I reached out to a sell-side advisor to get his opinion on expectations on dental consolidation in 2024 and to answer questions typically most dentists will have when it comes to this process. As this evolution in dentistry continues to take shape, dentists must have clarity on this complicated process. Hope you learn something new from the talking points below.
1. What are your expectations for dental consolidation in 2024? Overall deal volume was down across the board in 2023. However, the value of deals increased significantly compared to 2022. I expect deals to pick up as a lot of DSOs sat on the sidelines due to higher interest rates and being over leveraged from COVID purchases. The strong and well structured DSOs will continue to thrive. With high valuations and more capital invested into the strong, reputable, and up-and-coming groups, it’s going to be a banner year in 2024.
2. DSO’s seem to be more selective now in what type of practice they are looking to partner with. What are they looking for in a practice and dentist? Culture, age and room to grow/upside. Groups love doctors with a personality that can articulate what he/she has built and what they are looking for in a partner and why. Location, size of practice, and how many providers the practice has will also determine the overall enterprise value of the deal.
3. What is the biggest mistake doctors can make when they are looking to sell their practice? Trying to time the market and wait is the biggest mistake I see. High valuations and favorable tax rates are still not enough for some doctors who think offers for their practice will continue to rise. It’s one thing for a doctor to not move forward in a partnership because it’s simply not for them, but to try and predict the market is another thing. Doctors can potentially leave millions on the table by rolling the dice hoping these already very impressive offers will continue to rise. Is that a risk worth taking?
4. What do you believe is the value you bring to the table as an owner of an M&A firm for dentists? A successful M&A firm MUST have industry knowledge and immaculate relations with all DSOs and Private Equity firms. The fact that I started my career on the buy side/DSO sitting on the board for the fastest growing DSO in the country has certainly helped me in communicating with doctors what a partnership will truly look for them. Not many advisors have both buy and sell side experience nor have purchased, valued and sold a practice. Terms of deals are critical in this process and can potentially be the driving force on whether a doctor made the right decision. You get one shot at this so make sure you have a competent team behind you.
5. How much runway is left in dental consolidation and why should doctors entertain this option now? It varies, and while I do not think it will be obsolete and I would anticipate about another strong 5-10 years, valuations and equity options will certainly decline in the years ahead. I anticipate at some point for these DSOs to consolidate and acquire each other. Instead of 150 sponsored DSOs, having something around 15 in the future which control the market and purchase price is a strong reality.
6. Autonomy is a major talking point and concern for doctors and rightfully so. Can you elaborate on what a doctor should expect when it comes to having a partner involved in the practice? These DSOs have become more sophisticated in their partnership strategies. The days of having some MBA grad come in and tell you how to run your business are becoming extinct. They have realized while they are well positioned, supported, and backed to help manage the administrative duties, they are not the clinicians and want to continue to empower the owner operator and have them as the practice leader. They will support a partner as much or as little as they need. They do not want to babysit or micromanage their partners.
7. Doctors will receive equity in a transaction either at the practice level or the holdco level. Can you touch base on what doctors can expect as far as a return on that investment and what are some of the pitfalls doctors should be worried about with their equity? The equity return varies when a doctor partners with a DSO/DPO/PE group. It goes back to my answer earlier that you cannot time this nor should wait. If you can get in on the ground floor of a recently formed DSO, you will see the same return the C level suite will see (CEO/CFO/COO). In contrast, deciding to wait a few years and now the DSO has grown from 25 practices to 250 practices, that rollover equity has lost significant value. Imagine getting in on Netflix, Apple, Amazon when you are the 20th investor partner vs. the 200th. The biggest pitfall is when a doc represents themselves and they allow a buyer to determine their EBITDA as well as distract them with what seems a large offer. Private Equity is very smart and they know uninformed doctors are easily enticed by an attractive “multiple of EBITDA.” They will promise the world to you with an outrageous figure of what your equity will be worth when you retire and that is just fools good. Doctors must control the narrative NOT the buyer. If you are with the right Group, you should typically see a 3x return on your investment.
8. Many younger doctors are still in growth mode and have 20 years of practicing left in the tank. Why would they entertain this idea? To minimize risk, have a better work/life balance, and earn financial freedom while getting back to why you became a dentist in the first place. Not having to run the business and deal with the headaches of that is extremely attractive to younger doctors in this day and age. From a financial standpoint, you will earn more over a 20 year career as a DSO affiliated doc than private practice. You cannot predict COVID II or personal health issues, nor can you predict sudden competition (a DSO??) opening up shop around the corner from you. The average doctor today that affiliates is 44 when 7 years ago it was closer to 55-57. That has been the biggest shift in our industry.
9. How is real estate handled in these deals whether the doctor owns or leases the building? DSO’s aren’t typically in the business of buying real estate. If they were, it would have an affect on the overall value of the deal, but doctors do have options. REITs love practices that affiliate with a DSO as you are now a part of AAA rated tenant and the value of your real estate increases on day 1 of a partnership. My firm handles all RE dispositions while many firms do not. It is up to the doctor if they want to be a landlord and have the passive income or sell the building and not worry about the headache. We negotiate long term NNN leases for our clients based on fair market value. We are affiliated with the largest dental RE group in the country.
10. New buyers are coming into the market at a rapid pace. What should doctors be cautious of when receiving an unsolicited deal from a potential partner? As I mentioned, I came from the buy-side and DSOs spend hundreds of thousands of dollars on marketing and advertising directly to the doctor. They represent their interest and want to buy you low and eventually sell the entire portfolio high. Good advisors keep their feet to the fire and only represent a seller’s interest. Beware of anything that is too good to be true, because it is.
11. What are the tax implications in a deal like this? I am not a tax accountant so we encourage speaking with your CPA and or tax advisor, but we position all deals to have less of a tax burden on our clients where they are taxed at tangible cash at the capital gains rate. We are in an election year and if you aren’t aware we are $33TN in debt as a country. That money to pay off debt needs to come from somewhere..will it come from an increase in the capital gains rate tax which is currently at 20%? If so, expect to give more money to the government at the closing table in 2025 and beyond. Currently, with high valuations, more options for you as far as partners, and favorable tax rates, the stars are aligned to make a deal now.
12. Is there anything you would like to add about the state of the market? There is no time like the present and it is a great time to sell. With the market being at a lull last year, investors are licking their chops wanting to see an ROI and are cash rich. It’s going to be a very exciting year in dental consolidation.
Perhaps this is the year that you begin to entertain the process of looking at all your options. As I have mentioned in the past, a phone call between the two of us and figuring out your “Why” would be a good starting point. After our phone call, if you determine you would like to look into some next steps, I can certainly guide you through that. If it’s not the right time or not a fit for what you are looking for..so be it! At least you’re paying attention. I’m here to help anyway that I can.
