viper svp don schwall on The Group Dentistry Now Show: The Voice Of The DSO Industry – Episode 21





I’d like to welcome everybody back to the Group dentistry Now show. I’m Bill Neumann and our guest today is Don Schwall. Don is with Viper Equity Partners. So Don, first off, welcome to the group dentistry now show.


Don Schwall: Thanks a lot Bill. I’m glad to be here.


Bill Neumann: I appreciate you being here. During this time, we’re going to talk a little bit about the crisis that’s going on and but first, I want to give you an introduction to Don and Don’s background. So Don is the Senior Vice President of Corporate Development at Viper Equity Partners. He leads large dental mergers and acquisitions. Don designs and completes multi-office and roll-up dental practice transitions with velocity at the highest valuations, he’s adding value and scale at all levels.


Bill Neumann: Don’s innovative corporate development experience enables him to lead multiple complicated projects and transactions simultaneously, while drawing from his expertise in corporate strategy, M&A, IPO transitions, and recapitalizations, venture capital, private equity, targeted marketing and business development with a focus on middle market and healthcare transactions. So that’s a mouthful, but Don has a great background in merges and acquisitions. He’s going to talk a little bit about his background, but first, Don, again, welcome to the show. Tell us a little bit about your organization, Viper Equity Partners.


Don Schwall: That sounds great. Bill, I’ll tell you Viper Equity Partners is America’s leading M&A advisory and investment bank in dentistry, with over 1.8 billion closed since 2009. In 2019 alone, we closed over 110 transactions. Our M&A relationships with family offices and private equity funded organizations are very unique. The Viper team consults with practice owning doctors and roll up groups for potential integration and marketing, to offer negotiations and diligence to the closing table.


Bill Neumann: And yeah, I know Viper’s… You have a couple other partners there. There’s David Branch and I talked with David before and it sounds like your team is growing. So I know that you’ve recently added Dr. Mark Birner as well.


Don Schwall: We have. Right now, everything that happens at Viper is done in house. We have our own MBA finance team, we have our own post LOI closing division, our own PR department, marketing, business development, et cetera. And the benefit of that is that it allows us to move these transactions to close sooner by not having to outsource.


Bill Neumann: That’s great. So tell us a little bit more, I gave everybody a brief bio, but tell us a little bit more about your background Don.


Don Schwall: Sure. I as a trading specialist at Paine Weber throughout the 1990s. And in the late nineties, I moved to Silicon Valley as a dotcommer, started my own public company. And what came out of that was I used the capital I made in that business to open my own private equity firm. And that’s where I developed my skills in private equity and M&A. And I did that for approximately 20 more years. When I moved down to Palm Beach, I had met our founding partner, Dave Branch, and I found his business model to be so interesting and unique that I had to be part of it.


Bill Neumann: So this leads to the next question. So our audience is really diverse, so we have a lot of large DSOs, a lot of emerging dental groups, mostly led and owned by doctors. And then we also have some solo practitioners that are kind of interested and DSOs, or trying to figure out what a DSO is. Do I transition to one? Do I sell my practice to one? What does that all mean? So maybe give the smaller groups or the solo practitioners that are on the fence or curious about a transition to a DSO, why they should consider that.


Don Schwall: Sure. There’s a lot of benefits to transitioning to the DSO. When you’re an individual practice owner, it’s like owning two businesses. You have your clinical business, then you have your administrative and operational business. So a lot of times that can take a lot of time out of your day as well as your clinical aspects, which most doctors enjoy focusing on. So when the DSO comes in, what their main goal is, is to reduce cost and increase revenue. And they really focus on the administrative operational side of the business. And that would be things like practice operations, recruiting, HR, benefits, IT, your accounting and your payroll, insurance, billing and collections, CE, marketing and advertising, lab costs, supply purchasing. A lot of things that a lot of doctors don’t like to focus their time on. And as well as having that DSO as a partner, it’s a great opportunity to grow your business.


Don Schwall: A lot of times, this isn’t about a doctor retiring immediately. It’s about him wanting to access the equity in his dental practice and continue practicing with a large dental group and the benefits are obvious. Beyond taking that operational administrative side of the business out of your hands, it can also create a better work life balance, where maybe you have the opportunity to step back from the chair a little bit more and spend time doing other things that you’re interested in doing, as you work your way on that structured exit strategy to retirement.


Bill Neumann: So that leads into the next question. As far as, maybe I’ll make this a two parter here. So you work with a lot of, did you say it was 110 transactions closed last year? Is that what you mentioned?


Don Schwall: Yes.


Bill Neumann: Okay. I’m kind of curious as to maybe the types of dental practices that you’ve worked with before and then maybe the age of the clinicians that are transitioning over because I think there’s probably a little… It’s more diverse than a lot of people think. So the question, the two partner is, can you tell us a little bit about who you see, who is reaching out to you, who’s transitioning over to a DSO, types of practices, age of the clinicians. And then also when is the time to transition a dental practice to a DSO.


Don Schwall: So it’s a very diverse answer. As far as the ages go, I speak to doctors that are in their mid thirties, to doctors that are in their seventies. The reason being is there’s a lot of really young go getters out there that have gone into the market and done very well. They might be 37, 38 years old and they own a multi-office practice and they understand that they don’t want that administrative operational aspect of the business to manage because if they can partner with the right group, that partner can come in as an investment partner to continue doing acquisitions. In the same stroke for an older dentist that maybe he’s in his seventies and he’s considering retirement soon, the benefits of going with the DSO are obviously based on the valuations.


Don Schwall: You get much better valuations and terms when you transition to a DSO then you would selling to an associate or doing a private transaction. So that makes for a better retirement package overall when you’re deciding to step away in two to three years. If I go back to the younger dentists, if they’re 37 years old and they built out their practice for acquisition and that’s what they want to continue doing, they could do that for 10, 20 more years and many of them do. And having that partner there only increases that overall return on their investment of time and effort to build out that practice.


Bill Neumann: Well that’s great to know. So it’s not necessarily older dentists that are looking to retire in two or three years. You have a lot of younger dentists that are looking for support, funding, somebody to maybe help out with that admin side and focus on the dentistry side of the business.


Don Schwall: It is. And as far as what types of practices we work with, it’s all types. Everything from single office to very, very large multi-office practices that might own 50 plus offices. And they’re on varying sizes in different locations and there’s a lot of different strategies out there that I think a lot doctors don’t know about. Beyond just a standard DSO transition, where you partner with this larger group and you end up becoming an equity holder and they own a majority position of ownership within your practice. Sometimes there’s other strategies to increase valuations for smaller offices.


Don Schwall: One would be the roll up, where we would take 10 offices in the same location that are owned by 10 different people and roll them up into a single entity and integrate them before taking them out to market. And the differences can be extreme in the valuations in those cases, and as I mentioned before about doctors that have built their practices through acquisitions, there’s always a strategy called a sub-DSO strategy where you actually become a partner with the DSO and they become your investment partner to continue acquisitions. In those scenarios, sometimes doctors actually completely step back from the chair and they focus 100% on business development and acquiring new practices. While at the same time as a client of Viper, Viper will go out and also source new practices for that doctor to acquire as well.


Bill Neumann: Interesting. So there’s a lot of different ways and a lot of different types of clinicians that are partnering with DSOs. There’s a lot of different ways to do it. There’s different ages, and I think this is good to understand because most clinicians that really don’t have a lot of experience talking to DSOs or don’t have any experience or have heard from somebody else, they may have heard one different transition option and there are multiple ones.


Don Schwall: No doubt. Yeah. I believe a lot of doctors understand the term DSO. They might know what it stands for and they have understanding from speaking to other people or maybe attending events about how they work. But I find it to be a much more diverse option than doctors really believe. And when we speak to them, getting that across to them is our first point. We speak to thousands of doctors a year and obviously every one of them does not want to transition to a DSO. And that’s a personal decision. However, the benefits are incredible when you put them on the table and take a look at what can actually be achieved.


Bill Neumann: Let’s talk about COVID-19 and the the market disruption. I mean this is really an unprecedented time, I know that’s overused now, you hear it all the time, but it really is from our country, really globally. So this market disruption, how is it affecting dental practice owners right now? What are you seeing when you talk to clinicians, when you’re talking to the DSOs that are looking to acquire? What do you guys… You’re there day in and day out, talking to both sides, buy and sell. What are you seeing? What are you hearing? What are your thoughts?


Don Schwall: When the COVID-19 issue first arose, obviously the DSOs own a lot of practices, so they had to put their protocols into place, which they already had ready to go. So I’d say within one week of all this beginning, we were right back on the phones with them. For example, in March, I believe we closed… We had 14 new LOIs come in signed, which are offers, written offers for clients. And already in April, we upped six. We’re still speaking to doctors, we’re still moving forward. The DSOs themselves already have their capital in place. They’ve had it for years. Many of them have it in escrow, many are just holding it as a fund. So they’re still out there buying. The multiples as well have not changed. We’re seeing the same multiples that we were seeing before COVID-19 came into play. And I believe a lot of doctors don’t think that’s what the case is. So we’re still seeing those six times multiple OV, but on valuations in the marketplace, and in fact we’re getting LOI above six.


Bill Neumann: Really interesting. So this is good news here, because I think there’s a lot of confusion from both sides, from the buy and the sell side. So you’re still super busy, business as usual.


Don Schwall: We are. I have doctors I’ve spoken with in the past reaching back out to me that may have been on the fence when considering whether or not to move forward and if you want to look at it as a benefit, obviously the practices are closed right now and that actually gives the doctors more time to work with us directly when they come in as a client. And that would be with providing the information required, the PNLs, everything associated with what we require to create the documentation, the financial packets to calculate that valuation. And it’s a rare opportunity because typically a doctor’s tied up every single day. Most of my calls with doctors are done before 9:00 AM and after 5:00 PM. It’s very rare that I can speak with them during the daytime because they’re practicing. Right now, that’s not the case.


Bill Neumann: So what about the practices that have already transitioned to DSOs? You’re still talking to a lot of those folks as well. What are you hearing from them?


Don Schwall: Oh, well, obviously they’re pretty happy. All of that responsibility has been passed on to the parent DSO. So as far as they’re concerned, they’re on a vacation right now. They’re not working. They didn’t have to step in and take care of all the protocols required for COVID-19, they’re not having to worry about their employees, not having to worry about that lease payment on their office or a mortgage payment if they own the property. So they’re basically just in a holding pattern and saying, “Hey, when were reopened, let me know. I’ll come back and I’ll start practicing again.”


Bill Neumann: That’s good to hear. So let’s talk about this then. Given the fact that it seems like this is still a great time, if not, maybe even a better time to consider partnering with a DSO, let’s talk about practice parameters. So when a dental practice is considering a transition to a DSO, let’s talk a little bit about those practice parameters.


Don Schwall: Location can be important. There are certain regions that are of more interest to some, but that’s changed over the last several years. There’s hundreds of DSOs out there and some of them are very regional. You have some that are focused on the Midwest, some that are focused in the Northeast, the South obviously, the West coast. It’s just the way they operate now. So there usually is a buyer for everybody. When it comes down to the actual practice parameters as far as the minimum requirements that we find most DSOs are looking for, those would be things like a minimum of five operatories or chairs, 1 million in collections or more for your previous year. It would also be how long you’re willing to continue practicing. I would say the maximum, minimum is two to three years, if you’re going to transition. Obviously the longer you stay, the more beneficial it is to you. And the partnering DSO was well.


Don Schwall: So those would be some of the most important aspects. The other ones for practices is it’s always more beneficial to already have one associate in place if you’re the owner doctor. And the other thing is multi-office is always attractive. Because not only is it a bigger opportunity for expansion for the partnering DSO, but at the same time it’s going to mean higher collections, most likely higher EBITDA and that’s what we base our valuations on. Whereas a lot of groups, DSOs, et cetera, will base a valuation on audit percentage of collections. We actually base our valuations on a multiple of your EBITDA, your earnings before interest, tax, depreciation and amortization.


Bill Neumann: So these are some really good things to keep in mind as far as parameters go. What about specialty? Multi-specialty practices, the CNE or just a specialty focus endodontists, orthodontics. Do you see any differences there? Are there any areas that are a little bit more active than others or does it really vary DSO to DSO?


Don Schwall: Years ago, that may have been an issue when all the DSOs were really focused on general dentistry, but that’s no longer the case and it’s two fold. So the larger DSOs that went out there and they acquired only general dentistry practices, they realized it at a point that they could begin acquiring specialty practices in the same markets because they could refer business from their general practices into their specialty practices. So, that was one place that it changed. To take it to the next step, now there are specialty practice DSOs that only focus on one practice. There’s DSOs that only focus on endodontics, there’s DSOs that only focus on orthodontics. So there’s always an outlet there.


Bill Neumann: Well that’s good. So there’s definitely more opportunities than ever. So even if you’re not doing general dentistry, you still have options whether you’re doing strictly endo, ortho or oral surgery. It seems like there’s a DSO built for just about everything. So let’s talk about back to the seller, the potential seller, the practice is looking to transition to a DSO. Let’s talk about some negotiating points available to those practice owners.


Don Schwall: So it goes well beyond just the valuation. I find a lot of times the doctors are very focused on that one number, what am I worth? X. The fact of the matter is, is that it really goes well beyond that number. So beyond just the valuation and negotiating that point, there’s also a negotiation for your employment agreement, which is based on a percentage of your collections. There’s a negotiation for your bonus package, which is typically an increase in collections year to year and an increased in EBITDA year to year. There’s the negotiations for your benefit package. If you own your property, there’s negotiating that long-term lease with the partnering DSO. So when you take a look at the full picture and add all those numbers in, that goes a lot higher than just the overall valuation. And then when these transactions are done, they’re typically done in a cash equity split.


Don Schwall: The most common is an 80/20. So just using a round number, let’s say it’s $1 million is your valuation. At the closing table, you would receive 800,000 in cash, 200,000 would then become equity ownership in the partnering DSO. And the benefit there is that the average annual returns for a lot of these DSOs are very attractive. They could be around 15% a year. So, if you’re willing to stay five to 10 years, obviously you also are going to make nice gains as that valuation increases over time. And when I take a look at it from a market perspective, the way those asset values increase is just that. These transactions are typically done as asset purchases. So each time a practice is acquired after you, the asset value increases within that portfolio. At the same time, the main goal of the DSO is to reduce those expenses and increase the revenue, which also benefits that equity piece.


Bill Neumann: That’s great. So there’s a lot to consider. It’s not just what am I going to get, right? What are you going to pay me for my practice?


Don Schwall: Definitely. It goes well beyond the valuation, and I was stating before, there always is a benefit to want to remain in place and continue practicing if you can and if that’s what you desire. Because the longer you stay, the more you’re going to make.


Bill Neumann: So tell me a little bit about maybe the difference between Viper Equity there. There’s some other organizations out there that are doing practice transitions. Some have been around for a while, some haven’t. So let’s talk about Viper versus maybe some of the other folks out there doing practice transitions.


Don Schwall: So Viper Equity Partners, as I was saying, is the main key differences that we’re investment bankers. We transact completely different than a broker would or if you went directly to a DSO. We’re actually providing true representation for our clients and that’s in the form of not only proofing valuations and doing all the front end due diligence, it’s also about negotiating each piece of that transaction. We discuss the valuation, the employment agreement, the bonus structure, the benefits package, the equity piece, and possibly the lease on the property. And by doing so many transactions, so often we understand that everything is negotiable as well. There’s hundreds of DSOs out there, but we probably work with about 30 of them and we’ve done dozens of transactions with these groups. We know the key executives at the DSOs, they know us, we have great relationships with them.


Don Schwall: That goes a long way. And then by creating this due diligence and the financial package and proofing the valuation, we saved the DSO a lot of time and money because they’re not having their team doing the business development and due diligence. And that can equate to a lot of savings for them, which translates into a higher valuation for our clients. At the same time, as I stated before, we close these transactions with velocity, meaning our goal is to get them done as quick as possible. So rather than dragging our feet or keeping the DSO involved too long, which costs them money, we take that, we increase that valuation, we shrink that window to the closing table and that benefits everybody that’s involved, including the owner, the DSO and Viper Equity Partners.


Bill Neumann: Thanks Don, I appreciate that. That sounds like you do quite a bit. You’re not just a broker. I mean you’re doing quite a bit more than that. And I think that’s something that a lot of both DSOs and also the practices that they’re looking to transition over and need to consider when they’re looking for a source to really help guide them through this important decision.


Don Schwall: Definitely. And we also enjoy what we do. I’ve been in this finance M&A private equity game for almost 30 years now and I wouldn’t be doing it if it wasn’t something I didn’t enjoy. And we do it every day. We’re always available for our clients seven days a week. If somebody has a question or needs something, they can always reach out directly, even over the weekend. So we’re very focused. We have the experience and we achieve very high valuations in a shorter window of time, which I believe everybody likes.


Bill Neumann: Sure. Yeah, absolutely. So I’m going to ask you this last question. I really appreciate this as I think this has been extremely enlightening. I’ve known of Viper for quite a while, but there’s a couple of things that I didn’t even know. So I appreciate you answering these questions Don. What do you see the next… What does the next year look like? Next year and a half? Give us a little peek into the future. Again, we talked a little bit about right now, the COVID-19 crisis does not seem to really be affecting anything except there are some relatively… There’s some happy folks that have already transitioned over to DSOs. You’re still very, very busy. You’re getting calls from docs, DSOs are still looking to acquire practices. Valuation is still right where it was pre COVID. What about in the next year, year and a half? What can you tell us?


Don Schwall: So just to go back to even last year, 2019 was our best year ever. And with what I’m already seeing this year, I have no doubt that we’re going to do better in 2020 than we did in 2019. I believe there’s a lot of doctors that have been considering transitioning to DSOs and they were sitting on the fence and wondering why. A big thing that I preach to my customers and prospects is market risk mitigation. And before all this came out, I was always talking about it but I wasn’t talking about it because of COVID-19. I was talking about it from an investment bank perspective because I saw valuations going so high. And when valuations increase that fast, that much, it’s always time to take some equity off of the table, especially when you can continue working and actually do less work because you’re not focused on that operational administrative side.


Don Schwall: So I see 2020 being a great year in this DSO transition market. And just from what I’m seeing on the new clients we’re bringing on already, as well as the letters of intent that we’re getting signed and the closings we have. I see it being better than last year. And I think if someone’s been considering this, now they understand what their risks can be. And for the people that we did already closed as we spoke about, that risk has been removed. And I think a lot of people might understand that things can happen again and that there always will be hiccups and if you’ve made a lot of money in your practice, you can pull that equity out and continue working.


Bill Neumann: That’s good news. I think it’s a very hopeful move as well in some people and it’s a great time when you might be a clinician that’s only doing emergency dental work right now and so you have a lot more time on your hands. You may want to reach out to Don over at Viper Equity. We’ll have his information in the show notes and in the article with the transcription of this entire podcast. But again, thanks Don. One more time. It’s Don Schwall. He is the Senior Vice President of Corporate Development over at Viper Equity Partners. I appreciate you taking this time. I’m sure you’re busy and we look forward to chatting with you again very, very soon.


Don Schwall: Thanks a lot Bill, I look forward to speaking with you again.


Bill Neumann: Okay, and thank you everybody for listening to this episode of the Group Dentistry Now show. To learn more about dental practice transition opportunities contact Don Schwall directly using (561) 530-4416 or don@viperequitypartners.com.



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