June 19, 2023
The Current State of DSO Consolidation
Unless you’ve been living under a rock, the dental industry is going through a consolidation wave that is expected to jump from 25%–30% to 60%–70% in the next 10 years, and dental entrepreneurs are taking note. According to data from the American Dental Association’s Health Policy Institute, 13% of all U.S. dentists are currently affiliated with a dental service organization (DSO). In the current state of play, Nevada is leading the charge at 23% and Alaska is taking up the rear at 2%. Here’s what you can take away from this information expect for the future of consolidation in the dental industry.
How to leverage equity arbitrage
Since equity arbitrage occurs during a consolidation wave, now is the time to leverage the equity in your business. DSOs can offer more money for the same practice because they’re backed by private equity and, therefore, not beholden to the same debt ceilings that private owners have to deal with. A private equity firm can buy a dental practice at fair market value and increase the value of the equity that has been invested by five times over the course of a typical five-year private equity investment cycle.
What to consider
You don’t need to be ready to retire to sell your dental practice to a DSO. As part of the consolidation trend, you can sell to a DSO and still practice at your original location, as long as clear lines are drawn. While affiliating with a DSO isn’t an option for everyone since each DSO has its own practice profile or requirements (including collections, number of operatories, location and type of dentistry), you’ll get a higher valuation and be able to completely retire when the time comes.
What to evaluate
More and more, dentists are looking to relinquish their managerial responsibilities in favor of clinical care. Those looking to enter the space are faced with high student loan costs, forcing anyone from recent graduates to establish practice owners to look at different options other than a sole proprietorship. With changing demographics and a high regulatory environment, there is a lot more at stake for dental professionals to make sure they stay on top of all that is involved in running a successful practice.
When to test the market
Dentistry is just one of hundreds of industries going through consolidation, the only difference being dental practices are undervalued compared to every other industry out there. Even if you don’t have enough capital in your business to pay off your debt, it doesn’t hurt to put your dental practice on the market to see what options present themselves, especially when comparing individual buyers to group investors, like DSOs. The worst thing that could happen is you keep the practice for another year or two before going through the process again to recognize your true market value.
What this means for the future of consolidation
Thanks to the industry-wide consolidation trend, working with a DSO can be mutually beneficial. Equity arbitrage has created wealth-building opportunities for those looking to sell their dental practices at an earlier age. This level of activity means more dentists are becoming aware of options beyond selling 100% of their practice to a partner and retiring, the only option that existed in past generations. Likewise, as consolidation has ramped up, so has the competitiveness of the deals. As a result, the dental industry has since shifted from mom-and-pop practices to the now estimated 350 DSOs in the country.
Where to start
As with most life decisions, you’ll want to begin with the end in mind. What are you hoping to get out of the sale of your dental practice? A professional broker who specializes in the dental industry will put together a prospectus to determine how much your practice is worth. That way, you can make an informed decision based on several different scenarios rather than taking the only option available.
When selling your practice, it often comes down to evaluating if it is going to be in good hands. Sure, the money also has to work, but you’ll want to work with someone you like and trust to take care of your patients and staff. Talking to your team of advisors early will only give you more control over the sale of your dental practice. Contact the experts at Professional Transition Strategies to see if you can benefit from the consolidation wave taking place.