Host Geoff Cockrell invites Steve DeLong, founder and co-CEO of Bluetree Dental, to discuss growing a DSO in a competitive healthcare landscape. Bluetree, which has expanded to more than 40 offices across six states since its inception in 2012, represents a successful model of combining de novo growth with acquisitions. Steve emphasizes the importance of maintaining a balance between central guidance and local practice autonomy, ensuring that dental professionals retain a degree of control over their operations. Geoff and Steve also cover the strategic alignment of interests between a DSO and its dental providers, detailing Bluetree's approach to equity ownership and partnership models. Finally, Steve shares insights about Bluetree's decision to partner with Clairvest Group for a minority private equity investment, highlighting the desire for a cautious, long-term growth strategy over rapid expansion. 

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This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuireWoods series exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuireWoods partner, Geoff Cockrell, as he and specialists share real-world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series, I'm your host, Geoff Cockrell, partner at McGuireWoods. Here at the Corner series, we try to bring together deal makers, thought leaders at the intersection of healthcare and private equity. Today, I'm joined by Steve DeLong. He's the founder and co-CEO of Bluetree Dental, a growing DSO. Steve, if you could give a little introduction of yourself and Bluetree before we jump into some questions.

Sure, happy to do so. Thank you for having me on, Geoff, appreciate that. Like you mentioned, CEO of Bluetree Dental, we established back in 2012, just right at the very beginning of DSO's growth spurt within the marketplace. There were of course, established larger groups or just emerging groups at that time, but to be honest, we didn't really have any idea of really what was out there. We just knew there were some opportunities in our marketplace, which is in the Reno area, northern Nevada, to fill some gaps in the marketplace, and so we slowly began to look for those opportunities. I partnered with two pediatric dentists and two orthodontists, and we ended up opening a couple of offices together and then just ended up merging my management business as well as the pedo business and the ortho business.

From there, we just continued to expand through great partners to de novo is opening new offices where the opportunity existed with some of our existing brands, and then eventually, we moved outside of the Reno market and now we have in the mid-40s of offices and six Western states, California, Oregon, Idaho, Washington, and Utah. We continued to grow pretty independently on our own until last year we did bring in a minority private equity investment. We are adjusting to that relationship, but for the most part, we continue to do the same thing, just look for opportunities, find great partnership model. We have 45 doctor partners who the majority have equity within the whole toe of the business and as well as some that have joint venture models. We continue to adjust as the market adjusts.

A lot of the DSOs that I know, they're doing a balancing of de novo growth versus acquisition growth. How have you thought about that balancing?

We've done exactly the same thing. Really, I think any good growth within a dental group or any business is strategy should center around what the opportunities look like within your core market. For us, both opportunities existed. We had early acquisitions and continue to make acquisitions, but at the same time as we acquire or partner with existing practices, they often have great models that we can build upon or expand upon or they may not be taken advantage of in their market just because of lack of resources or time. We've been able to build off those existing brands. Bluetree is kind the umbrella, but majority of our offices all have their own brand and we market them separately. We're also multi-specialty, so we have pedo, ortho, general dentistry and oral surgery. We've just taken advantage of the opportunities that exist. Once something slows a little bit, then we might focus in somewhere else.

I think I heard some of the seeds of an answer to this question in your response, but another area where there feels like there's a choice that DSOs make is the degree to which they have central command control consistency across a number of offices and a number of jurisdictions versus ceding more local autonomy. I know each approach has its pluses and minuses. How do you think about that topic?

Well, I think if it's truly a partnership between the DSO and the provider partners, then you really, it's a fine line between all of those things and it's a constant balancing act. I think in the inception there was this, "Hey, we're going to come in, we're going to take all the manager responsibilities, and hey, just focus on what it is that you do best." Well, that's great and that's very appealing to a lot of provider partners, except for the fact that the majority of them went into dentistry because they liked the autonomy, they liked to be able to run the business, and so it just became overwhelming for many and continues to be. They don't want to not have autonomy in how they run their business. We might think, well, they have all the autonomy clinically, which of course they do, but they also want to be involved in the business aspect, and so it's a constant balance.

We've evolved, we never use the language that we take away all the administrative leadership from our provider partners, but what we do is we help balance that effort in our group. We, of course, have brought in centralized services and support to added value isn't maybe the right word, but to really just support what's going on in the practice levels. We consistently build our leadership structure or we would call a group operating system. We just finished this last week a semi-annual Bluetree leadership conference. We bring all the practice managers, all the providers, all of the support services, leadership together and making sure that we're all united under the same vision and purpose, so when we walk away, we know what each of our roles are and who's there to support them when they need the support, either from situational or just recognizing weaknesses and so forth.

That's our play and that's continuing to evolve. We want framework, but there needs to be freedom in that framework. As time goes on, there definitely is the lean because you bring in practices and partners into the group and they're successful offices 95% of the time. The first rule is do no harm, continue to do what you're doing. You've done a great job, happy to be a partner, and then you want to slowly move to interdependence. How can we complement each other? Then as you grow, you get more associates, you bring other people who haven't built a practice and then you start to realize that, "Wow, we need some best practices of best practices here, some framework." Then the danger is that you overcompensate into those areas, which some providers might appreciate, but then the majority still like that, want to make sure that there's that balance between the economy and contribution and so forth. Which we value and we want to put in. We have a whole provider structure, committee structures, leadership structures. It's a complex animal for sure, especially as we evolve as the DSOs.

A related topic to that central controls versus local autonomy is how you think about provider alignment from an economic perspective. There's certainly different schools of thought as far as where equity ownership, should that be central, top co-type ownership, ownership at a subsidiary JV level, how do you think about provider alignment through that lens?

Great question. Continues to be a hot topic and an evolving topic in some which there are groups that are trying to shift gears and some who are claiming that essentially that they were the creator of some structure out there that exists. It's funny because DSOs have been around a long time and especially the early mature DSOs out there have done and accomplished so much and there's not a lot of new ideas. We started out as a not from alignment perspective, we started out as a hybrid organization. We had the initial owners were all in, all five to seven of us that had put into pediatric dentists, to orthodontists, to general dentists. We all had equity essentially in the hold co, though it was structured really between two organizations. As we brought in new partners, we brought them in as joint ventures in as early as 2012, 2013.

That was great for alignment and those early partners started to see the rest of the organization grow more rapidly than maybe their individual offices. Then they had interest in participating in the hold co. Those practices might have been one specialty who was referring to another and vice versa. Having ownership in the hold-co from a kind of kumbaya, we're all in this together perspective, had a huge impact in our organization in the early on. We made that transition, transferred ownership from joint ventures into the hold-co, and that worked for really, really well for 10 years. We grew just right at 30% year-over-year on our own, just bootstrapping it, and it was great. As we began to expand outside of our core marketplace and get a little bit bigger, we started to find that alignment could use some improvement, essentially.

We've started to revisit the joint venture model that we had started with. It's not in every situation, but we just analyze the circumstance, where they're located, how close they are to a core business in a marketplace, what their desires are, and we try to improve that alignment. Now we have multiple mechanisms from a pure joint venture model to a hybrid of a joint venture model as well as rolling equity into the hold-co. We even have compensation models that allow, for lack of a better term, synthetic joint venture. Maybe they have equity in the hold-co to some level, but then there's a profit share piece that happens at the practice level. Because really, what the alignment needs to do is to make sure that everybody is rolling in the same direction. They all feel like it's no different. I've really started to think of dentistry, probably not the first person to say this, but it's like that collective bargaining, like you have in professional sports, or you might have it in law firms or you might have it in academics.

It's just balance, you have the professionals and the producers supported by an administrative team who have other expertise, and you want to make sure that there's a balance in what everybody is putting in and what everybody's getting out of the organization. What you say is about alignment and partner alignment is just a huge topic, at least in our organization right now, and I'm sure it is in others. I've heard in large joint venture organizations that the joint ventures perform generally 400 points better than non-joint ventures. They're adding 3 or 4% of profit in there that maybe didn't exist. No, I haven't done any study of that, but that's just some anecdotal information, but it also has some other challenges depending upon how that joint venture was structured with the partner. How can they sell it later? Can they sell all of it? Can they not sell any of it? You might've solved an alignment issue early with the joint venture, but you might've created a problem for somebody else in the future how to handle that, so no easy answer.

Yeah, no easy answer. I found that a lot of the current thinking is centered less on, and you put your finger on it at the end of to what extent is the alignment mechanism, second, third or whatever bites at the apple in the sale even, versus how much alignment should be focused on current compensation and having current compensation impacted by things they control. Then maybe more specifically, having that alignment vehicle itself be a mechanism of current compensation because if you own at a top-co level as income flows back into top-co, they're almost never doing current distributions of that cash flow. It would go towards enterprise-level debt repayment.

It might go to other acquisition activities, but it's not generally being distributed, whereas a JV level of equity ownership, it's not always but often is designed to be currently compensating and distributing that cash flow, at least to the percentage that they own. That dynamic of being mindful of both the direct impact on current compensation of things they can control, and also setting current compensation at a level where they're not a market compensation risk of leaving the organization has been one of the big drivers of why a lot of the thinking, especially in dental, has gravitated towards JV models. That's what the picture looks from where I sit.

I think you've talked to enough people inside outside of the space to see similar types of issues and problems that can arise. The early days, the structure was a growth stock. There are some that are growth and income stocks, and we traditionally were like that and continue to strive to be something of a balance, but it's delicate because interest rates doubled and all of a sudden, even if you were doing some dividend to your providers, that can only just be limited by what's happening in the space. There's a lot of ways to think about how to approach the business and what it might look like in the future, but some immediate feedback to the providers and their effort. We've took in something a little novel and are refining it, but most private equity deals have some incentive pool for management.

We carved out a good portion of that for provider incentive. We've tried to again, add another level where if we have a provider partner that's performing well and making sure that we have some option plan that could address that in the hold-co as well as at the practice level. I think it's going to take a lot of creativity and desire to create a long-term partnership that really addresses, because what I'm seeing also is it's a lot of short-term fix. This isn't working, let's try this until we exit, or let's do that. This is going to be somebody else's problem. You also have to admire really the big guys from a Heartland to Aspen to PDS and others who just like, "This is our model, this is what we do."

They evolve, for sure, but just from a relationship, motivation is not just centered around, it's also centered around certainty. People want consistency in compensation and their roles and so forth. It doesn't also help an organization merging groups that are constantly changing and trying to adapt as well. Again, a lot of complexity there. Trying to find out, make good solid transitions to maybe a better long-term strategy, but always looking beyond the current partnership, and that's the key. As A CEO, we're building a long-term business, not a short-term one, and it'll always be valuable regardless if you're building something that's good and on sound principles.

At 40 offices, I think you said six states and in existence since 2012, you're approaching the more mature side of the market. Obviously, not as big as the much, much bigger ones, but one of the dynamics that I've observed and others have is that there can be some pretty significant differences between the more emerging side of that market versus the more mature side, whether that is valuations, growth prospects, strategy. How do you see the more mature market as being different from the more emerging market in those regards?

Well, I think the term mature just denotes a bit more thoughtfulness about what you're doing and why you're doing it and the impacts of those decisions on the whole business, on partnerships, on banking relationships with your team. We all have a growth component to what we do, but we also understand that when you're buying offices and partnering with offices and you have a certain debt covenant, you're buying offices beyond what leverages that you can get from the bank, that you better have two things. You better have growth, organic growth, because if you're not, then the ups and downs of the marketplace will catch up to you.

The mature businesses have seen some of those ups and downs. They understand that they have to be thoughtful in the partnership process because there's a danger of some of what we're seeing right now in terms of interest rates and debt covenants and just getting a little over leveraged unintentionally. Not even that, that was your intent, but you could go from a three to a five pretty quick when your interest rates double and so forth, or your organic growth has stalled because of the economy. If you're heavy ortho or something that sell a bit more, what's the word I'm looking for? The choice decision than it is.

Discretionary spending.

Discretionary. Yeah, discretionary

Clipped in tighter market.

Yeah, exactly. Those definitely impact all the things that you talked about. Just real quick, those small, those emerging ones coming in with new private equity, new debt, like one, they have some money to deploy and there's timelines behind it, and so you tend to go to market and compete in some ways against somebody who's willing to spend more money than you are because one, they have it, and two, they haven't quite experienced what you've experienced. It is what it is. You just have to be patient and making sure you're thoughtful about who you're choosing as partners and what it is that you're paying for those partnerships and be willing to be patient.

You mentioned that after growing more bootstrap and organically that you recently took on some investments, some private equity investment, but that it was minority investment, which is a little less typical. A couple of questions. What was the thought process around that and how has that been going and also, what problem were you trying to solve with the additional capital?

Yeah, great. For us, we were looking, again, a longer-term picture to the business and we wanted to, one, dip our toes into things a little bit. We also recognized we had a lot of growth capability and strong foundation. We were like, "Well, we want to be able to capture as much of that as we can and keep everybody aligned in the future, even beyond this initial partnership." We definitely had a minority play in mind, and so we were patient to find. We partner with the Clairvest Group, they're out of Toronto and really, I think almost all are, the vast majority of their investments are minority, and that's what they do is partner with entrepreneurs and managing owners of the business. We explored a few others, some who just had different growth or outlooks or just the partnerships. That was our idea, is that, "Hey, we saw this as a much longer term. We didn't want to go to straight majority."

One, we avoided it for a long time, so we wanted to just ease our way into those relationships and explore those. The other mindset for us is that we've been doing it for a while, for 12-plus years, and so we didn't necessarily do it to get growth capital to put back in the business. There were a few individuals that just wanted to take a few chips off the table and get a strong strength in their financial foundation so we could continue to go and do this for quite a few years in the future. We also picked a minority partner that had a longer view, not a three-to-five-year, maybe a six-to-eight-year-view on our business, so it forced us all to be engaged and focused things, but so far so good. It came in at a little bit of a softening of the market. We're just being patient and continuing to strengthen the foundation of the business so we can catch back to what our growth curve has been for the last 12 years.

Steve, I think we could talk for quite a while, but let's end it there. Tremendous insights on alignment and strategy. Really appreciate you spending a little time with us. This has been a ton of fun.

No problem. I appreciate the opportunity to share some thoughts and happy to do it anytime. Thank you.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host, Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this series, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.