As dental consolidation continues to move forward, a natural maturation cycle takes place. In its early stages, dental consolidation was primarily a “land grab” whereby private equity groups (PEGs) were acquiring practices, each with their own respective earnings before interest, taxes, depreciation, and amortization (EBITDA), and once they reached a certain size, they would sell that “bundle” of practices to the next PEG.
Usually, the second PEG would specialize in operationalizing the bundle of practices and begin to optimize the platform and extract incremental profit while continuing to grow by acquiring new practices. The larger the DSO, the more important for there to be real operational improvements, expense management, marketing expertise, and other services that capitalize on economies of scale and centralized services. We predict that we are approximately halfway to full maturation of the dental industry. Full maturation does not mean full consolidation, because there will always be unaffiliated practices and groups in the space. We estimate that full maturation would result in 65%–80% of the market affiliated with a DSO.
What does this mean to those interested in affiliating with a DSO?
Simply put, it means that there are more options than ever and the landscape is harder to navigate than in the early stages. In the early stages, all groups were new; however, now we have groups that were started 20 years ago as well as groups that are looking for their first acquisition. Because there is still good runway in the industry and dental performed well through and after the pandemic, it is still attracting new PEGs.
Some of our clients want a hands-off partner (invisible DSO), while others want a group with a full-service offering, including boots on the ground operational support. There have never been more options available to sellers, and a good advisor strives to create partnerships that add to the industry and that generate a win-win-win for the client, the DSO, and the patients they serve together.
The formula
The key to maximizing valuation is to find two parties that fit together perfectly and where 1 + 1 = 3. This requires a seller with an upside in their business, or value to add to the DSO, and a DSO/buyer with the ability to unlock that upside. For example, if you have unutilized operatories in your practice, you are not at full capacity. This is a very attractive variable to the right DSO! An advisor would highlight this to all interested parties and find the short list of DSOs with the capability to unlock the upside. These are the groups that would be willing to stretch on valuation as well as create seller incentives in the years post close.
Through rigorous diligence on the front-end, an advisor identifies where the value and upside lives within each client’s business. They should frame this up and highlight this to each buyer. Tusk’s marketed process allows clients to survey the entire market to find out which DSO will be able to unlock the upside and address operational pain points. DSOs will pay more for assets that have growth potential, and it is an advisor’s job to showcase that and bring a large enough pool of buyers to the table to find the right one. It takes a lot of data gathering and modeling to get buy-in, as well as a lot of outbound communication to bring in all the buyers.
One size does not fit all
Tailoring the perfect match for your business involves a comprehensive survey of the entire market. With an expanding pool of potential buyers, it becomes crucial to hire an advisor well-versed in the operational and cultural DNA of the ever-changing buyer landscape. This strategic approach not only accelerates the partner selection process, but also conserves your time while optimizing the overall value of your business. Choosing the best partner for your business will allow you to receive the value you deserve for your life’s work.
Editor's note: This article appeared in the March 2024 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
Ryan Mingus, managing director of Tusk Practice Sales, has 12-plus years of sales and leadership experience in the dental and health-care industry, most recently as business development director for strategy and optimization at Align Technology. Mingus earned his BA in economics and business from the Virginia Military Institute and his MBA from the University of San Diego. He also held the rank of Captain in the US Army
