June 13, 2022
What You Need to Know About the DSO Consolidation Trend
You’ve heard it before: Dental service organizations (DSOs) are here to stay and growing fast. With consolidation in the dental industry expected to jump from 25%–30% to 60%–70% in the next 10 years, it’s important to leverage the equity in your businesses correctly during this all-important arbitrage event. Here’s how you can compete in a consolidating world.
As recent as 15 years ago, there weren’t that many options to sell your dental practice. You were either forced to bring on an associate (which, incidentally, only has a 20% success rate!) or partner with someone looking to get into the community. Drawing inspiration from other verticals in the medical space, the dental industry has since shifted from mom-and-pop practices to the now estimated 350 DSOs in the country.
What to consider
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.
Why it matters
Even though DSOs are dominating the transition market, 30% of dental practices are still sole proprietorships, which was the only option less than two decades ago. DSOs aren’t putting these practices out of business but are rather placing competitiveness in the marketplace that is beneficial for sellers financially. Now more than ever, there are lots of different avenues to take advantage of when it comes to making the best decision for the future of your dental practice.
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.
In years past, selling 100% of your dental practice when nearing the end of your career was the only option. Then, the options involved to include banding together with other dentists and specialists to offer more flexibility in your schedule, as well as better marketing opportunities when the time came to sell. These days, more dentists are realizing they don’t love all the unseen responsibilities that come along with owning a practice so are choosing to go with an institutionally backed group that allows you to roll some equity into those platforms or participate in a joint venture that keeps a certain agreed-upon percentage in your favor.
When to act
Ten years may seem like a long time for the consolidation wave to crest, but now is the time to get the ball rolling while there are still options on the table. As the power dynamics shift, dentists are coming out on top. Even if you decide to do nothing, by having the most amount of information available to you, you will at least know what your dental practice is worth.
DSO versus single buyer
Unsurprisingly, DSOs have greater purchasing power and corporate structures, allowing them to pool and allocate key resources, such as staff, cash and personal protective equipment (PPE). Typically, a DSO’s valuation of a practice comes out higher than an individual’s. Not only will your practice value for more if selling to a DSO, but you also have the option to stay on and earn a salary for that inevitable retirement, unlike with a straight buy-out.
What to evaluate
As with most aspects of life, you’ll want to focus on what you’re good at and then hire someone to do the rest. For DSOs, since they typically operate between five and 25 practices at a time, that’s the managerial aspect of running a business, from payroll to human resources. At the same time, you’ll want to understand what your burnout point is before taking your career to the next level so you don’t lose sight of what’s important to you and your business.
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 get the selling process started.