After a slow 2022 driven by increased interest rates, we experienced some normalization in dental mergers and acquisitions (M&A) in 2023. Here are four trends from 2023 that will impact 2024 deal activity.
1. A substantial portion of the buy side remains 'pencils down'
As much as 40% of the buy side went pencils down on M&A in the second half of 2022 and remained pencils down through the first half of 2023. These groups decided to focus on organic growth while interest rates rose. Their stated goal was to allow for the debt markets to settle and then ramp up M&A with a solid business in place that showed a track record of strong integration and financial performance.
Interest rates continued to rise in 2023, keeping most groups that went pencils down on the sidelines. Most of the market believes that interest rates are beginning to settle, which has generated inbound inquiries to Tusk from groups that went pencils down. Many conversations with these buyers have indicated they are ready to reengage in M&A.
2. New platforms are being formed to replace nonactive buyers
Dental continues to attract plenty of interest from private equity groups (PEGs). Tusk takes a handful of inbound calls every week from PEGs that want to enter dental or have recently created a new DSO through a significant acquisition and are now looking to be aggressive in the M&A space.
These groups have allowed Tusk’s clients the unique opportunity to join a group on the ground floor and benefit from a meaningful “second bite of the apple.” There are, however, pros and cons of working with new groups, because the risk profile of the equity roll can vary greatly. We utilize our entire network to vet new buyers and help our clients make the right decision based on all available information.
3. The buy side is being much more selective
Buyers active in M&A have become very pointed in their assessment of the assets they are looking to acquire. Diligence lists have grown longer, and investment committees are taking a much deeper look than they were before. In addition to diving deeper into the financial and practice management system data, they also look at fit and integration risk.
Buyers are focused on how each acquisition will be additive from a strategic perspective and the downside risk if the business isn't integrated effectively. Tusk focuses on understanding what each buyer is looking for from a target acquisition profile perspective and how each client works with their strategy. This approach is excellent for the dental industry, because buyers are focused on building partnerships that generate organic growth post-close rather than just aggregating earnings before interest, taxes, depreciation, and amortization (EBITDA).
4. Deal structures vary widely
As the cost of debt increased for buyers, it was only a matter of time before historical deal structures/valuations were impacted. The groups that have remained active in M&A have taken a wide-ranging approach to changing their deal structures to account for higher interest rates on the debt they use to finance their deals while also making attractive offers to sellers.
Buyers know that sellers are acutely aware of the multiple they receive and because of this, buyers have had to change the structure of their deals to keep multiples at the same level. We have seen buyers introduce unfavorable elements in their deal to “window dress" it and save the stated multiple attractive. Tusk must go broader than ever to bring a wide range of buyers to the table, make the process competitive, and for our clients to obtain the best deal terms possible.
Summary
Dental service organizations were built with lofty growth targets in mind. Buyers cannot sit on the sidelines forever and hope that organic growth meets the annual growth targets they have set for themselves. Now that interest rates appear to be settling, we expect M&A to pick up by the second quarter of 2024 and that the second half of the year will be like 2021, which was the height of dental M&A activity. New groups are being formed each month.
If you’re looking to explore a transition in the next 12 to 24 months, you must start the preparation process now. If you’re wondering where your practice’s value stands today in preparation for the upcoming market conditions, don’t hesitate to call Tusk.
Ryan Mingus is managing director of Tusk Partners and has more than 12 years of sales and leadership experience in the dental and healthcare industry, most recently as the business development director for strategy and optimization at Align Technology Inc. Mingus earned his bachelor's degree in economics and business from the Virginia Military Institute and his Master of Business Administration from the University of San Diego. He also held the rank of captain in the U.S. Army National Guard.
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.
