While the dental M&A comeback is not expected to slow down anytime soon, some executives are predicting that buyers will be more selective and strategic with their deals over the next five years.
Three executives recently spoke with Becker’s to discuss their predictions for dental M&A, including how they expect the pace of deals to evolve and the factors that will go into organizations’ decision making.
Note: Responses were lightly edited for clarity and length.
Question: Do you expect the pace of M&A to accelerate, slow down, or fundamentally change over the next five years—and why?
Jessica Lo. Vice President of Operations of Urgent Dental Center (Indianapolis): I can only speak from where I sit, and from where I sit, it’s going to increase. The big thing that I’m focused on right now is evaluating if a practice is really something we can take on and not take a loss. Our goal is for them to be at least 18% for their EBITDA, so that there is enough to cover the management fee we have to bring them in and to have some leftover. As we move through this, if there are solo offices or small groups looking to put themselves out there to be acquired, they really want to be thinking about those things, and again, making sure things are something you can duplicate and that is not going to be overly complicated.
Hamza Asumah, MD. Director of Operations for Juniper Services (Sparks, Nev.): I don’t think it’s going to slow down for sure. We can see everything going back up the way it should. I think the one important thing we need to understand is that how these deals will be made will also be a very important piece to this. If we follow the cost of capital, it’s definitely going to drive deal velocity. We have to understand exactly what the interest rates are now, and what that means for small DSOs, for medium-sized and for larger DSOs. Who is at a good place to be able to really leverage some of these things? That’s going to be very important because when interest rates were close to 0% between 2019 and 2021, people were buying practices at 12x-13x multiples. Now, interest rates are 4% to 4.5%, which is really high, so nobody’s willing to buy practices at that. So, the way those deals are structured is going to definitely change. I don’t see them slowing down, it’s just how they’re structured … The quality of what you acquire is going to be very important. How easy is it for that acquisition to be integrated? That’s where most, especially smaller DSOs have struggled. You acquire the practice, but integrating them into your infrastructure and leveraging that piece is what is going to be important.
Haim Haviv. Founder and CEO of Hudson Dental (New York City): I definitely see [M&A] accelerating. If interest rates go to that point, you will have more buyers paying these higher numbers. It’s just kind of human nature, when it’s tempting and money’s cheap, then people tend to overspend. We all do it in our private lives, and there is no reason for us to not do it in our professional lives. However, the focus [will be] on quality and what Jessica said, realistic EBITDA. If you see offices that are very attractive on paper, but the provider has been doing everything, and they are about to leave in a year, it’s not going to be as attractive. Even if money is cheap, I do expect buyers to be more selective about these kinds of deals. I just see better or more informed due diligence, [and more focus] on, what are you buying? Are you buying a person that is doing the work? Are you buying something that has the processes and standards? And If a person, one way or the other, is no longer with a group, can you expect a reasonable outcome? There are always some changes, and you get hit when providers leave, but can you at least model something that is reasonable for what you paid? So, accelerating, but I think it’s going to be a little bit more mature in that sense.
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