Latest / Orthodontic Products Podcast / Why Waiting to Sell Could Cost You: The Case for Early Partnership
Transcript
- Alison Werner (00:04) Hello and welcome to the Orthodontic Products Podcast. I'm your host, Alison Werner. As consolidation continues to reshape orthodontics, more doctors are finding themselves at a crossroads. Do you keep expanding independently or do you explore a partnership while your practice is still growing? The exit versus expand question isn't just about retirement anymore. It's about valuation, timing, risk, and what kind of career you want over the next decade. Today's market presents opportunities that didn't even exist a few years ago. but they come with complexity and a lot of misconceptions. To help unpack what orthodontists should actually be thinking about, I'm joined by Ty Ramsey. Ty is a mergers and acquisitions advisor with Professional Transition Strategies, where he works with doctors on practice valuations, partnerships, and competitive OSO and DSO processes. With more than 20 years in the dental industry, Ty brings a practical, real-world perspective on how these decisions play out and what orthodontists often get wrong when they wait too long to explore their options. Here's our conversation. Alison Werner (01:05) Ty, thank you so much for joining me. I really appreciate it. Ty Ramsey (01:08) Sure, really happy to be here and do another podcast with you. Alison Werner (01:12) Yeah, this is your second time with us. And so just for those who didn't see the last podcast, can you kind of talk a little bit about your background and kind of how it's relevant to today's conversation? Ty Ramsey (01:23) Sure, yeah, I've been in the dental industry for a little over 20 years now, spent a large part of my career, ⁓ I was a national ICAT salesperson, which is a high-end CBCT x-ray. ⁓ In my career, I'd... ⁓ had the, I was pretty blessed, did very well with that, sold over 800 of those in my career. was able to develop a lot of great relationships through that and then I parlayed that, I just kind of found myself in the dental transitions, mergers, acquisitions world whenever I left there, started out as an independent consultant and then just kind I've landed in this just through my relationships and have now been with professional. I was doing it ⁓ as an independent for a couple, about a year and a half, and then I joined Professional Transition Strategies, ⁓ which is the largest ⁓ &A advisory privately held in the nation. I joined them about ⁓ two and a half years ago. Alison Werner (02:26) Mm-hmm. Okay, all right. So with that in mind, we're going to talk about exit versus expand. So just to get started, at what point in an orthodontist's career does the exit versus expand question usually become relevant? Ty Ramsey (02:58) Yeah. ⁓ To sound like a politician, would say, mean, not to sound like a politician, but let's say it depends. mean, the average age of ⁓ our client last year was in the mid-40s. ⁓ And in December, I transacted someone who was 72. So ⁓ it's all over the board. It just depends on your goals. ⁓ Also last year, transacted a couple of partners that were ⁓ late 30s, early 40s. So it really depends on your career trajectory and can range all the way from, you know, like the lower end there all the way up to, you know, well into retirement age. Alison Werner (03:46) Okay, so what would you say are the biggest misconceptions orthodontists have about selling or partnering while their practice is still growing? Ty Ramsey (03:57) Yeah, I think it's the belief that everyone likes to call it selling. It's not selling, if it's done right, it's a partnership. So there's a lot of misconceptions about selling to corporate. Well, and that's part of my job is to screen out those corporate type DSOs. Believe it or not, there are 350 plus self-identifying DSOs. And there are probably well over 100 that I wouldn't touch with. Alison Werner (04:14) Yeah. Mm-hmm. Ty Ramsey (04:34) a 10-foot pole, but there are many that are doctor-led, doctor-owned that allow full clinical autonomy for the doctor. So one of the biggest misconceptions is that the doctor is going to lose control and lose his identity moving forward. Not going to get to keep his staff, going to have to change the name, all of a sudden going to show up. There's going to be new employees there. None of that is true. It's a true collaborative Alison Werner (04:35) Mm-hmm. Mm-hmm. Mm-hmm. Ty Ramsey (05:03) partnership and if a doctor could envision taking all the things that he or she hates to do off their plate such as the administrative burden, HR, payroll, staffing, what if all that could be taken off of their plate for them to just do what they love, dentistry, orthodontics? Alison Werner (05:17) Mm-hmm. Yeah. Hmm. Okay. So why can transitioning a practice during a growth phase kind of often lead to better valuations of financial outcomes than waiting, say, until later, like when you're ready to retire? Ty Ramsey (05:40) Bye. Yeah, there's, you know, if you can imagine for the people who don't have video, you know, if you can imagine a graph of your career, like, you know, maybe you started off as an associate and then you either bought into a practice or hung a shingle and grew the practice. I mean, your career trajectory is going slowly up. And then as you go on and on, you know, it eventually plateaus and then you want to start working a little less towards, you know, the last Alison Werner (06:03) Mm-hmm. Ty Ramsey (06:12) 30 year career you're kind of trailing off and a lot of lot of practitioners make the mistake of you know, okay Well, I want to you know, go to the beach and hand over the keys to someone well if they had just planned about five years in advance in many cases it can make you know seven figures difference on their retirement because ⁓ it makes a huge difference to catch a practice that is Alison Werner (06:16) Yeah. Ty Ramsey (06:42) considering a partnership on an upswing versus ⁓ one that is in decline. There's going to be ⁓ much less demand for a practice in decline than there is for a practice on the rise. Alison Werner (06:49) Okay. Okay, well kind of related to that, ⁓ how can you know, I've talked to you before and how can a DSO or OSO partnership kind of actually accelerate growth for an orthodontic practice because you're talking about going in when you're growing. So how can it actually take it to a next level? Ty Ramsey (07:11) Okay. Yeah, in just a, I mean, in so many ways. For one, they're gonna take... you know, all the administrative and managerial burden off the doctor's shoulders. And they've got best practices. You know, there are a lot of consultants out there, a lot of great consultants that come in and give advice, but just imagine having live data 24 hours a day. our a hundred other practices. Here's what we did here. Here's how it worked. And just having that live data and that collaboration, ⁓ Also, same thing with marketing, marketing best practices across all the different, with the collaboration. ⁓ And there are just so many things that having all of that live data and having a group of like-minded doctors collaborate and grow towards a common goal, ⁓ it's kinda like one plus one equals three. ⁓ 50 or 100 practices with the repetitive expenses centralized and collaboration amongst all the like-minded doctors is going to grow way faster than a 50 or 100 individual practices on an island. Alison Werner (08:42) Yeah. OK, so you talk there a little bit about the resources you gain through that collaboration and working part of a bigger organization. Can you go a little further out of the kinds of capabilities orthodontists typically gain access to through a partnership that are the hardest to build independently? Ty Ramsey (09:00) Yeah, well, right off the bat, it's just economies of scale. mean, the cost of their everyday supplies are sometimes gonna go down 20, 30, 40 percent right there. And then that's one of the biggest things. And then also just the infrastructure, an infrastructure that is proven to work. The average orthodontic new partner with Alison Werner (09:14) Okay. Ty Ramsey (09:30) the right group is gonna grow right around eight or nine percent the first year. And most of my clients have grown well in excess of that. I can think of my last couple orthodontic clients that I placed grew over 20 percent and 25 percent respectively, year over year, their very first year. So there's... It's just so many different things, like I said, the marketing, the staffing, the admin burden being eliminated and all the best practices and collaboration. Alison Werner (10:09) Okay, so what operational or financial markers do DSOs and OSOs look for that kind of signal that a practice is ready for an acquisition? Ty Ramsey (10:19) Yeah, yeah, great question. There's something, you know, I call it like a ⁓ class A asset. They want a certain amount of revenue and a certain amount of ⁓ EBITDA, which is ⁓ an acronym for earnings before interest, taxes, depreciation, and amortization. So I would say in general, the ⁓ kind of the, at the lower end, ⁓ they're looking for practices generating you know in just around a hundred thousand dollars a month so let's call it 1.2 million in annual collections and an EBITDA margin of around 20 percent which in that case would be 240 250 thousand that's that's at the at the very low end ⁓ so but it so if your practices you know fits into that scenario those Alison Werner (11:12) Okay. Ty Ramsey (11:18) parameters, it would be worth looking into. And even if it doesn't, ⁓ if you have a smaller practice, it's still worth getting a professional valuation on that if you wish to plan for the future, have any kind of exit plan in mind in the future. Alison Werner (11:38) Yeah. Well, related to that, what risks do orthodontists take on when they delay exploring options because they assume they're not ready yet? Ty Ramsey (11:44) Mm-hmm. Yeah, so ⁓ unfortunately I had a live example of that. ⁓ We had a client who we had a couple of offers for. They decided to put that off and ⁓ they got ill and they passed away and ended up selling, having to sell the practice for a third of what we originally had done. So that's just reality. It's it's it allows you to take some chips off the table and De-risk your life's work. So the risk that's one of the risks the other risk is you know, a lot of people think my practice is growing, I'm going to wait a couple of years. Well, the market literally changes monthly in this business. So we don't know where the market's going to be. even a few months, few years, we don't know. Could be, you know, most experts think that ⁓ every industry that has involved private equity investment has been a bell curve. ⁓ Alison Werner (12:44) ⁓ Okay. Mm-hmm. Ty Ramsey (13:03) So it happened, industry consolidation, ⁓ happened 30 years ago in medical, 20 years ago in pharmaceutical, a little over 10 years ago in dental, veterinary and dermatology. ⁓ There's far fewer vets and dermatologists than there are dentists, so those industries are reaching the consolidation point. Dental, there's around 200,000 Alison Werner (13:18) Yeah. Ty Ramsey (13:33) unique NPI numbers in the US just because there's more inventory There's more of the consolidation wave left in dental. So what is consolidation? Consolidation is when 60 to 70 percent of all of the assets or practices, let's call them attractive practices to investors in private equity have been partnered with a group and once we reach that Alison Werner (13:36) Mm-hmm. Okay. Mm-hmm. Ty Ramsey (14:03) We'll go back to the you know to the more traditional days of doctors no longer having the option to partner with a private equity backed group or being invested in directly by private equity it'll move more to a my exit strategy strategy now is to sell for 70 to 80 percent of collections to suck to another individual or do What's called a Mercer acquisition in which you sell off pieces of your price? Alison Werner (14:17) Yeah. Ty Ramsey (14:33) as you go, or percentages, in an effort to try to get somewhere in the 80 to 90 percent of collections over a period of years. But what we're in now, in this consolidation wave, allows doctors an opportunity that didn't exist a few years ago, and probably won't exist a few years from now, which is yet a much higher valuation, and in many cases, an exponentially better Alison Werner (14:35) Mm-hmm. Ty Ramsey (15:03) plan and not even always an exit plan, just a partnership plan that is going to yield a better work-life balance and better income over the course of their career. Alison Werner (15:16) Yeah. Okay. So for the kind of the growth minded orthodontist, what deal structures tend to make the most sense for them? Ty Ramsey (15:24) Yeah, so. Again, it depends on their goals. There are many different kinds of deal structures out there. There's one we call it an equity role and that's where the doctor gets an offer and a portion of it, say 70 or 80 percent is in cash and the rest of it is in private company stock or equity in the group. On the other end of the spectrum is what's called a JV or a joint venture scenario. That's where the doctor sells a percentage of his practice and retains practice level equity in his own practice. So a doctor might have a ⁓ $2 million practice and sell 60 percent of it ⁓ and then maintain the other 40%. ⁓ Ownership, so he would let's say that I have a two million dollar practice and Let me say two million dollar practice and 20 percent EBITDA margin, so let's call that four hundred thousand in EBITDA that's basically the amount of money that the the practice is spinning off after everyone's been paid including the doctor at a fair doctor wage So the doctor would partner with a group get a nice pay day Alison Werner (16:27) Mm-hmm. Okay. Okay. Ty Ramsey (16:56) and then moving forward be paid a fair doctor wage and then on top of that get distributions for 40 percent of the profits. So 40 percent of those profits would be 160,000. So if he or she just stayed level, that'd be 160,000 in profit distributions. We have many examples where doctors have partnered in that scenario and then grown so much. Alison Werner (17:00) Mm-hmm. Okay. Okay. Ty Ramsey (17:26) that their 30 or 40 percent of practice level equity after the growth, they end up recovering their original income they were making as a single practitioner and sometimes even exceed it. Back to the first example I gave where it's partially paid out for cash and then the rest in private company stock. Historically that private company stock Alison Werner (17:41) Okay. Mm-hmm. Ty Ramsey (17:56) in these private equity funds has appreciated 3 to 5x dollar on dollar every 3 to 5 years. So in this same example where we have a $2 million practice, let's say ⁓ you might have $1.5 million of it paid in cash and then the other $500,000 paid in private company stock, fast forward 5 years, you might have a 5x return on that Alison Werner (18:05) Okay. Ty Ramsey (18:26) private company stock so you've got another 2.5 million in wealth accumulation so we've just turned a two million dollar practice that if another practitioner would probably sell in the 1.5 to 1.6 million dollar range we've just turned that into a four million dollar practice through what we call equity arbitrage. So two very different offers there are some Alison Werner (18:37) Mm-hmm. Okay. Okay. Mm-hmm. Ty Ramsey (18:55) combination of the two where it's a joint venture and you get the private holding company stock as well. Alison Werner (18:58) you Okay. Okay. Okay. So what questions should orthodontist ask themselves before deciding whether to exit or expand? Ty Ramsey (19:12) huh. I think it starts with hiring a good advisor like our company. You want to get professional advice. I mean, if my teeth are crooked and let's say I've got a class two, div two, I'm not going to watch a video and then try to treat myself. You know, I'm going to go to a professional, an orthodontist and get treatment. That's the analogy I like to use. This is what we do. Professional Transition Strategies, the company. Alison Werner (19:40) Mm-hmm. Ty Ramsey (19:43) I'm with we've done over a billion dollars in deals for our clients on average we do about a hundred partnerships a year ⁓ So this is what we do so the number one thing I would say is get a professional to help you out Just like if you're going into court for something, you know, I'd say some big court case You wouldn't go in and try to represent yourself same thing here. We deal with Alison Werner (20:11) Mm-hmm. Ty Ramsey (20:13) all these different DSOs and private equity groups. know everything about them. ⁓ I can't put enough stress on the importance of getting a good advisor when you're looking into this. And that starts with ⁓ a free practice valuation. And that's what we do is that's the first step. do a free practice valuation with no obligation. Alison Werner (20:42) not a care-ass of what kind of time frame does this process take? Ty Ramsey (20:46) Thank Mm-hmm. Yeah, so let's say that, you know Alison Orthodontics wanted a, ⁓ you you were looking into it and you would send me all your financial info. Basically, it's just standard information, last three years, tax returns, P &Ls, some reports from your practice management system, financials. And then we would have evaluation done. Normally we'd get it done in about two weeks. And then we'd go, We do a zoom call with the doctor and we are able to show them for the first time how their practice looks unlock the real value of their practice from an investor's lens rather than an individual's lens. what we do is, I mean, only good things can come from that because we're either gonna, we're gonna uncover some blind spots. And if we don't have a lot of blind spots, then your practice is in great shape and we can take you to market and get an outstanding outcome. If it's not, we're gonna uncover Alison Werner (21:41) Hmm. Okay. Ty Ramsey (22:05) those blind spots and then you can course correct and potentially you know save your or you know it's going to be millions of dollars of difference in some case. So ⁓ planning ahead is very important. Plan ahead and get a professional advisor. Alison Werner (22:23) What are some of the key blind spots that you see? Ty Ramsey (22:26) Yeah, like someone's payroll might be out of whack, they might be ⁓ really in bad shape with their rent, their supplies spend might be really high. ⁓ We measure all of these in the complimentary evaluation, we call it a prospectus, but we measure those against the industry norms in our valuation and we help uncover those blind spots. Alison Werner (22:54) Okay, so if an orthodontist is curious but not ready to make a move, what's kind of the smartest first step they can take to understand their options? Ty Ramsey (23:04) Yeah, they can they can contact me or us and ⁓ look into doing that complimentary practice valuation. That'll just help them kind of get a feeling for where their practice is ⁓ and where it could go or where it needs to go. ⁓ I've got a client right now that tried to go to market on their own a couple of years ago ⁓ and then decided not to do anything and then hired us and since then they've, they've declined a little which does create a bit of a challenge, but we're still going to get a I believe we're still going to be able to get a very nice outcome, but if Back to the risk in waiting, you know, really what you want to do is Get an advice get a great advisor and then look into it now now that doesn't mean go to market now that just means I'm not gonna be pushing anyone to go to Alison Werner (24:06) Right. Ty Ramsey (24:09) market. I'm just going to help them plan and part of that plan might indeed be looking into things now but also part of that plan I've told many of my clients hey let's check back in a year you know I've got one really large orthodontist that once a year about every January we look at the numbers and we reassess and they haven't decided to do anything yet which is just fine and they might not ever they might not all they might always stay on their own which is just fine as well. Alison Werner (24:10) Mm-hmm. Okay. Mm-hmm. Yeah. Ty Ramsey (24:39) are still plenty of great private practices out there and I'm not here to, you know, I never throw shade on a private practice. I mean, good for them. It's just my job. I consider my job is just to give them all the options so that they can make an educated decision, a decision that's best for them and their families in the future. Alison Werner (24:50) you Great. Well, Ty, thank you again for joining me. I appreciate it. Ty Ramsey (25:05) You bet.