DSOs weigh growth strategies while economy sputters

While some DSOs are confident in their ability to continue expanding their footprint during a time of high costs across the board, others are shifting strategies and focusing on other areas of growth to wait out the storm. 

Inflation rose during the COVID-19 pandemic, reaching 7% in 2021 and only dropping to 6.5% in 2022, according to Investopedia. As companies and consumers struggled to keep up with the higher costs, the federal government raised interest rates to bring inflation down to 3.4% by the end of 2023.

Increased costs affected dental practices' ability to remain financially stable. Many dentists saw higher price tags connected to supplies, staff wages, lab fees, personal protective equipment and rent or mortgage. More than 42% of dentists reported to the ADA in 2022 that the cost of supplies and materials rose by 11% to 20%, while 44% said staff wages increased by 1% to 10%.

"Everything is increasing. We thought once the pandemic normalized, it would provide a respite from the increased costs in supply chain issues and inflation, but that hasn't been the case," Pasha Javaheri Saatchi, DMD, told Becker's in September.

Richard Hall, CEO of Irving, Texas-based U.S. Oral Surgery Management said macroeconomic conditions were one of the biggest challenges facing DSOs.

"The biggest one is the macroeconomic conditions with the cost of capital more than doubling over the last 18 to 24 months," he told Becker's. "Debt availability is very tight and expensive. I think that's going to limit the growth for those DSOs that don't have availability to that capital."

MB2 Dental founder and CEO Chris Villanueva, DMD, told Becker's he has seen a decline in acquisitions from competing DSOs dealing with the growing cost of capital and issues accessing debt.

"We see competitors that once bid against us on deals beginning to slow down or halt their acquisition pace as capital runs out," Dr. Villanueva said. "Groups are beginning to run up against their debt covenants because they were too aggressive in paying higher multiples to accelerate growth. Unfortunately, many of these groups are now unable to generate the same-store growth needed to meet their leverage requirements.‚Äč"

Mr. Hall predicted that these economic challenges would continue until at least the second half of 2024. Until then, he added that DSOs could also begin merging out of necessity. 

Mr. Hall said USOSM is in a good position to acquire the debt needed to continue its growth efforts from last year. USOSM plans to focus on organic growth while also adding more surgeon partners and several de novo practices.

Boca Raton, Fla.-based Sage Dental also plans to focus on organic growth, including adding new technology to expand patient care, which Chief Marketing Officer Jonathan Kaufman said could be crucial to a company's success.

"The days of simply expanding portfolios through acquisition, without any core brand or technological integration, are long gone," Mr. Kaufman told Becker's. "As technologies continue to emerge rapidly, the inability to deploy them swiftly or adapt operations will delay organizational growth."

NextLevel founder Gary Kadi told Becker's he expects to see some DSOs fail in 2024, especially those that don't have a plan in place to grow during economic uncertainty, but having proper strategies and benchmarks in place can help attain growth. 

"Many Fortune 500 companies experienced their best growth off the backside of the Great Recession and the pandemic," he said. "While it may seem like growth is impossible when everyone else is reigning in, the pathways to growth are still there. As long as you have a good strategy and clear benchmarks, it's actually easier to grow because there is less competition. If DSOs are strategic, they can still enjoy massive growth this period, even if the economy is generally considered challenging."

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