Over the past decade, there has been a tremendous influx of mergers and acquisitions (M&A) in the dentistry sector. The advent of private equity and institutional investors has transformed an industry once flush with countless individual practices into one dominated by large dental service organizations (DSOs). But how has the COVID-19 pandemic impacted this boom in capital injections and what does the next chapter hold?
During a panel discussion at the Becker’s Future of Dentistry Roundtable in Chicago, representatives from three DSOs explored the role that M&A will play in dentistry over the next five years or more.
Post-COVID M&A
The discussion began with a look at how the past several years have impacted M&A activity for DSOs. The chief growth officer for a DSO with hundreds of practices across the United States began by noting that the economic struggles of the COVID-19 pandemic separated “the players from the pretenders” in the private equity investment community. He explained that there is a herd mentality among investors in that if they see one business having success, they think all businesses in the same industry will also be successful and they don’t have to do a lot of work to make them that way. “I think the biggest mistake they made was thinking dental was easy,” he said. “These businesses require a lot of work, effort and attention.”
He noted that when it comes to DSOs, success isn’t solely measured on whether an organization is able to grow. Instead, DSOs are also measured on whether they become better, and if they are adding value. “When COVID hit, it was a very bright light on companies that were built the right way, with the right foundation and the right principles,” he said. “Unfortunately, there are a number of [DSOs] that either no longer exist or sit in the hands of their lenders, and they’re trying to figure out what to do with them and how to repair them.”
Looking ahead, the DSO executive added that he sees private equity and institutional investors being much smarter about their DSO investments in the future. Investors and operators alike can’t predict economic headwinds or a pandemic, so if they are going to build out a DSO, they need to do it “the right way.”
Private Equity’s Role
If private equity firms and institutional investors are willing to build out DSOs the right way, then their relatively recent venture into dentistry may prove to be a very lucrative partnership. The chief development officer for a DSO with over 60 practices noted there is currently a significant shortage of individual doctors who are willing or able to buy practices. “This is a demographic shift we’ve seen coming for quite a while,” he said.
Therefore, dentists that are looking to sell their practices have gradually come to the realization that they may have to sell to private equity firms. “There is no other exit strategy; it’s especially true for practices outside of major metropolitan areas,” he said.
With so many private equity programs out there and so many doctors who have only known sole proprietorships in their careers, making such a move can be incredibly confusing. “Whether it’s a hybrid or other sophisticated model, I think everyone is currently trying to figure out what that’s going to look like, long term,” he added.
Despite that confusion, private equity owners are still driving growth in the DSO sector, noted a second chief development officer for a DSO with offices in nearly 15 states. She explained that there has been “accelerated consolidation” in the dentistry space over the past five years, even with the COVID downturn. “At the end of 2020 and especially in 2021, things came back with a vengeance,” she said. “It was the busiest year for M&A activity.”
DSO Outlook
As for the next five years, private equity investment may be a necessity for dental practices to remain competitive. The first chief development officer noted that the fastest growing area in dentistry right now is dental implants. Handling these implants requires a sophisticated level of expertise, as well as a lot of money to invest in the technology. “I think you’re going to see a competitive differentiation in which there are going to be some groups that have that ability to invest in the necessary software and hardware and seek new training,” he said. “And I think there will be some groups that do not. As patient needs become more sophisticated, I think [smaller] groups are going to really struggle with that.”
Furthermore, there is massive competition for qualified dentists. The DSOs and practices that win out will be the ones that can pay the best and offer the most benefits, noted the second chief development officer. A 2022 survey of seniors from 66 U.S. dental schools by the American Dental Education Association (ADEA) found that 30% of respondents who planned to go into private practice immediately after graduation intended to join a DSO.
The Value of a DSO
The panel concluded with a discussion on what a good DSO can offer and what dental practices should think about when they consider joining one. The chief growth officer for the large, national DSO advised attendees to “peel back the layers of the onion” and get comfortable asking questions about whether a DSO offers the suite of services that they’re looking for. He also believes that the best DSOs are the ones that offer unique insights that practices won’t find internally.
“The DSOs that I think are going to be able to continue to perpetuate their brand and their longevity in the market are the ones that can tell the dentists and their teammates something about the practice that they don’t know,” he said. “That’s how they add value—bringing a perspective and information to a conversation and partnership that wasn’t available.”
