Navigating a shifting dental economy

As we wrap up 2024, it's evident that the dental mergers and acquisitions (M&A) market is navigating a period of profound change, creating both exciting opportunities and substantial challenges. Practice owners looking to make a strategic exit or find the right partner in 2025 will need to understand these market dynamics and how to leverage them.

Ryan Mingus.

This past year was marked by economic strain, with inflation creating a difficult environment for practices to grow earnings before interest, taxes, depreciation, and amortization (EBITDA) and same-store sales. However, we’re now seeing significant shifts that may benefit practice owners, including rate cuts and an improved debt market, creating favorable conditions as we enter 2025.

With buyers increasingly focused on EBITDA growth over top-line revenue or location count, practice owners with robust profitability metrics will likely have a competitive edge in upcoming deals.

A challenging yet resilient market in 2024

The operational environment in 2024 has been tough for many dental practices. High inflation drove up costs across the board, straining profit margins and making it challenging to maintain the steady growth in EBITDA that buyers value. However, despite these pressures, a growing number of buyers, including legacy dental service organizations (DSOs), are back in the market.

We know of six groups that have secured $1.8 billion or more of new credit facilities over the last two years. Many buyers are eager to act on their acquisition goals but are also approaching deals with a renewed emphasis on low-risk, high-value acquisitions.

The resurgence of legacy DSOs and two recapitalizations in the latter half of 2024 are encouraging signs. DSOs and private equity-backed buyers remain well-funded and motivated, but they are conducting heightened due diligence to ensure any acquired practice aligns with their focus on profitability and future growth.

New conditions favor practice owners: Rate cuts and improved debt markets

A significant shift in late 2024 is the gradual improvement in the debt markets, aided by recent rate cuts. As buyers gain access to improved debt markets, we expect greater flexibility in deal structuring, which may lead to an increase in acquisition volume and valuation ranges.

You should prioritize working with an adviser who can develop a deal structure that maximizes your value and ensures long-term success. Their approach should go beyond merely facilitating a transaction -- rather they should focus on creating structures that align with clients’ long-term financial goals and that protect them in an evolving market.

A new buyer focus: EBITDA over top-line revenue

As DSOs continue to evolve, they are becoming more sophisticated in evaluating prospective acquisitions. This shift is especially evident in the emphasis on EBITDA growth rather than top-line revenue or location count.

For practice owners, this means that simply expanding the number of locations or increasing gross revenue isn't enough; the focus is on building a resilient, profitable operation that can sustain growth in a challenging economy.

Practices that have successfully grown EBITDA during 2023-2024 despite inflation and operational challenges are particularly well-positioned to attract favorable valuations from DSOs eager to showcase stability and growth to their investors.

This trend reflects the broader DSO and private equity strategy to minimize acquisition risks while ensuring long-term profitability. Practices that have concentrated on optimizing their operational efficiencies, managing costs, and improving profit margins are exactly what buyers are looking for -- and these practices can command a premium in the current environment.

Preparing for the increased demand in early 2025

Looking ahead, we anticipate even more activity in the dental M&A space as we enter the first quarter of 2025. With legacy DSOs reentering the market and buyers actively seeking growth-oriented practices, this upcoming period is shaping up to be an opportune time for dental practice owners to explore their options. DSOs are actively working to meet acquisition targets, and improved credit facilities over the past two years have only strengthened their purchasing power.

However, with global economic pressures projected to disrupt markets and negatively impact valuations and deal structures beginning in 2030, a strategic, proactive approach is essential. Given, it takes roughly five years to realize the full economic benefit of a DSO affiliation. Now is the time for practice owners to assess the strengths of their operations, build a clear financial narrative around EBITDA growth, and ensure their business is positioned to withstand external pressures.

Capturing the right moment in an evolving market

For practice owners who have managed to thrive in a difficult year, 2025 could represent a turning point. With DSOs seeking out practices that can bolster their profitability metrics, this market environment provides a rare opportunity to command premium valuations. However, to navigate this effectively, you'll need expert guidance to ensure your practice is well-positioned to attract the right buyer on the best terms.

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.