can use it as an opportunity to self-reflect, take a personal inventory, and decide, “These are the things I’m getting burned out. Let me do something about it.” You can decide to have that burnout lead you to making what could potentially be a bad financial decision based on that emotional burnout. Use that as an opportunity to self-reflect. You’re an entrepreneur. Entrepreneurs are resilient. We’re creators. Don’t forget that. Mike and Kyle, this has been awesome. I’ve been looking forward to this episode ever since it got put on the calendar. Thank you both so much. Real quick, Kyle, if anyone wants to reach you, what’s the best way to do that?

It is LinkedIn. You Google search Kyle Welch. I’ll pop right up.

Mike, what about you?

It is Mike@AccelerateDental.com. I am happy to talk to anyone if you want a view on where this is going. We love talking to dentists and being pretty candid about what options are.

Both of you, thank you so much. I know this isn’t going to be the last time we have the opportunity of doing this. I appreciate your time. Everyone, thank you so much. Go ahead and click that subscribe button for more in-depth, expert information and insight about our industry. Thanks so much, guys.

Important Links

• Kyle Welch’s Website
• Mike Baird on LinkedIn
• Kyle Welch on LinkedIn
• Accelerate Dental
• American Dental Association
• Jonathan Moffat’s Website
• Aligned Advisors
• Jonathan Moffat on LinkedIn
• Dental Wealth Multiplier

About Mike Baird

Michael Baird is the CEO of Accelerate Dental, an innovative Dental Partnership Organization helping entrepreneurial dentists retain practice ownership, increase practice growth, and deliver higher quality care.

Prior to founding Accelerate, Michael served as CEO of Henry Schein One, helping the world’s largest dental software company transition to the cloud and overseeing a software portfolio used by 70% of Dentists. Before that, Michael was founder and CEO of Avizia and served as President of Amwell after Avizia was acquired in 2018. Mike helped grow Amwell to be the largest provider of telehealth technology and services in the US with a successful IPO in 2020. Mike serves on various boards and is also a Venture Partner at Waterline Ventures, a Boston based venture capital dedicated to digital health transformation. Mr. Baird holds a BS degree in accounting from Brigham Young University, an MBA with distinction from the Kellogg School of Management at Northwestern University.

About Kyle Welch

Co-Founder of Children’s Surgery Centers. Dental Focused Ambulatory Surgery Centers. Children’s Surgery Centers provide access to medical procedures to at-risk populations, serving patients the hospitals won’t see.