Obtaining private equity recapitalization has become an increasingly challenging feat for many DSOs, according to Freedom Dental Partners Founder and CEO Avi Weisfogel.
Mr. Weisfogel recently spoke with Becker's to discuss what he sees as the biggest challenge facing DSOs currently and how he is following the fluctuating economic climate.
Editor's note: Responses were lightly edited for length and clarity.
Question: What are some of the biggest challenges facing DSOs right now?
Avi Weisfogel: It's the ability to get a private equity recap. It ain't easy anymore, especially for corporate DSOs. Those models are becoming difficult to find private equity recapitalization, which is typically the goal. So there's a couple pieces to it. You start a DSO, what bank is funding your debt consolidation? That's not necessarily an easy thing because not that many banks do this. So you have to understand what it is that a bank would be looking for that would make them comfortable to take debt on all of these practices who have not been together, put it into one node and then go ahead and consolidate that loan. Knowing how to do that is a specialty.
You have to understand the specifics of what banks are looking for, and if you don't, you'll never get it off the ground. Then, it's all right, where's our funding coming from going forward? How are we going to go ahead and monetize this, where every DSO wants to acquire practices. Where does the money come from? If you don't put your structure together properly and have a solid track record of how you're going to do business, again, where's the money going to come from when you want to go out and acquire practices? It just isn't there … If we look at the real struggles, I'm going to prepare this structure with the idea that we want to have some type of investment here, so we can start to take some chips off of the table. Rather than having 100% of my assets sitting in this specific stock, maybe some of those chips come off the table. If you haven't planned that properly, you probably never will be able to take one chip off of the table, and then everyone's gone. Maybe their life was better working together, but the goal wasn't just to work together. The goal was to work together to create something special. So it's understanding this market that is everything right now.
Our hopes and goals are that we're always going to stay in the know of what's happening. Where are the trends? Where are things going? What's more likely to be capitalized than not? If we can keep ahead of those trends, even better, because when something like this happens and we're creating these dentist-owned, dentist-led platforms, they're much easier to get funded than just a typical corporate structure.
Q: Are you looking at the economy more optimistically in terms of how it may affect DSO activity in the future?
AW: I only look at things optimistically. I was a dentist in 2001 during 9/11, in 2008 during the crash of the mortgages when my buddies were all telling me, "Oh my gosh, this is so hard to try not to let the negativity seep in our world." There's not really a place for it. I mean, it's true, DSOs mostly have pencils down now. They're not really buying, and where I could have sold a practice that was decent to a DSO for a 7x multiple two years ago, I'd get that same practice for maybe a 5x today because of high interest rates and because most of them are just on a freeze. So we see that being the fact here.
Obviously, anytime an election comes around, there's always the hope things are going to change. I certainly am not someone who ever really gets involved in politics, so I don't ever think, "Oh, if this person's elected, we're screwed." I think that when you plan things properly, you're going to do okay anyways. These businesses have to survive. They can't just be hoping that a certain set of circumstances happens in order for us to flourish. What happens if the worst case happens? Is your business and the people in it better positioned than they were before they started that business? If that's your thinking, you can't lose. So maybe you couldn't get the biggest reward of it, but you're still doing better than you would have beforehand, and you can kind of ride out any condition. I tend to think optimistically on pretty much everything. I'm not naive by any stretch. I just found that, in general, negative thoughts aren't going to help most people. They certainly won't help us, and when you're leading companies, leading individuals, nobody wants a negative guy up top.