Latest / Orthodontic Products Podcast / Beyond the DSO/OSO Buyout: Understanding Post-Deal Earnings
Transcript
- Alison Werner (00:06) Hello and welcome to the Orthodontist Products podcast. I'm your host Alison Werner On today's episode, we're discussing one of the biggest financial concerns orthodontists have when considering a DSO or OSO partnership, whether they can rebuild or even grow their annual income after the transaction closes. While many deals provide significant upfront payouts and future equity opportunities, doctors still want to understand what post-transition compensation really looks like and how larger organizations work to improve practice profitability over time. In this conversation, we explore how compensation structures typically change after a partnership, the operational strategies DSOs and OSOs use to drive growth, and the financial questions orthodontists should be asking before making a decision. Back with us to talk about this is Ty Ramsey, a mergers and acquisitions advisor with Professional Transitions Strategies. The firm has completed more than 600 transactions nationwide, representing more than $1 billion in deal flow. During our discussion, Ramsey explains how organizations evaluate post-transition earning potential, what operational changes can influence the doctor's income after partnering, and why understanding the full financial picture extends beyond salary alone. Here's our conversation. Alison Werner (01:17) Ty, thank you for joining me again. I really appreciate it. Ty Ramsey (PTS) (01:20) Yeah, really happy to be here. Had a great time last time and looking forward to chatting again. Alison Werner (01:25) Yeah. Okay. So many orthodontists worry that after partnering with the DSO or OSO that they won't earn the same annual income they were making beforehand. How common is that concern in your conversations with doctors? Ty Ramsey (PTS) (01:41) Well, are, it's, would say if you're just looking at go for W-2 income, ⁓ yes, that can be the case. ⁓ It depends, they could end up making more. depends on the structure. There are multiple buckets that we look at and then we do a five year estimated wealth accumulation based on amount of cash at close, time value of money. their go-forward comp, their equity and how that appreciates, and even the rent on their building if they own the building, because that can be another lever that they didn't think of as we get in and negotiate for a triple net lease with a long-term multi-million, sometimes multi-billion tenant. Instead of having Bob's Burgers as a building you own, you now own a building that McDonald's is the tenant. So that can be, but at any rate, there's four buckets that we consider. One of them is cash and clothes. The other one is the go-forward comp. The other one is the equity in the group and what that is eventually going to be worth. Those are really the three buckets. And then, you know, kind of a 3A is the Alison Werner (02:51) Mm-hmm. Ty Ramsey (PTS) (03:03) is the rent and the long-term kind of lease if they own the building. while there can be, you know, I would say the normal go-forward comp rate for an orthodontist is going to be anywhere from $1,500 to maybe $1,400 to $2,000 per diem. It can also be a percentage of collections, but Alison Werner (03:07) Thank Mm-hmm. Mm-hmm. Thank Ty Ramsey (PTS) (03:32) The way they need to view it is if they were to step back from the business and just wanted to own it and just take the profit that it spun off every year, you know, what would they pay an associate? And they're becoming an associate, but really they're not. They're becoming a partner of this group and working together. And then they'll be paid a fair doctor wage moving forward. But like I said, we look at all those different factors. Alison Werner (03:38) Yeah. Mm-hmm. Mm-hmm. Ty Ramsey (PTS) (03:59) and come up with a wealth creation plan for them where, we always compare it against status quo. Alison Werner (04:07) Okay, well, I'm kind of curious when doctors do say like I want to get back to what I was making before the deal What are they actually referring to? they talking about salary or talk about distributions or lifestyle or just overall wealth creation? Ty Ramsey (PTS) (04:23) Yeah, I'd say overall wealth but not all doctors pick just the highest offer. We return on a good practice, we'll return normally five, six, seven, sometimes eight, nine offers to choose from. And they don't always pick the highest offer. It's all about cultural fit too. And I call it a mental return on investment. There's a lot of... There's a lot of my clients that have told me, hey, I never thought about this, but once I cemented an exit plan, an eventual exit plan, whether it be five years, 10 years down the road, they say so much stress just came off of me. Because now as a private practitioner, mean, God forbid something happens and they can't practice tomorrow. The value of their practice just... Alison Werner (04:59) Mm-hmm. Yeah. Ty Ramsey (PTS) (05:17) plummets and the value of their biggest asset just plummets. What we do is allow them to take some chips off the table and diversify their biggest asset. So it's not just about getting back to what you were earning before. We take many different things into consideration. But yes, in general, if you're looking at just W2 moving forward, ⁓ Alison Werner (05:18) Mm-hmm. Yeah. Yeah. Mm-hmm. Ty Ramsey (PTS) (05:46) In orthodontist, I would say a going rate is going to be anywhere from $1,500 to $2,000 per diem. But keep in mind, they're getting a nice lump sum We do a full analysis, time value of money versus their seller discretionary earnings. ⁓ So we're always comparing against status quo. So here's what you're doing now. Here's what this like moving forward. Alison Werner (06:13) Mm-hmm. Ty Ramsey (PTS) (06:15) that there's no surprises moving forward. The last thing we want is for them to feel like it's a reverse mortgage. There have been cases where, you know, we've told clients, hey, we don't think this is good for you. Yeah, we'd love to do the deal for you, but as your advisor, it's my job to tell you, you know, if I think a deal is good or bad, and I don't think it's a great deal for you. And that's happened before. Alison Werner (06:23) Okay. Yeah. Mm-hmm. Yeah. Can you give kind of give an example of what would a bad deal look like in terms of your compensation down the road? Ty Ramsey (PTS) (06:48) Yeah, I would say a bad deal looks like, you know, for any craps players out there, you're betting all on the come, you know, you're you're betting a lot on future events. So, you know, very little, ⁓ very little cash at close. ⁓ You know, and you've got tons and tons of equity awarded with a bunch of ifs, ands and buts and. Alison Werner (07:11) Okay. Ty Ramsey (PTS) (07:14) So you might be taking that hit on go forward comp and you, know, the whole deal is dependent on the equity and the appreciation of the equity. ⁓ That's to me, that's the worst kind of deal where you just have a huge amount of equity that's awarded to you and not much cash. Alison Werner (07:25) Mm-hmm. Okay, okay. You you've talked a little bit about this, but I kind of would like to have you go a little bit deeper. When a doctor transitions into that DSO-OSO partnership, how does their compensation structure typically change? Ty Ramsey (PTS) (07:48) Yeah, so they'll go from, you know, just a bunch of, you know, they normally legally run a bunch of tax treatments through, ⁓ you know, cars, maybe paying family members who help out, things like that. All that stuff, you know, they might buy, you know, a cone beam or they might pay a consultant $50,000 for the year and be able to write that off. All that stuff goes back to their EBITDA, which is ⁓ earnings before interest, taxes, depreciation, and amortization. And all DSOs and OSOs base their offers on a multiple of EBITDA. Alison Werner (08:32) Mm-hmm. Ty Ramsey (PTS) (08:33) So their comp structure, all those one-time type of expenses or capital expenses, all those capital expenses will Alison Werner (08:41) Thank you. Ty Ramsey (PTS) (08:44) continue going forward but won't count against them in most cases or there are certain cases where they do a what we call a joint venture type of deal so if they spent a hundred thousand on a cone beam and had a 60-40 joint venture partnership they might pay $40,000 and the group pays $60,000. So but just their pure comp they're going to be normally on a per diem or a percentage of collection Alison Werner (08:45) Yeah. Okay. Mm-hmm. Okay. Mm-hmm. Ty Ramsey (PTS) (09:14) But also, we normally negotiate some kind of growth bonuses in there or even profit share moving forward. If it's a joint venture situation where they still retain a portion of their practice as ownership, the more their practice grows, the more their profit grows, the more their income grows. it's two different structures, two different ways to grow your income partnership. Alison Werner (09:14) Thank you. Thank Mm-hmm. Okay. Okay. Within the practice, what are some of the biggest operational changes that can directly impact a doctor's income after these partnerships? Ty Ramsey (PTS) (09:54) Yeah, just, ⁓ you know, these, the DSOs and OSOs will do a full analysis of the practice with us prior to making an offer. they, you know, if a practice is really maxed out and they don't see a lot of room for growth, you know, they might not make an offer. mean, but a lot of times they have a whole bunch of levers they can pull, you know, schedule optimization, helping. Alison Werner (10:19) Mm-hmm. Ty Ramsey (PTS) (10:23) with staffing, materials are gonna be 30 % cheaper. There are a lot of, maybe they add a retainer program that hadn't been implemented before, but they have 100 scenarios where it's been very profitable. So they might recommend that. Might not make the doctor do that, but recommend it. Hey, it's to both of our benefit if we add. Alison Werner (10:29) Mm-hmm. Mm-hmm. Right. Mm-hmm. Ty Ramsey (PTS) (10:52) a retainer program here on the front end. they have all kinds of, just imagine a consultant advising some stuff. It's like having a consultant with live data all the time with 50, 100, 200 locations of data that they're always pulling from. So they just have all these different levers they can pull to make the practice more profitable. And the average growth first year. Alison Werner (10:54) Mm-hmm. Right. Thank Ty Ramsey (PTS) (11:20) of a practice joining a DSO or OSO is about 9%. And that's average across all the different kinds of groups. In orthodontics, I would say at least the clients I've had, I've had multiple clients grow over 20 % the first year. Alison Werner (11:27) Okay. Yeah. Okay. What have you seen? What do you think is the key driver of that success for those practices, those 20 %? Ty Ramsey (PTS) (11:55) ⁓ It's just, I mean, it's just a matter, like I said, of pulling all those levers, just following a partnering with the group ⁓ while completely keeping their autonomy. People need to remember the grip. screen out tons and tons of groups, the groups that I call activist groups that come in and if the doctor joins, they're just part of the spreadsheet. Alison Werner (12:04) Mm-hmm. Mm-hmm. Ty Ramsey (PTS) (12:21) They use their materials, they follow a script, they do everything by playbook, cookie cutter. And those are the groups that have turnover doctors every 18 months that you hear about. The groups we work with, the majority of are doctor-led, doctor-owned, doctor-founded. And doctor's name stays on the door, staff stays the same. They're the product. they're investing in the doctor as the product and they want that product to carry on as long as they can. So the last thing they wanna do is come in, make a bunch of changes. They do take the back office off the doctor's plate, the stuff they don't need to be doing anyway, accounting, payroll, that kind of thing. But that's probably one of the biggest things when the doctor just has time to just do orthodontics and... Alison Werner (12:51) Thank Right. online. Mm-hmm. Ty Ramsey (PTS) (13:14) not dedicated to a bunch of back office stuff, they can easily grow along with best practices that they have basically a buffet plan of best practices that have worked at other practices and that they can choose from. it's just any number of ways they can grow. Alison Werner (13:24) Mm-hmm. Yeah. Yeah, I don't think we've really emphasized before the fact that, you know, with removing that back office responsibility from the doctor's plate, there is going to be more time to see patients. yeah. Yeah. What's what in your opinion separates partnerships where doctors successfully regain or exceed their prior income from those where doctors end up disappointed financially? Ty Ramsey (PTS) (13:45) Absolutely. ⁓ I would say, I mean, in most cases, ⁓ having good broker representation. That's my job is to make sure that they're one of the biggest decisions they'll ever make. It's going to be a good one. And to give them all the information that we can so that they can make an educated decision. Just like if you, you know, God forbid, had to go to some big court case you were involved in. you probably wouldn't have a great outcome if you just went in and represented yourself versus hiring an attorney. Well, you know, and I joke with orthodontists, you know, I wouldn't, could walk, I mean, maybe not legally, but technically I could watch a YouTube video of how to treat a class two div II and then try to treat it. My outcome is going to be very different from yours because that's what you do. Just like conversely with us. Alison Werner (14:33) Right. Uh-huh. Right. Yeah. Ty Ramsey (PTS) (14:57) ⁓ My outcome's gonna be very different than yours on a practice transition. There's a great example of a, it was an oral surgery practice that we partnered in December and they had gone to market and we do all specialties by the way, but they had gone to market on their own and they let me know this after we had successfully partnered them, but ⁓ they, ⁓ Alison Werner (15:20) Mm-hmm. Ty Ramsey (PTS) (15:23) had gone to market on their own, gotten a couple offers, rejected them, hired me to take them to market. We got nine offers. The one they went with ended up being over 50 % better than what they got on their own. So I would say, you need great representation to do that. Alison Werner (15:27) Mm-hmm. Okay, yeah. Okay, for orthodontists who are considering a partnership, what financial questions should they be asking to better understand their post-transition earning potential? Ty Ramsey (PTS) (15:55) Mm-hmm. Yeah, that's something that there's a hundred different things that go into that. And I would just suggest that they get a free valuation done with us. It's a complete valuation on the practice underwritten by a dental CPA. Helps uncover any blind spots. It could mean millions of dollars to them in the future. You know, we compare. their supply spin, their payroll, their marketing, their rent versus industry averages, take all kinds of demographics into consideration. And then we present them with this 15 to 20 page document that's a complete valuation on their practice. And we use that to market their practice if they decide to go to market. But there's no obligation. The free valuation is theirs to keep. Alison Werner (16:26) Thank Mm-hmm. Yeah. Mm-hmm. Mm-hmm. Yeah, well, but I'm just also curious, even if they're just preparing and they want to walk into that conversation with you, what should they be thinking about in terms of those financial questions so that they can feel prepared coming in to sit down with you even? Ty Ramsey (PTS) (16:55) Yeah. Yeah. Yeah. Yeah, they need, I mean, they need to, I mean, they need to step back and take a look in the mirror and saying, hey, know, what have we, where are my weak spots? And a lot of times they don't know. So they don't know the questions to ask. We help with that, but it's gonna, you know, maybe their payroll's really high. Maybe their rent's really high. Maybe they can... ⁓ you know, start doing same day starts and drastically increase revenue. Maybe, ⁓ you know, it's just a whole number of things, but they always want to make sure that they have, you know, their expenses and their payroll under control and they're, you know, for a start. And they also want to make sure they have a great culture. That's very important as well. These groups can see through a bad culture and they won't. Alison Werner (17:40) Yeah. Mm-hmm. Yeah. Mm. and Ty Ramsey (PTS) (18:00) They won't make investments. They want like-minded doctors that have great cultures in their office. Alison Werner (18:07) Well Ty, thank you for being with me again. I really appreciate it. Ty Ramsey (PTS) (18:12) Great. Thanks for having me. I really enjoyed chatting. Alison Werner (18:16) Great, thank you.