For years, the dental support organization, or DSO, market has been a considerable part of many private equity companies’ portfolios. This is because dental practices can be highly profitable and very adaptable, so joining forces is a natural fit. This industry is young and shows no signs of slowing its growth over the next several years. As we emerge from the haze, doctors will more than ever see the value in being part of an organization. “I often get asked by doctors why they would want to be part of a DSO, and what the benefits are for that type of affiliation,” states Greg Wappett, director of corporate development for 42 North Dental, a Northeast-based DSO. “I tell them that the answer is different for everyone because the motivation to join a group is case specific,” Wappett continues. “Look at the situation we are coming out of now. It could not be more evident how beneficial it is to have a human resources, operations, clinical affairs/quality assurance and finance team behind you to navigate through this. The key is to ensure that there is a stable and healthy company that employees can return to and patients can be able to count on when things get back to normal. Being part of a DSO just makes that all easier.” As dentists and DSOs alike assess the past few months, it is easy to agree.
One thing that seems to be moving forward with velocity is the consummation of deals between dental practices and DSOs. In fact, in that regard March and April have proven to be two of the busiest months in several years. Alabama-based High Speed Alliance has orchestrated numerous practice sales for its clients over the last 18 months and currently has over a half dozen of their clients’ practices under LOI, tracking to close. “Our fear of buyers walking away from deals has gone unfounded. We even had new LOIs come across our desks this week,” says CEO of High Speed Alliance and retired dentist Dr. Forrest Bryant. “Larger, more capitalized DSOs are becoming more aggressive, purchasing practices and smaller DSOs. We still think the valuations will stay high,” he adds. This trend is being seen nationwide.
With prices holding in the market there have been some adjustments in how deals are being structured, which is a logical way to manage risk for sophisticated buyers. “We are seeing buyers incorporate additional earnout periods or increase the amount of purchase price subject to an earnout,” reports Jonathan Eskow, managing partner at Eskow Law Group. “The good news on a macro level is that for all the deals we are working on, valuations are holding steady so far and progress continues to be made on diligence and legal document flow with all tracing toward closing as planned. This is a very positive sign and a testament to the strength of, and general confidence in, this industry.”
That said, dental does not stand alone. “At the end of the day, practice valuations are no different than any other type of market condition. The stock market goes up and it goes down, as does real estate,” affirms Wappett.
The main thing is to focus on getting back to where we were 60 days ago. It is time to let March and April pass into the rearview mirror, and we must all get back to doing what we do. As for the dental consolidation market? “We look at the facts, the amount of deals we have under LOI heading to close, inventory of practices under contract and available for acquisition and DSO/buyer appetite. These areas are at all-time highs,” states David C. Branch, principal at Viper Equity Partners, an M&A advisory and investment bank. “There are zero indicators that the dental industry will dip or that there will be any long-term damage to PE firms or DSOs from this short-lived set back. What we are seeing are marquee practices and groups that now realize the true benefit of being part of a DSO coming to market—and coming in a big way,” Branch adds. All dentists and dental specialists should be looking hard at the DSO market and what it can mean for their future. Soon the DSO meetings, dental conferences and educational seminars will be back in full swing, all excellent opportunities to network and learn. We would say that market is back, but in truth it never left. It is stronger today than ever and will continue for many years to come. “It is our advice to our dental clients that they be very aggressive with their growth plans both now and into 2021,” recommends Dr. Bryant. One may say no greater words have been spoken.