The Group Dentistry Now Show: The Voice Of The DSO Industry

A well-known speaker on the DSO event circuit, and a respected attorney for 25 years, Brian Colao discusses where we are as an industry and the mistakes that have been made during this pandemic. Brian shares his passion for our industry and addresses the importance of dentistry sharing ONE voice with the message that dentistry is essential. He explains that our recession-proof industry must also represent itself as pandemic-proof to government officials immediately. This is an incredibly insightful and passionate audio only podcast for both solo and group practitioners, teams, administrators, executives, and trade organizations!

Our podcast series brings you dental support and emerging dental group practice analysis, conversation, trends, news and events. Listen to leaders in the DSO and emerging dental group space talk about their challenges, successes, and the future of group dentistry.

The Group Dentistry Now Show: The Voice of the DSO Industry has listeners across the North & South America, Australia, Europe, and Asia. If you like our show, tell a friend or a colleague.

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FULL TRANSCRIPT

Bill Neumann:

I’d like to welcome everybody to the Group Industry Now Show, I’m Bill Neumann. And in this episode of the Group Dentistry Now Show, we have somebody that I don’t think really needs an introduction to about 99.7% of the people listening, but I’m going to introduce him anyway.

Bill Neumann:

Most people know Brian Colao. But if you don’t, Brian is the Director of Dykema’s Dental Service Organizations Industry Group, and I’m not going to go into his entire bio because he has one of the longest bios I think I’ve ever seen and it’s well justified. Brian has been in the dental space for approximately 25 years.

Bill Neumann:

So he’s been in the industry for two and a half decades, it’s amazing. Widely regarded as one of the foremost authorities in the United States on, I would say all things DSO. I’ll tell you a couple of the things that he focuses on, but only a couple because there are a lot, DSO formation, DSO business structures, M&A, regulatory compliance for DSOs, and that includes corporate practice of dentistry, illegal fee splitting, advertising regulations, laboratory regulations, patient financing, et cetera.

Bill Neumann:

And Brian did ask me to mention this, and I’m thankful that he did. But he was named one of our DSO influencers to watch back in 2019 and he’s written several articles for us and contributed to some other articles that we’ve done in the past. And really, I think, Brian correct me if I’m wrong, but you contributed to an article right around when we first started back in 2015, maybe 2016 and it was really on that first generation of DSOs and how a lot of the DSOs or group practices at the time publicly traded ones. There were some lawsuits wrapped around that, so there was really formative article and we still get a lot of activity on that article to this day. So again, welcome Brian Colao to the Group Dentistry Now Show.

Brian Colao:

Thanks. Thanks, Bill. And I just wanted to tell you, it’s my pleasure to be on here today and thank you for everything you’ve been doing during this pandemic to keep the DSO industry informed. I’ve just been listening to a lot of your podcasts and looking at a lot of your content and I just want to thank you for everything you’ve been doing.

Bill Neumann:

Sure. It’s strange times which we’ll talk about and who would have thought that the recession proof or near recession proof dental industry would be devastated with something like this. Nobody would have predicted this and actually you were one of the contributors to the 2019 recap and the 2020 predictions. So we’re going to work on a redo of the 2020 predictions because we did those in January. And so now of course we have to redo it because what’s going to happen in 2020 and then 2021 and we’ll talk a little bit about that in this podcast.

Bill Neumann:

Brian, first, tell us a little bit more, tell the audience a little bit more, the ones that don’t know about Dykema and the team there. What do you do for the dental industry as a team and also the DSO industry specifically?

Brian Colao:

Yeah, no. So, I’m an attorney and I’ve been in the dental space 25 years and I supervise a team of 40 attorneys that specialize 100% in healthcare, and 20 of my team members are 100% dentistry. They focus 100% of their practices on dentistry, all the things you kind of mentioned during the introduction. But the bottom line is we represent, I believe, 375 plus in excess of 375 DSOs in all 50 states and six Canadian provinces. And pretty much any possible conceivable legal issue that could impact a DSO, we handle.

Bill Neumann:

It’s interesting because we get people that reach out to us from time to time DSOs with various questions. And a lot of times I’ll send them over to you and you’re already in conversations with them. So you do know just about everybody in the industry.

Brian Colao:

That’s certainly my goal, it’s a little more challenging when we can’t go to our dental conferences and see everybody, but I’m grateful for… On the one hand, I’m sick of Zoom and ready to throw it out the window. But on the other hand, I’m very grateful for Zoom and other virtual mediums, so at least we can still try to network as best we can, but no doubt, we’re in a very challenging circumstance now. Normally at this time of year, we’d be getting ready for our industry leading conference next week.

Brian Colao:

So it’s a little sentimental for me, we were going to have a thousand people yourself and Kim included coming to Dallas for our conference. And now we’re just going to have to make the best of these virtual events.

Bill Neumann:

Yeah. We’ll talk about that a little bit later on in the podcast, but you did one virtual event that was highly successful, I really enjoyed it. I loved the format, it was about as engaging as you can be with the limitations that we have with virtual events and certainly educational and I know you’ve got some things planned for later on in the year virtually, and hopefully some things planned in 2021 that will be live and we’ll be able to get back together again.

Bill Neumann:

But let’s talk about, I think some real pressing issues and concerns the DSOs have right now in group practices, had this recent surge of COVID cases in some states, you’re from Dallas and so you’re certainly seeing that in the state of Texas. So tell me a little bit about what you and your team are seeing and hearing from clients about the current state of affairs for practitioners. What do you see in here?

Brian Colao:

Well, I mean, to me, it’s very simple, Bill. It begins and ends with the dental offices have to remain open. And I just know for certain, we’re going to talk a little bit about that today. If you don’t even ask me the questions, I’m going to start talking about how essential dentistry is and how, the practices have got to stay open. I don’t think you want to do that the first two minutes here but you’re going to hear from me today on that.

Brian Colao:

But generally it begins and ends with these offices have to remain open. I joke a lot but I’m serious if the dental offices remain open, the DSO industry is going to be fine, they can ruin our lives, Bill. I mean, this is where I’m joking, they can shut down the NFL, they can shut down major league baseball, we can’t go have a drink at a bar, no rock concerts are allowed anymore, they can shut down the restaurant.

Brian Colao:

But if the dental offices remain open and they’re safe and the patients believe they’re safe, the impact on the DSO industry is going to be very, very minimal. The sad thing about all this is that’s not what happened. What happened was for the first time in the history of the dental industry, at least during my lifetime and most people’s lifetimes that were even considerably older than me, the government told you, “You couldn’t go to the dentist unless you had an emergency.” And that has never happened.

Brian Colao:

So dentistry has been virtually recession proof throughout its history, but everybody’s got an Achilles heel or a little weakness, and at least this time around, it was not pandemic proof. And the key for everything that’s got to happen.

Brian Colao:

I mean, yes, you’ve got to make the practices safe and I can talk about that and I believe they are safe. And yes, the patients have to believe the practices are safe because if they are safe, but they don’t believe they’re safe, they’re not going to come back. But those two things, I think we’ve done a great job during the reopening of one, making the practices, in fact, safe. And to most patients, a recent poll by the ADA said, “At least 73% of the patients believe it’s definitely safe enough to come back and they’re not canceling appointments.”

Brian Colao:

So there’s some improvement there but largely we’ve done a good job, and in a few more weeks we’re going to do an even better job. The elephant in the room or the other shoe that might drop is if these cases keeps spiking, will they go back to a scenario where they ask dental offices to close? And if that happens, that could be potentially very damaging obviously to the industry and that cannot happen. I mean, that’s not even something I want to even entertain.

Brian Colao:

We have to spend every waking hour, literally making sure that we never get to a situation where these dental offices close again. But in terms of what we’re seeing right now, it’s encouraging how, the first part of the pandemic bill, it was about, “How do we lay people off? Do we furlough them? Do we lay them off? How do we get our PPP loans in place?” I mean, really depressing stuff. I was busy, but it was not, it was very depressing.

Brian Colao:

Now it’s how do we invite the workforce back and comply with the labor and employment regulations? How do we get our PPP loans forgiven? How do we navigate a situation where if somebody tests positive, we’re not closing the office down, but how do we safely navigate the regular… who do we have to report to? What is our obligations? You know, if somebody tests positive. Because in a lot of places it’s going to happen. I mean, I know that they get upset at us at the CBC if we compare this to the flu, but you know, the flu’s are coronavirus, this is a coronavirus. Maybe this is a novel one.

Brian Colao:

But in the end of the day, this is going to morph, I think Bill, it’s just a question of how long it takes into a situation where you’re just going to have to live with it. We’ve never, to my knowledge, shut down dental offices on a wide scale basis because people got the flu. Dentistry has been dealing with infectious diseases since very long time, but it really got serious during the AIDS crisis in the ’80s. That’s when PPP started to come out, you’ve got tuberculosis, you’ve got hepatitis A, you’ve got hepatitis B, you’ve got the regular flu, and nobody is better than the dental office at handling that.

Brian Colao:

And this whole idea that somehow it was unsafe. And by the way, Bill, there’s not a single statistic out there that anybody can cite to, that say the transmission rates are any higher in the dental offices than any place else. But somehow it got to a situation where they shut the offices down. And I told you, I wasn’t going to rant and rave in the first five minutes, but I’ve broken that rule. I started ranting and raving in the first five minutes because I think the key to all of this is the dental office has got to remain open.

Bill Neumann:

Well, yeah. And I think you’re fine branding and raving, so that’s fine, I think it’s extremely justified. And I also think that it’s very timely given the recent surge in COVID cases in some States. And you hear rumblings from governors and mayors, saying that they may start to…

Bill Neumann:

Well, they already are right. They close the bars down in Texas, they were open and now they’re not open again. So, what else could possibly happen next? And so we don’t know and so you’re right. I think there has to be, “Hey, we are essential as an industry and we can practice dentistry safely.” Have you seen or heard anything specific to dental in any states, whether it’s from government or whether it’s just from maybe some skittish clinicians that want to close things down again or just remain open for emergency care only?

Brian Colao:

Yeah, I have. On a wide scale basis, no. I mean, the good news is so far, none of the governments are making any rumblings about closing dental offices down. And I think that’s great. And I think because we’ve told them after I think this horrible mistake was made where they shut down the offices, lots and lots of meetings, I participated in some, we told them no place is safer practically than the dental office. I suppose if you lock yourself in your house and crawl into your bed under the covers and never leave, that might be number one.

Brian Colao:

But the dental office is like a real close second to that because everybody’s got PPE on. You can go to a bar, I mean, I feel bad for the bar owners. But if you walked into a bar and everybody had the N95 masks and they had a hazmat suit on it and they had gloves on, you could probably, God, I don’t know how you drink, but you could go to a bar and talk to people and it would probably be okay. The problem is that’s not practical, nobody’s going to a bar to do that, nobody’s going to a rock concert to do that.

Brian Colao:

So unfortunately that’s why those businesses are going to get hit the hardest, and I feel bad for those folks, but there’s just no way around that. But a dental office is not a party, it never was. Nobody’s listening to rock music and dancing around and throwing back shots. I mean that at least not at my dentist, that’s not what happens there.

Brian Colao:

You walk in and you get treated and everybody, I went to the dentist and I put it on my podcast series and I had my dentist. Bill, on my podcast series, Dr. Lowman, she talked a little bit about the whole thing and you go there and one, they take your temperature, two, they had me wait in the car. Three, everybody had N95 masks on and gloves. Four, they had fans blowing for air circulation. Five, I had to do a pre-rinse with peroxide which deactivates the virus and the hand scale, they didn’t use the Cavitron.

Brian Colao:

By the time all that was over with, I couldn’t think of a safer place, it might’ve been safer than in my house under the covers, because I don’t have PPE at my house.

Bill Neumann:

That’s true, very good points. I think it’s really interesting and let’s just hope that to your point that we don’t back step and close down offices again are limited to emergency only care. So you mentioned a couple of requests that come into the DSO team at Dykema that have been coming in and how they’ve shifted from on the employment side anyway, from furloughs and laying people off, to how do you bring employees back now.

Bill Neumann:

So talk a little bit more about that. And then maybe some other general business related questions as practices open back up. I know that there’s the PPP and I know recently that there’s some provider relief, there’s a provider relief fund and that was really relegated just to a Medicaid and Medicaid managed care. But I think that’s been expanded, which is really interesting. And I think a lot of dentists, MD, and then DSOs, are the one who take advantage of that.

Brian Colao:

Yeah, it’s a little bit messy out there, Bill. And I mean, I guess it’s messy everywhere, I mean, this is not a political show and I have no intention of getting political on here other than to say, “I think most people can agree barriers, governments have not worked well with each other to solve this problem.” And it’s been very, very messy, and you know the federal government has not always been in sync with the state governments. And you’ve got some state governments that are pretending this isn’t happening, some are locking everything down.

Brian Colao:

So that has led to a very messy environment, I’m not passing judgment that’s for the politicians, but from a legal standpoint, when I’m advising practices, it’s messy out there. You have PPP loans that people took advantage of, you have disaster relief loans. Now, you’ve got this healthcare provider relief fund which is 2% for Medicaid, but they’re expanding it. Then you’ve got enhanced unemployment.

Brian Colao:

And the reason this becomes an issue is I asked the question, because even as a lawyer in the space for 25 years, I sat down with our labor and employment specialist and I said, “Why do I got to meet with you about inviting employees back? Aren’t they happy to come back? Don’t we call them and they just come back? Why are we having a meeting on this?” And they’re like, “No, it’s in fact, very complicated.” One, some of them are taking unemployment and actually were making more money on unemployment than they were in the office.

Brian Colao:

And what happens if you tell them to come back and they say, “We don’t want to come back, we want to earn unemployment.” Do you then fire them? Do they then lose their enhanced benefits or not? And these are open questions. I’ll just tell everybody there’s not a clear cut answer for that. Then it comes down to, what if an employee tells you they’ve got an elderly person at home and they’re worried about coming to the office or what if your employee is over 60 years old and they’re worried about getting it and they’re afraid to come back.

Brian Colao:

Do you have the right to fire them? How do you handle that situation? So this has given rise, Bill to real messy situation. By the way, all of these questions, there are not clear cut answers to them, you got to sit down with your lawyer and go case by case and figure out what the best solution is. But the overarching theme that I’m telling my clients is, and I don’t mind sharing this, on your show is, we got to keep the offices open.

Brian Colao:

I can’t guarantee that somebody’s not going to get sued for something or some employees not going to do something. But the alternative of just shutting the offices down until this pandemic passes, it’s just unacceptable. I don’t think there’s anybody, maybe if we’ve got one of your listeners, that’s independently wealthy and just says, “You know, I don’t need to earn any money, so I’m just going to keep my thing closed until it’s all over with because I don’t have to make a living.”

Brian Colao:

All right. Maybe that person can do it, but that’s like one in a 100,000 or something. The rest of us that have to work for a living, you can’t shut them down. You’re just going to have to navigate these and people have to understand there’s going to be legal issues, you’re going to get labor and employment complaints, people are going to contest unemployment benefits, you’re probably going to get sued before it’s all over with.

Brian Colao:

And we’re just going to have to work through those, but the alternative to shutting it all down, I mean, we’re not going to shut it down, we’re just going to have to navigate some of these legal issues going forward.

Bill Neumann:

Absolutely. So beyond those questions, I am sure this is a question that you’re getting quite a bit. We actually did a webinar about two months ago when things first started to say, maybe it was May timeframe. So a couple months into the pandemic but a month and a half in regarding practice valuations.

Bill Neumann:

So I’m sure you’re getting questions there. So from that perspective, let’s talk a little bit about what questions are you getting? What are the answers? What are you hearing as our single, as a solo practice, if I’m a sole practitioner I’m looking to affiliate, sell my practice to a DSO, where do I stand? Can I even do that now? And then what’s the value of my DSO? Has it gone down? Is private equity interested? I mean, there’s a lot of really…

Bill Neumann:

And then if everything’s in limbo right now how long do we have to wait until things get back to pre COVID if they get back to them?

Brian Colao:

Yeah, so a couple things on that. I do get all those questions, everything you said, I get several times, probably even a day. I was going to say several times a week, but honestly, probably almost several times a day I get just about every question you just went through there.

Brian Colao:

So this is where we start. To try to give some clarity to an otherwise messy situation, we start with, remember, this is a public health crisis but it’s not a financial crisis, like in 2007. So the reason that’s important is the financial markets are fluid, they’re running normally. Now a bank may elect not to allow a loan in a certain situation, but they’re running.

Brian Colao:

In 2007, the markets all shut down and we were incapable, like you couldn’t get a loan. I remember the very famous, if you saw that movie Too Big To Fail, General Electric said, “We sell light bulbs, we’re one of the most profitable companies in America and we can’t get alone because it’s not possible to get a loan.” Now it’s possible to get a loan today, the markets are not shut down.

Brian Colao:

So that’s the first thing, because that means there’s a lot of money on the sideline and there’s a lot of interest from buyers. There continues to be a lot of interest from sellers. So the question becomes, is it in your best interest buyer or seller to do a transaction right now? And because you know this Bill, because you’ve been in this space for a long time, not all DSOs are equal, some were doing a lot better pre COVID and some were doing a lot worse pre COVID and now that COVID hit some are recovering better, some are not recovering, a couple are going out of business are filing bankruptcy.

Brian Colao:

So it really depends on the organization. But the three principles, I would say when I first get questions about valuation are one, this is a health crisis, it’s not a financial crisis, so there’s money out there to invest so don’t worry about that. Two, there is great interest from buyers, they are interested. The whole industry has now evolved on the DSO side about very sophisticated business development folks who sole job and they’ve all got MBAs from wonderful business schools and their whole job is to do dental transaction.

Brian Colao:

So there’s no way they’re sitting on the sideline, they want to do deals and are interested in doing deals. And just about every seller that wanted to sell before wants to sell now, as you pointed out, some might want to sell even more now than they did before because of this mess. So the environment is fine for M&A. The question becomes what’s going on with your organization, your individual organization? Because I’ve got clients that are 110% of where they were COVID, I’ve got clients whose business was on such an upward trajectory that even not doing any business besides emergencies in April and May, they’re still ahead now of where they were last year at this time.

Brian Colao:

So if you’re one of those folks, you can do a pre COVID deal right now and get just as much money as you would pre COVID. If you’re somebody else and you’ve recovered 75, 80%, you might have to take a little bit of a haircut, not because the M&A market dried up, not because people are not interested. The reason you’re taking a haircut if you do a deal now is because we will. You remember Bill, it all comes down to a multiple of EBITDA, and if your EBITDA is 20% less now than it was pre COVID, you’re just going to take a haircut not necessarily because people are panicked or there’s some sense that dentistry is not as strong industry, you’re going to take a haircut because your EBITDA is low.

Brian Colao:

If your EBITDA is down at 50% where it was last year, you’re going to take a major haircut. My clients that are 110%, they might actually, some of them get more than they would have gone on January 1st. So it really comes down to what is going on with your individual organization. A lot of buyers out there are willing to give you a proven deal that basically says, “Look, I’ll use silly numbers, Bill. We were going to give you a $100 pre-COVID you’ve recovered the 75-80%.” You’re telling us you’re going to be at 100% by the end of the summer, we don’t know that.

Brian Colao:

So here’s what we’re going to do, we’re going to give you 75% of the pre-COVID price now and we’re going to give you an earnout and let you earn out the last 25%, meaning if exactly what you say happens and your revenue recovers, then we’re going to give you the pre-COVID price. If what we’re afraid of happens, that you only get back to 86% and you never get back to a 100%, then you’re not going to earn some of money and the price is going to remain a little bit less.

Brian Colao:

And there’s a lot of flexibility and that lets us do deals today because Bill, I believe you didn’t ask me this yet, but I believe by 2022, maybe even by the January 1st of ’21, the M&A market’s going to be back to normal for the most part. Like I said, I can’t guarantee that they’re not going to say you can’t sit in a football stadium or you can’t go to a bar, but we don’t need that, we just need the dentist’s offices open and patients going to them.

Brian Colao:

And I feel like probably, but clearly by January 1st, most of the uncertainty surrounding dental offices should be over with. So 2021 will probably be a very normal M&A year, but if you want to do a transaction now not wait to 2021. And some people it’s a good move to wait but not everybody, a lot of people, it’s a good move to do a transaction right now.

Brian Colao:

And if you want to do a transaction right now, you may have to get a little creative with the buyer and do an earn out or have a hold back. And depending on how much your practice recovers will be, how much of the pre-COVID price you can recover, if that makes sense.

Bill Neumann:

Yup. Yeah, it sure does. That’s encouraging. So let’s talk about this, because this is another question that I’m sure you’re asked quite a bit. So who’s best positioned right now to take advantage of this environment, right? They’re going to be winners and losers and I mean, when you look at this, can you say, “Hey, it’s the smaller groups that are going to do well, it’s a larger groups. Is it structure based? What are you seeing as far as like the DSOs that are coming to you and going, “Hey, Brian, we feel really good. We’re going to do some deals now,” or, “Hey, we’re teetering on the brink of bankruptcy.” What do you think so you’ve seen…

Brian Colao:

It’s organization based. Bill. It’s a great question by the way, tremendous question you asked, but it’s organization based. There are big organizations that are willing, there are big organizations that are doing great, there are small organizations that are not reopening that they’re just like a solo practitioner said, “That’s it, I’m just not going to reopen.” And there are smaller organizations that are thriving and everything in the middle.

Brian Colao:

So it’s a great question. So if I was to try to answer it real quick here, like, what is the characteristic of an organization that’s doing well? Well, it would be an organization that was doing well pre-COVID. Nobody was doing poorly before COVID and then COVID hit and they suddenly started doing well. Maybe Chick-fil-A, Chick-fil-A is the only example of that. I can think of the toilet paper manufacturers, maybe the hand sanitizers. They probably, I’m not saying they were doing bad, but they were doing like average and then COVID hit now they’re killing it. Yeah, that’s great for them.

Brian Colao:

But no dental service organization was like doing poorly pre-COVID and now it’s just killing it, post COVID or in the middle of COVID, they’re not. So the characteristic of an organization that’s doing well now and poised to do really well is one that was doing great pre-COVID, it was on an upward trajectory. they were expanding rapidly.

Brian Colao:

COVID was a little bump in the road for them, but now that it’s back open they picked up where they left off. A lot of those organizations have great culture, great communications with their employees, they even suffer from some of the problems, some of the other organizations did. Their employees were breaking down the door to get back to work.

Brian Colao:

And usually they’ll have access to capital because there are going to be a fair amount of opportunities out there where certain solo practitioners and others maybe don’t want either are going to close down and look to sell at a great discount, or just don’t want to go it alone anymore. So there’s going to be some tremendous opportunities in that marketplace. And if your organization was on an upward trajectory, you’ve got a good culture, and you’ve got access to capital, either a credit facility, or you’ve got a private equity investor.

Brian Colao:

I’ve got an organization right now, I probably shouldn’t mention their name but they’re an up and coming organization. If you come to my conference in Denver next year, you’ll hear about them. They’ve only got six offices right now but they’ve got great culture, a great business model, they’re up to like 110% where they were now and they’ve got a private equity investor.

Brian Colao:

So they’re looking, signing LOIs left and right, because they’ve got capital and there’s tons of opportunities. Another characteristic Bill, of somebody doing real well are the specialists. Remember the specialist, the endodontists, the oral surgeons, they never really had to shut down because they were deemed emergency. If your head is throbbing due to a root canal, that’s an emergency. Okay, nobody’s going to say you couldn’t get that done during COVID.

Brian Colao:

So the endodontist were mostly reporting to me that maybe they were at 92%, 91%. I mean, nobody got out totally unscathed but they took just a minimal hit. And I actually closed our group, closed four or five transactions in May, right in the middle of all this because they were endodontic in oral surgery deals and their offices were open and they were bringing in revenue.

Brian Colao:

So the buyer didn’t mind closing the transaction. So the specialist did well right through the pandemic and are continuing to do well. And the organizations that were on an upward trajectory had a great culture and now have access to capital are doing well right now. The ones that aren’t doing so well are the ones that were doing poorly pre-COVID and the ones that may have been marginal pre-COVID, but able basically to live hand to mouth but kind of get through. Now, this may have set them over the edge.

Bill Neumann:

Good stuff. So this is a question that we seem to get, I’m sure you get it as well, but we seem to get quite a bit. It normally comes from the industry itself. So the dental manufacturers, the distributors, the people that are selling products and services into the space. But I’m sure this would be important to understand as a group and the DSO as well.

Bill Neumann:

So we’ve seen consolidation over the course of the decades that you’ve been in the industry and I’ve been in the industry. Do we think it’s going to accelerate? And if so, is it going to accelerate differently? What does that look like?

Bill Neumann:

In other words, do we see dentists that may not have considered partnering with the DSO going, “Oh my gosh, I need safe harbor, I am not going to go through a pandemic or maybe an economic crisis in the future or something else again without a partner.” Do we see consolidation of groups where a DSO is buying a similar size group?

Bill Neumann:

What do you think maybe you’re already seeing it now? Tell me a little bit about what that may look like.

Brian Colao:

It’s looking at about the same and let me explain, it’s not quite the same but it’s looking about the same. Remember Bill and you know this, prior to the pandemic, it was a very robust explosive M&A environment. So there was tons and tons of stuff going on. So if I say it’s the same, that means it’s very robust now, but some people were speculating, “Well, this is going to be the mother of all things. This is going to be like a rocket ship.”

Brian Colao:

Instead of just being a very busy robust market, this thing is going to be out of control and lawyers are going to be staying up until 4:00 in the morning and nobody’s going to go to sleep. That hasn’t happened for this reason. Some people just didn’t reopen, they just didn’t reopen. It kind of surprises me because I kind of thought if you’ve had enough of this and you don’t want to go it alone anymore, why wouldn’t you affiliate with the DSO? That’s a perfect match.

Brian Colao:

Ironically, some doctors in their 60’s just said, “You know we’ve made enough money in our career, we’re frightened enough, we don’t even want to sell to anybody, we’re just shutting the thing down.” So that happened at one level. At another level, you had some organizations that are undergoing the individual fact-Based determination that I’m talking about and they’ve concluded, “We’ve recovered okay, but our numbers in 21 are going to be off the charts. So let’s just wait to 21 this out, let’s just wait.”

Brian Colao:

And then there’s a third category that says, “You know, we’re doing well enough right now let’s do a deal right now.” And I think the confluence and there is a category Bill of solos that said, “You know what, I’m not closing down and I’ve had enough of this and I do want it like accelerate my affiliation right now.”

Brian Colao:

So you got one group of people that is accelerating their affiliation and another group of people that are just going to do the transactions, they always wanted to do pre-COVID. You’ve got another, so those are two, what you would call tailwinds, moving the thing along. But then the two headwinds are the offices that just didn’t reopen, didn’t close, didn’t affiliate. And the offices that are saying, “You know, we could sell now, but we think we’re going to knock the roof off this thing in 21 so we’re going to wait and get a better price, at least in their mind, we’ll see what happens,” but in their mind they feel like they’re going to get a better price.

Brian Colao:

So you’ve got sort of like two tailwinds, two headwinds, and it’s equaling about the same level of activity we saw, at least for our group pre-COVID. Other people, we do more volume of dental transactions than anyone else so we’ve remained busy. Some other folks in the industry that I know have reported a slight decline since then. So maybe on an average, it’s a little down from where it was but still a pretty robust market but not just the out of control explosion that some people were predicting and part of that is the uncertainty.

Brian Colao:

I mean, we’re having a second surge of this, I think the uncertainty is never good for any market.

Bill Neumann:

Great points and yeah, I would have guessed differently, but that’s… I heard rumors that maybe the mid markets and the smaller groups may be poised better because they don’t have private equity infusion and PE’s scared off. So, I mean, I know there’s so much speculation around it. A lot of it is, I guess, like you go back to, what was the group like pre-COVID, what’s the culture, maybe if they’re owned by an outside organization, private equity, how do they feel about the health of the industry? Any more thoughts?

Brian Colao:

If you want to let me, if you want to make a bad call, allow me to make a bad COVID joke, I’ll make a bad COVID joke right now. If your organization had underlying health conditions, pre-COVID, it’s probably struggling right now, it really is. If pre-COVID, you had no underlying health conditions and you were doing very well, you’re either fully recovered or well on your way to recovering right now, that’s my bad COVID joke. But it’s kind of applies, it’s kind of the truth.

Bill Neumann:

It’s very relatable, yes, I love it. Any other things that you can think of regarding like M&A markets in the industry, like we talk about the future and I want you to save some of this because I’m going to have you contribute to that article. But then we’re going to do on what the…

Brian Colao:

Well, there’s still a lot of competition out there and yeah, no, I’ll go into more detail if you’re going to be gracious enough to let me write an article, I always love contributing. I’ll go into more detail. But for today, let me just say this. There’s a lot of competition, competition eliminates bottom feeding, some of the things. A lot of the sellers were afraid, “Oh my God, people are going to low ball me and they’re going to bottom feed me.”

Brian Colao:

They’re only going to do that Bill if there’s not competition. If I’m the only guy that wants to buy your house and your house is worth $100, but I’m the only guy interested, I can walk up and offer $50. And if you’ve got to sell, you may have to put up with my nonsense, unfair as it might be.

Brian Colao:

But if there’s five people that want to buy your house and I walk up and offer 50, and that guy next door says, “I have full offer 50, I’ll give you 60.” And then the guy next to him says, “Well, it’s worth 100, I got room to go, I’ll give you 70.” And then the other person says, “It’s worth 100, I’ll give you 80.” And so on and so forth, competition pretty much prevents bottom feeding.

Brian Colao:

And there are a couple bottom feeders out there, of course, we’re not going to mention them on your podcast. But let me just say this, they got what they deserve. A couple of the bottom feeders that ended up successfully bottom feeding bought organizations that nobody else wanted. And I think they’re kind of struggled to be perfectly honest. Most of the organizations that I deal with, that I’m proud to represent on the buy side, or I enjoy being opposite on where I’m representing sellers, they’re just looking for a fair deal here, Bill. They’re not trying to bottom feed.

Brian Colao:

And the reason is this is one of the few industries where the buyer and seller have a relationship post-closing. If I’ve got a McDonald’s franchise and I’m selling it to you, as soon as I sell it, I’m out of there. So if I engaged in puffery and made up stuff and inflated the price and you overpaid for it, and I’m out of there, I’m laughing at you and who cares? And the DSO industry, the buyers and sellers remain in bed with each other for three, four, five years, there’s often rollover interests.

Brian Colao:

So if somebody deceived somebody or acted in bad faith, you got to live with that person as your partner for at least three to five years. So it’s just not a good recipe for that type of funny business and I’m very pleased that, that has been one aspect of the pandemic that’s really brought out best in people.

Brian Colao:

The overwhelming majority of buyers are acting in good faith and just trying to find a fair deal for everybody. And the couple bottom feeders I found kind of got what they deserve to be honest, and they’re not doing so well. So that’s been a very pleasant surprise in this whole pandemic.

Bill Neumann:

Well, that’s great to hear and yet to that point, you’re in the relationship for at least three to five years and possibly longer so you want it to be a good one. So let’s talk a little… this is what you really wanted to talk about, you touched on it earlier but let’s talk about the industry being shut down to begin with, how we can prevent that with this resurgence.

Bill Neumann:

So we don’t shut the industry down again, and then what’s going on from the ADA, ADSO and then some of the lobbying efforts that have been going on to kind of prevent this, or maybe weren’t going on to prevent this to begin with.

Brian Colao:

Yeah. So why did it happen? Because you got to understand for a minute why it happens and then we can talk about how we can prevent it is, I think a huge opportunity was missed and maybe because I’ve been talking for a little bit, I’m a little calmer. I’m going to resist the urge to just like fly off the handle. But I feel like the ADA dropped the ball. I’ll just say that, I’ve said that several times, not intentionally. I know the folks over there, they’re good people.

Brian Colao:

I’m not maligning anybody but the ADA didn’t act like a trade group to be precise, I don’t want to just say they drop the ball, let’s talk about the problem. The problem was the trade group for the bars, the trade group for the World Wrestling Federation, the trade group for the liquor stores, the trade group for the laundry mats, the trade group for the gun shops, they acted in their best interest. They didn’t see themselves as crusaders for the public health. They said, “I don’t care if it’s safe, not safe, what the deal is, we’re going to keep the laundry mats open. I don’t care if it’s essential or not, we’re going to watch professional wrestlers jump off the ropes and knock people down and that’s going to be our mission.”

Brian Colao:

I don’t care regardless of whether it’s really essential or not, we’re going to let people buy guns. Regardless of whether it’s really essential or not, we’re going to keep in the states where it’s legal, the marijuana dispensary’s open. They acted as a trade group, that’s what a trade group does. It’s the CDCs job and the government’s job to tell us what we can and can’t do. And it’s the government’s job to say, “I know you all want to go to the bar and get a drink and bars are fun and we like them too, but it’s just irresponsible, you got to close the bars, sorry.”

Brian Colao:

That’s where the CDC and the government to do. If the liquor and beverage trade group told the bars, “Yeah, we’re going to just do what’s in the public’s interest, we’re closing all the bars down.” They would be fired as a trade group immediately that liquor and beverage trade group would never function again. Now, go to dentistry, what happened? The ADA said, “Sure thing, we’ll shut down. We’ll issue a recommendation that we’re only going to treat emergencies and we’re going to ask everybody to shut down.”

Brian Colao:

I’ve never seen anything like that in my life. The ADA is not the CDC, they’re not a branch of the government, it’s not their job to tell us to shut down, it’s their job to advocate and lobby for their trade and they didn’t do it. It would have been their job to have said, “Listen, you guys are jumping to conclusions, you’re rushing to judgment. You are saying, there’s a pandemic going on. People are getting this, oh my God, these people are putting their hands in people’s mouth. Shut them all down.” That’s what the public was saying.

Brian Colao:

However, as your trade group, we want to tell you that dentistry is more equipped to handle infectious diseases than most doctor’s offices and even hospitals, we’ve been dealing with AIDS and HIV and tuberculosis and hepatitis A and hepatitis B, and the regular flu and the common cold for decades, we’ve got PPE, we’re going to issue industry leading guidelines as to how to safely operate a dental office. That narrative you heard about just because we’re sticking people hands in their mouth, what’s going to be unsafe is completely false, there’s a huge correlation between oral health and underlying conditions, the studies are showing.

Brian Colao:

If you don’t regularly take care of your mouth, you can get diabetes, you’re at a greater risk, a greater risk for heart disease, a greater risk for inflammation, infections. The research Bill, is not complete on this so I want to be upfront, it’s not complete. But they are saying that inflammation generally leads to other infections being more susceptible.

Brian Colao:

I’m willing to bet you just a beer on this, I don’t have the proof right now that they’re going to show you poor oral health contributes to the susceptibility of coronavirus. I’m willing to bet you in the future, there will be study that says that, we don’t have it now. So the point is it’s absolutely essential to keep these offices opened. That was the ADA’s historic job, I am questioning whether they should be allowed to speak for the dental industry anymore.

Brian Colao:

I know a lot of dentists that are turning in their ADA membership and are just not, they feel like it doesn’t represent their interests anymore. But the ADA’s job would have been to have acted like a trade group, come up with guidelines, recommendations for keeping the office open and advocated for the trade. Instead, what they did is say, “We’re just going to let this thing close down and put all of our constituents basically out of business for two to three months.”

Brian Colao:

And I just think, I’m going to try not to get wound up but there’s not an adjective strong enough to describe the ball that got dropped there. So how do we prevent that from happening in the future? Well, the DSO industry is a separate and distinct industry. Anybody that’s in the DSO industry knows we’re different from solo practitioners. I mean, it’s true that the DSO industry has affiliated contractually affiliated dental offices, that practice dentistry, but the similarities kind of end there.

Brian Colao:

So I feel like we have to speak for ourselves and I know the ADSO has been attempting to do this. Dykema has been doing it, we have dentistry essential campaign, we’ve been lobbying and advocating for clients and getting them in front of elected officials to make sure they know the importance. I’m recommending the dental industry is heavily connected, you go into a community and you talk to some of the really good dentists in that community, they all know the mayor, they all are have access to the governor, they’re frequently invited to political events.

Brian Colao:

Now is the time to get in front of all of those elected officials and tell them one how essential dentistry is, how incorrect that snap judgment narrative was. And three, the huge correlation between poor oral health and all of these other diseases. And the fact that there’s not a single study that says, “There’s a higher transmission rate of this virus or HIV or tuberculosis or hepatitis A or B in a dental office than anywhere else.”

Brian Colao:

I mean, now is the time because if this surge of cases goes on much longer, it’s conceivable somebody somewhere might ask the question, “Should we shut dental offices back down again?” And that can’t happen, just cannot happen.

Bill Neumann:

Right, so the industry as a whole needs to be prepared and the dentists in particular in DSOs need to be out there advocating now to prevent that from happening, because it could happen in their state, county, city, wherever.

Brian Colao:

And you got to pressure the ADA to be on board. And here’s why, because you got to speak with one voice, right? If the liquor stores went to the, I’m not familiar Bill with what all of their talking points are, but they went to the governor’s office with one voice, at least in Texas.

Brian Colao:

And they said, “This is an outrage, you better not shut these down, or we’re going to reign hell on you.” Every single person, that’s part of our lobby and all the people that drank liquor, millions of people, you cut off their access, you’re not getting reelected. And the governor was like, “Wow, I got that message loud and clear. I’d better leave the liquor stores open.” What you can’t do is have the DSO industry go to a governor and say, “You better keep these offices open, look at all these things and then have the ADA say, “No, you should close them.”

Brian Colao:

Then the governor’s going to look and say, “Well, these guys don’t have their act together, some of them are telling me I should keep it open, some of them are telling me that they can’t, I guess I’ll make my own decision. It doesn’t really matter.” We got to speak with one voice here or it becomes really, really problematic. And, you know Bill, you might like me be starting to get sick of the we’re all in this together, how many millions of times have you heard that? Well, we’re not all-

Bill Neumann:

Hashtag role in this together.

Brian Colao:

Yeah, but we’re not okay. I mean, we are like superficially, like, “Look, we’re all citizens of this country and we’re all susceptible to this virus and we should treat each other well and try to cooperate, like I’m a big advocate of wearing masks and trying to do my part.” So yes, we’re all in this together on that part.

Brian Colao:

But on the business side of it, we’re not all in this together. Do you think the liquor stores or the World Wrestling Federation or the laundry mats cared really, whether it was safe or not? No. They cared about staying open. And the difference is the dental office unlike a liquor store or a laundry mat, or I had one of my dentists on one of my podcasts say they were able the pet grooming stores stood open. He was able to get his dog’s teeth brushed but couldn’t open up his dental office. That’s how crazy this was.

Brian Colao:

I don’t know that any of those places can really guarantee safety, but a dental office pretty much can, maybe not a 100%, nobody can do that. But a dental office can say, “Look, here’s what we’re doing, everybody’s got an N95. Everybody’s got gowns on, everybody’s got gloves on. You’re going to wait in your car, we’re going to take your temperature. You’re going to do a peroxide rinse.” Do you do a peroxide rinse Bill when you enter the liquor store?

Brian Colao:

I mean, no. So, the one that’s the most suited to actually tell the public, this is a safe place to go, it really is, or as safer place as we can make it get shut down. And the other ones that I don’t know what kind of safety you can really guarantee in a gun shop or a liquor store or a laundry mat or a marijuana dispensary, I just don’t know. I’m not knocking those businesses but I’m familiar with those businesses, like any other consumer that shops. And I don’t know what they can guarantee, I do know that dentistry can guarantee a lot of safety measures.

Bill Neumann:

And that’s good to hear and I will say this, I know the ADA listens to the podcast and is on our websites, so they will hear this. And this is valid, valid points and let’s hope that we are speaking with one voice. So I’m going to end the podcast with one easier question. Well, maybe it’s easy, I don’t know, it might not be, I don’t think any questions are easy during this age of COVID but maybe look to the future and brighter times.

Bill Neumann:

And so future of DSO meetings, since you go to a lot of the meetings, you’re speaking at a lot of the DSO meetings at dental industry meetings. What do we see maybe through the end of 2020, and then what’s going to happen in 2021? Again, we know Dykema has their own meeting or now several meetings virtually. So through the end of 2020, are we going to be pretty much virtual for any dental meeting? And then what does 2021 look like?

Brian Colao:

Yeah, well, we do have our own meeting Bill and you’ve been a great supporter and sponsor of our meeting and I didn’t want to get off here without thanking you for doing that. We’ve always appreciated your support of our meeting, but getting to the questions it looks to me, things are just washing out. I’m saying for ’20, at first obviously all the March, you were probably going to the ADSO like I was that all got canceled in March and then pretty much April got canceled.

Brian Colao:

And then the Henry Schein meeting in May got canceled and then things that the DEO went virtual and that was supposed to be in June, and then we of course had to cancel our meeting in July. So things are fallen pretty quickly. I know that there was a couple events in September that have been canceled for a while, I don’t know if you know the answer, I’m just curious Dentsply Sirona said they were having their meeting, I don’t know if that’s changed now, but…

Bill Neumann:

As of Monday I talked to them, it’s still as on but you don’t know and Greater New York I think it’s…

Brian Colao:

I think it’s going to be tough.

Bill Neumann:

Yeah, I think so.

Brian Colao:

I mean, I commend them and I commend the Greater New York for trying and I will be there if they do it, but I feel like it may be tough but I commend them, I really do for trying to do it. Look, if they’re able to do it, that’ll be great, there’ll be at least two big events we can go to but most of the events that I’m aware of at least through October are going to be canceled or they’re strongly considering cancel.

Brian Colao:

I think if there’s anything in 2020, it would be maybe Greater New York, maybe Dentsply Sirona meeting, maybe the 1-800-DENTIST one that we did that was supposed to be in Beverly Hills in March is now I think in October. I mean, maybe if we do it, we’ll get two or three events in this year. I’d be grateful if we can get them in.

Brian Colao:

But I think a lot of people based on where the cases are now and what’s happening, I think there’s a strong likelihood, 2020 may be a complete virtual year. But ’21, I guess the wild card in all this is, they’re saying they may have a vaccine available first quarter of 21. If they do that would dramatically change everything, of course. If not, I would like to think by first quarter of ’21, maybe we can start to do some of these things. I think what you may see is everybody’s going to have to wear masks, you’re going to have to install those plexiglass mediums between people and there may be limits.

Brian Colao:

I was telling you, we were expecting a thousand people in Dallas, we know the ADSO meeting always gets 13, 1400 people may put limits, they may literally say first 500 that sign up can come or every organization gets one or two people and that’s it and that’s it. We may just find sort of limitation attendees limitations on these meetings.

Brian Colao:

With respect to our event, we’re going to do a pandemic proof event. Meaning if people sign up for our event, it’s going to be in Denver in July of 21, I hope you’ll be there, Bill. If for some reason-

Bill Neumann:

Absolutely.

Brian Colao:

… this thing is still going on next year. I mean, let’s pray it’s not, but if for some reason it’s not gone by next July, we’re going to have our meeting, we’ll pivot to a virtual thing. So anybody that signs up for our meeting will have the security of knowing the meeting is the event is going to happen, it’s just a question of, whether it’s going to be virtual or real.

Brian Colao:

But you know, I’m an optimist I really am hoping that by first quarter of next year we can get together in person because you’re just not effective, I commend everybody that has attempted to put on a virtual event this year, I commend and compliment them. And at least it’s better than nothing, it gives us a chance to do some interaction so I commended it.

Brian Colao:

But you know it’s not the same thing, we can go to a meeting in person and you can have a booth bill. And if I want you to meet people, I can lead five, six people by their hand to your booth in about five minutes and say, “Hey, I want you to meet Bill. I want you to meet Kim, come over here, talk to these folks.” And you just can’t do that virtually, I know they’ve tried these virtual rooms and things, I went into a couple of them. It’s just very difficult, I commend the effort but it’s very, very difficult nothing compares to that in person interaction.

Brian Colao:

And I feel like the sooner we can get back to this, the more the DSO industry is going to thrive with the M&A and all of the acquisitions that are going on. because a lot of sellers feel like they got to meet the buyer in person, they want to look them in the eye, they want to talk to them. Tons of that stuff goes on at the conferences, virtual’s just not quite the same way. But you got to deal with the cards you’re dealt Bill, not what you want, what you’re dealt.

Bill Neumann:

Right, right. Great. So I mean, listen, I totally agree virtual and I commend what you all have done with your virtual events and DEO and everyone else that’s put on virtual events and tried to create what you’re really talking about is that the ability to network, because you could still get the education online. There’s no doubt about that education you can get, you can learn. But that meeting people really if it’s going to be a three to five to 10-year relationship, if you’re partnering with a DSO affiliating selling your group, you probably want to meet that person or that those people, meet them in person versus virtually.

Bill Neumann:

So totally agree and let’s hope that maybe one or two of these events actually goes live, even if it’s much more scaled back. I think that, that would be the best we can hope for. Well, listen, Brian, I appreciate it. I really apologize that this is the first time we’ve actually had you on a podcast, but there’s so much to talk about. We’ll probably have to have you come back because things are going to change and there are going to be more questions and you’re going to have more answers for us and for the audience. So thanks again, Brian. I really appreciate you taking some time today.

Brian Colao:

Well, Bill, it was my pleasure to be here. Thank you for having me on here. Thanks again for everything you’re doing for the DSO industry. And yeah, have me back anytime, I’m delighted to come back. This was an honor for me to be here and really I’ll come back anytime you need me.

Bill Neumann:

Excellent. Okay. Well, thanks to all of our listeners and to all the readers and subscribers to the Group Dentistry Now, and listeners to the Group Dentistry Now Show, we will be back again with another great guest. So until the next time I’m Bill Neumann. Thanks again.

Speaker 1:

The Group Dentistry Now Show has listeners across North and South America, Europe, Asia, and Australia. If you like our show, subscribe today, and please tell your colleagues about us.

Speaker 1:

Welcome to the Group Dentistry Now Show: The Voice of the DSO Industry. Kim Larson and Bill Neumann talk to industry leaders about their challenges, successes, and the future of Group Dentistry. Visit groupdentistrynow.com for more DSO analysis, news, and events. Looking for a job, or have a job to fill? Visit joindso.com. We hope you enjoy today’s show.

Bill Neumann:

I like to welcome everybody to the Group Industry Now Show, I’m Bill Neumann. And in this episode of the Group Dentistry Now Show, we have somebody that I don’t think really needs an introduction to about 99.7% of the people listening but I’m going to introduce him anyway.

Bill Neumann:

Brian Colao:

Bill Neumann:

Brian Colao:

Bill Neumann:

Brian Colao:

Bill Neumann:

Brian Colao:

Bill Neumann:

Brian Colao:

By the time all that was over with, I couldn’t think of a safer place, it might’ve been safer than in my house under the covers, because I don’t have PPE at my house.

Bill Neumann:

Brian Colao:

Bill Neumann:

And then if everything’s in limbo right now how long do we have to wait until things get back to pre COVID if they get back to them?

Brian Colao:

Bill Neumann:

Brian Colao:

Bill Neumann:

What do you think maybe you’re already seeing it now? Tell me a little bit about what that may look like.

Brian Colao:

I mean, we’re having a second surge of this, I think the uncertainty is never good for any market.

Bill Neumann:

Brian Colao:

Bill Neumann:

Brian Colao:

Bill Neumann:

Brian Colao:

Bill Neumann:

Brian Colao:

Bill Neumann:

Hashtag role in this together.

Brian Colao:

Bill Neumann:

Brian Colao:

Bill Neumann:

As of Monday I talked to them, it’s still as on but you don’t know and Greater New York I think it’s…

Brian Colao:

I think it’s going to be tough.

Bill Neumann:

Yeah, I think so.

Brian Colao:

Bill Neumann:

Absolutely.

Brian Colao:

Bill Neumann:

Brian Colao:

Bill Neumann: