The mergers and acquisitions (M&A) world is largely cyclical, following a certain "rhythm." There are ups and downs—good and bad times to sell one’s business. Over the last five years, we have only seen dental practice values increase. So, the question we are often asked is, “How much longer can values go up?”
If you spend too much time watching the news or reading the financial press, it can feel as though we are only one day away from financial ruin, but the story in the dental economy is a different one. Demand is high across all specialties and general practices (GPs), and new capital is entering the market with regularity, keeping valuations high for now.
Recovery of specialties
There is no doubt that specialty practices recovered faster than most general dental practices in 2020/2021. As such, we saw a glut of specialty practices come to market in 2021 and 2022. New DSOs were formed around them. Existing GP platforms began incorporating them into their existing footprint. The demand for those practices was incredibly high, and many specialists cashed in on record exits with favorable back-end terms. This feeding frenzy is definitively not satiated, and specialty continues to be an incredibly hot vertical within dental M&A, often selling at a full turn and a half or more higher than many of the unsolicited offers from DSOs circulating the market.
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GP recoveries spur demand
Due in large part to the lag in recovery by GPs along with the market pivot toward specialty practices, GP M&A fell down the list of priorities for many acquiring entities in 2021 but saw a strong recovery in 2022. We are seeing more general dental buyers in the space and fewer GPs for sale than at any time in the last several years. For nearly every GP, there is a line of buyers ready to pay top dollar for appropriately positioned large practices and groups, and there are remarkably few options available for them to pursue. As an organization, we do not see this trend slowing down soon. We believe there will be an ongoing GP shortage to satisfy the array of buyers.
Private equity-driven organizations, which include most of the larger DSOs in the space and an increasing number of small- to midsize DSOs, traditionally undergo a recapitalization of funding every four to six years. This provides an opportunity for the existing investors to receive the yield they have been seeking while allowing a new pool of investors into the fray. This timeline often has a lead-up period before recapitalization that includes a very aggressive growth/acquisition phase for the corresponding DSO and more competitive offers being submitted. There are a significant number of these buying entities that are heading into this phase in their funding cycle and will be coming to the table with increasingly competitive offers.
Favorable conditions, but for how long?
Few great businesses on the market + an increasing number of competitive buyers + improved financials over 2022/2023 = the perfect time to receive maximum enterprise value and favorable exit parameters when selling your practice. If you are considering a sale in the next three years, you might want to pull the trigger soon.
It has been a robust M&A market for many years and the multiples we are seeing currently dwarf the exit multiples from 12-24 months ago. Although many buyers have a fresh stack of capital and can continue to pay rich multiples for dental businesses, some buyers are bowing out of competitive processes. Not all buyers are created equally when it comes to the ability to pay perspective. Thus, buyers who cannot pay market for deals today are going directly to dentists and groups in hopes of buying them directly, well below market rates.
What I love most about this business is that it is ever-changing. No two days are the same, no two DSOs/IDSOs are the same, and what they are looking for when acquiring a practice changes by the month. As a result, we must recanvas the market each time we take a new deal to market to find the right buyer at the right price with the right structure. It is not easy, but it sure is exciting.
I feel great about the 2023 dental M&A markets, but the question is, “How long will this cycle last?”
Editor's note: This article appeared in the March 2023 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.