Editor's Note: This is the first in a three-part series about the mergers and acquisitions (M&A) landscape in dentistry.
For many dentists, it's a scary statistic: 75% to 80% of dental practices will be affiliated with a dental service organization (DSO) within 10 years. That's the prediction from Brian Colao, the director of the Dykema DSO Industry Group, and the nation's foremost expert on M&A in the dental space.
Brian Colao.
The consolidation trend started in 2010 and quickly accelerated in 2015 when it was easy to get financing and investors were willing to pay 10 times, 12 times, and even higher multiples in their evaluations. That trend continued until about 2021 when higher interest rates started impacting the market, Colao says. Even so, about 30% of the dental practice market is currently affiliated with a DSO.
M&A 101: Truth vs. fiction
One of the biggest fears private practice owners have is that they will have to give up their clinical autonomy. That's not what happens, said Duff Bourassa, managing director of the healthcare division of E78 Partners, an accounting advisory firm. Another myth is that the DSO wants the dentist to leave.
Duff Bourassa.
"Most DSOs want you to work for at least two years," Bourassa said. "The more time you commit to staying, the more likely you'll get a better offer from a potential buyer."
The number of deals closed in the first quarter of 2024 was lower than expected, mostly because of higher interest rates.
"DSOs are being more discerning than ever with their acquisition strategy," Chris McClure, co-founder of Aligned Dental Partners, which provides M&A advisory and consulting services to group practices and DSOs. "They're seeking to affiliate with practices that have greater than 20% EBITDA, are willing to roll equity, and where the owner dentist will stay on for five to seven years."
Tips for practice owners who are considering selling to a DSO
Knowing how long you want to continue working will influence your transaction.
"If you're trying to get out within two years, then you may want to get a 100% buyout,” Bourassa explained. "But if you're willing to work longer, then you want a deal that has more equity."
Rondi Michaux.
Rondi Michaux is the former director of corporate development for two large DSOs, 42 North Dental, which is based in Boston, and Dental Care Alliance, which is based in Sarasota, FL. She also has years of experience in operations.
Michaux recommends asking the folllowing questions if you're considering selling your practice or group to a DSO:
- What are the terms of the employment contract?
- How is the deal structured? Will it be a joint venture? Will you receive equity in the parent company?
- How long are you expected to work after the transaction?
- How will you be compensated?
- What is the DSO's management fee?
- How many hours are you expected to work, and how will vacation/time off be handled?
- How are lab expenses factored?
- How will your lease or real estate investment be handled?
- Will the name of the practice change?
- Will you be compensated if there is a second equity event?
- What will happen with your associates and team?
- If you have associates, what happens to the existing doctor contracts?
- What happens with employee benefits? Vacation time? Sick leave?
- When and how will the DSO team want to meet with the practice team?
- What needs to be planned for the transition, including payroll processing, technology changes, and culture expectations?
- What will happen with your patients?
- How will they be told, especially if you are retiring/leaving the practice?
Deciding when you should talk to potential buyers
If you're planning to sell your practice or group to a DSO, you need a plan. Colao recommends practice owners take the following three steps:
1. Leverage all the technologies available to you. These include adding artificial intelligence to aid in diagnostics, automation that can streamline and shorten the revenue cycle, procurement solutions that cut costs and maximize the discounts available to you, and practice management systems that increase efficiency and run reports that help you track EBITDA (earnings before interest, taxes, depreciation, and amortization) and key performance indicators in real time.
2. Evaluate your overhead to ensure it's as low as possible. Colao recommends reviewing and optimizing your payer mix and adding the appropriate infrastructure that can help you prepare for a future equity event.
3. Review your accounting practices and ensure you have properly prepared financials. Potential buyers want to see them.
Once you have decided that you want to start the process, consider hiring an expert to guide you.
Kevin Cumbus.
"You only get one chance to sell your life's work,” Kevin Cumbus, founding partner and president of Tusk Practice Sales. Tusk excels at working with owner-founded and debt-funded practices to prepare them for sale.
Tusk can identify potential buyers that are a good match, handle the nondisclosure agreements, share the appropriate information to help drive up interest and enterprise value, and go through the sales opportunities with you.
Whether you prepare your files yourself or hire a professional broker, you need to provide financial and operational due diligence dating back at least a year. From "coffee to close," the sale process can take anywhere from 60 to 90 days, according to Michaux, although some deals take up to six months.
In part two of this three-part series, experts share the timeline that sellers should expect, including when to let your team know about the transition.
Beth Gaddis is the editor in chief at Planet DDS, a dental technology company specializing in cloud-based practice management systems, digital imaging, and dental marketing services. Previously, Gaddis was the marketing director for two large dental service organizations. Prior to entering the dental industry, Gaddis was a journalist for 16 years in a variety of roles, including as a TV news producer at the CBS affiliate in Boston. You can connect with Gaddis on LinkedIn.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
