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What should you expect from DSOs in the 2024 dental mergers and acquisitions market?

Selling smart: The return of DSOs in 2024

Feb. 24, 2024
In this installment of his monthly column, Kevin Cumbus shares what to expect from DSOs in the 2024 dental M&A market.

Although activity in dental mergers and acquisitions (M&A) markets has slowed over the last 18 months, TUSK completed more transactions in 2023 than in 2022. Our clients continued to see very high valuations for their businesses amid market headwinds. The interest rate environment has drastically shifted the buy-side environment from its recent peak in 2021. Closing deals has become more complicated than ever; however, with the right experience and a broad and competitive buyer pool, it’s possible to come to an agreement that both buyers and sellers are excited about.

From a sell-side perspective, the number of inbound calls from doctors/owners has not slowed down! We continue to hear that employee retention, wages, supply costs, general administrative tasks, and technology costs are creating headwinds to maintain profitability and overall growth. Many dental practice owners are reaching out because they have heard that DSOs solve some or all of these pain points, but they want to know more about what a partnership with a DSO could look like.

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DSOs were specifically designed to streamline dental practice operations by offering business support, economies of scale, professional development, marketing, technology integration expertise, and collaborative opportunities that incentivize growth. By doing so, DSOs are able to produce more efficient and profitable businesses that produce economic returns to investors and partner doctors. As such, they have become attractive to sellers who are feeling fatigue from the current operational environment.

DSOs in 2024: The good news

Investment banks in the DSO space represent private equity (PE)-backed DSOs that are looking to sell to the next PE sponsor who will take them into their next phase of growth. When a DSO sells to another DSO, it is called a recapitalization event or “recap.” This typically occurs every three to six years when the current PE sponsor achieves its growth goals and is ready to liquidate its position and return dollars to investors and partner doctors. The top investment banks indicate that the second half of 2024 will be a very active time for them and that there will be a number of large DSOs recapping. This is great news for the market because it validates that DSOs do in fact create value in the industry and return equity to investors and partner doctors.

What does this mean to a doctor who is not affiliated with a DSO?

There is an entire spectrum of buyers, including some groups that recently recapped, some that are about to recap, and others that might just be getting started. Clients should consider the pros and cons of each of the DSOs, their offers, and their corresponding equity to determine the best decision for the future of their business.

Partnering with a recently recapped DSO

Pros: Sign of a well-run, stable company that produced a return and liquidity to investors and partner doctors. Overall sign of lower risk equity.

Cons: Once a group has gone through a recap or several, the upside on the return is likely less than a new start-up. Likely a three- to five-year wait for the next recap.

Partnering with a DSO about to recap

Pros: High likelihood of a return on equity. You get a greater portion of your proceeds in cash earlier in a cycle.

Cons: The return on equity will likely be at a lower return than the doctors that partnered earlier in the cycle, because they have more time for the equity to grow.

Partnering with a new DSO

Pros: Ground floor equity that has a very high upside at a recap.

Cons: Riskier investments because there is a great deal of work and skill that goes into starting a DSO and getting it to its first recap.

The point of it all

Diverse DSO partnering options, each with unique benefits, promise a dynamic second half of 2024 for dental practice acquisitions. DSOs are looking to make up ground from market headwinds in 2023. To take advantage of this opportunity, you must take steps to prepare your business for partnership in the coming months. TUSK is by your side and can help guide you through choosing the right partner for your practice at the highest price.

Editor's note: This article appeared in the February 2024 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary subscription. Sign up here.

Kevin Cumbus, MBA, CEO of Tusk Practice Sales, has over a decade of experience in the dental industry. He has valued and sold more than 150 dental practices, managed over $100 million of revenue in a DSO, and is co-owner of a start-up dental practice, Mundo Dentistry. Today, as the founder of Tusk Practice Sales, Kevin and his team help dental practice owners sell their practices at the highest possible price with the deal terms they desire.

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