A confluence of events finds doctors facing unprecedented financial pressures. It really doesn’t matter if you are in private practice or part of a larger group.
The dental industry has experienced a permanent erosion of profit margins over the last decade or more. Top line pressures from insurance companies on the reimbursement front. The ongoing fallout from COVID on America’s healthcare workforce and resultant shortages. The seemingly uncontrollable rise in staffing costs, hygienists in particular. It is quite a lot.
The good news. Dentistry still has some of the healthiest margins in the retail healthcare category. That is exactly why lender and investor capital continues to relentlessly pursue the space. Dentistry remains a fantastic career choice for doctors with an entrepreneurial spirit.
We are seeing an increasing number of inquiries from dentists in financial distress. Some are independent and some elected to join a group that now finds itself struggling at the platform level.
At the independent level, many financial wounds are self-inflicted. Poor due diligence, overly aggressive assumptions, spending too much, Field of Dreams commitments, picking the wrong partners or key staff, etc.
At the group level, the financial duress is often out of the individual doctors’ hands and in those of the management team and majority owners of the platform. The financial details of the platform are often thin, to murky, to, in many (most?) situations, non-existent. In some cases, doctors who join such platforms only become aware of the challenges when it is way too late to do anything - irreversible decisions have already been made.
How can financial stress present itself at the group level? Slow paying vendors, reducing staff, limiting overtime, cupboards going bare, a noticeable slowdown in platform growth, and turnover in key senior management or founders are among some of the more common symptoms. The next level would be payment blockages or troubles receiving regular distributions per the operating agreements. The worst might be getting a “Dear Dr.” letter stating that your equity interests are now worthless. Yes, this happens and yes, it is becoming increasingly common in the current ecosystem.
What can you do?
Have you ever heard the expression, “Good company, bad balance sheet.”?
The thought being that an otherwise good company suffering from excessive debt can likely be structured. The restructuring is intended to ensure that ongoing operations - jobs and benefits for staff, ongoing care for patients - are minimally disrupted. However, if you are looking at a bad company, bad balance sheet, that business is likely DOA.
As a private practitioner, stay in close contact with your bank. Make them aware of your challenges. Ask for help. Be as proactive as you can be. The fundamental underwrite in practice lending is that doctors are highly reluctant to declare bankruptcy. While dental practices should be durable businesses, lender liability and bankruptcy laws exist for good reason. There is no point grinding for years or decades in an untenable situation just to avoid payment default or the Scarlet Letter of bankruptcy on your credit report. The lenders know that the value of a dental practice can plummet quickly and there is only nominal tangible asset value - i.e. a liquidation yields decimal dust compared to the loan balance. A conversation with a good bankruptcy lawyer is likely money well spent so that you understand your rights and alternatives.
If you’ve joined a group, the tack is likely different. Speak up early, speak up often. If your intuition is that something might be amiss, ask all the questions. Keep asking until you get answers. Speak to other doctors who joined your platform under similar circumstances. Experience tells us that groups in financial distress tend to turn to Deflection Mode when key staff and minority shareholders start getting curious. Heads on swivels. If necessary, hire an attorney to help bring a conversation to bear.
There can be opportunities to reacquire your practice(s) from the platform you sold them into. These transactions tend to be at a substantial discount to the original sales price. These discussions are entirely platform-specific - no cookie cutter approach. If the platform is still being controlled by the management team and the private equity firm the stock answer is usually “absolutely not”. If the platform is operating under forbearance with their lenders or the business is being controlled by a board member or representative of the creditors’ committee, the conversation can take on an entirely different look and feel.
It is important to remember that the primary duties of the board members of any company shift from shareholders to creditors the exact moment a company becomes insolvent. Many platforms tend to tread water for an extended period of time in the “Zone of Insolvency” which can look like rearranging the deck chairs on the Titanic.
A mindset pivot that might be helpful is to remember that there is nothing intrinsically good or bad about private equity (“PE”). It doesn’t have feelings other than an appetite for growth. PE is simply the most expensive capital that any business can borrow. It is temporary - think of it as rental equity or “requity”. It is a commodity, not some esoteric, bespoke layer of capital. Complicated, sure, but actually not hard to understand if you take the time to dig in. Like any business or industry, there are good and bad players. Their customers are their own investors (limited partners or “LPs”) - e.g. insurance companies, pension funds, endowments, banks, high net worth individuals, etc. - not their portfolio companies nor their employees. It is very common for the PE firms to simply hand the keys over to their own lenders and walk away from a platform once they’ve made the classic “good money after bad” call.
If you are a doctor who finds themself in either of the foregoing scenarios, we’d love to learn more about your situation and how we may be able to help. Even if simply a confirmation or validation of what you are experiencing.
Stay frosty!