Several DSO executives have spoken with Becker's in recent months to describe their growth strategies and trends in the industry.
Here are nine trends about DSO consolidation to know, including what dentists are looking for from DSOs and the forces impacting market activity.
Inside 1 DSO's 'special sauce' for success
Ali Saad, DMD. Co-founder of Prime Dentistry (Birmingham, Mich.): One of the biggest things that were non-dental founded [and] there were non-dental people involved, so they weren't dentists. We're seeing more and more of some of the collapse of that happening [as opposed to] a group like ours where it's owned by two brothers who are dentists and who had a great reputation in the community they were serving. I think the world is kind of waking up to that.
I believe that as a dentist, your main consumer would be your patient. When you get into the dental management side of things, you start to realize that your customer becomes your dentist first and foremost, and alongside that is your manager within that practice. One is your revenue producer and it's the person that you need to see your patients and the other one would be the person that's actually running the business side of things within that. So I think that's an awakening that the industry is kind of seeing from the dental starters, like the guys who are dental people starting an organization versus a private equity firm that [is] just bringing a dentist on board. You're seeing a shift of the customer, which is your dentist and your manager, choosing to work more alongside dental founders who had their hearts into it [and] had their sleeves rolled up because they understand the painstaking work that has to go on within a practice.
What's driving solo dentistry's decline, per 11 dentists
Omer Anisso, DDS. Espire Dental Encinitas (Calif.): Dentistry is following in the footsteps of the medical field 25 years ago. The only difference is that the dental DSOs have had the opportunity to study the successes and failures of our medical DSOs. What we are seeing is smarter and more patient-friendly organizations coming into the limelight for dentistry. Dentists today have better choices to partner with first class DSOs and are also more educated to not partner with the DSOs that don't have the same plans and culture. I partnered with an outstanding DSO called Espire. The organization is extremely smart, organized and the culture goes hand in hand with my personal feelings that you can have a "win-win" relationship with the organization along with continuing to serve your patients exactly the way you feel best doing so. I agree that the solo dentist will continue to decline but the positive is that the dentists that do partner with DSOs in the future, as I did successfully one year ago, can also do so with like-minded organizations and can continue to have a prosperous career that may actually take away much of the behind the scenes stresses that so many dentists would welcome.
Why some small DSOs could fail in 2024
Gary Kadi. Founder of NextLevel: There has been such wild growth with consolidation in the last few years, that I believe we’ll start to see some small groups fail. This is already beginning to happen with groups that are failing to recapitalize. What started as highly successful practices are now struggling to scale because they didn’t have a plan in place and, almost more importantly, don’t have anyone to spot inefficiencies and proactively course correct.
A lot of problems are also coming with practices where the owner has mostly exited and put an associate in their place. The associates don’t have the same experience and struggle to keep up with diagnosis and case acceptance. Without a fully adopted case acceptance plan, these practices are floundering in a high debt-to-equity ratio. Banks are coming in and taking over, and I’ve spoken to formerly highly productive doctors whose retirement plans are almost down to zero. Everyone is so focused on putting out daily fires that nobody takes the time to step back, look at data and make a plan for the future.
MB2 Dental hopes to build on momentum in 2024: Q&A with Dr. Chris Villanueva
Chris Villanueva, DMD. Founder and CEO of MB2 Dental (Dallas): The labor market continues to be one of the most significant challenges DSOs face today. Hiring is more difficult than ever, and having the resources and support team dedicated to hiring is critical. In addition, the growing cost of capital and access to debt is a challenge for dental groups. We see competitors that once bid against us on deals beginning to slow down or halt their acquisition pace as capital runs out. 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.
Why orthodontics, pediatric dentistry could see a surge in growth
Barry Lyon, DDS. Chief Dental Officer for the Division of Orthodontics and Pediatric Dentistry Dental Care Alliance (Sarasota, Fla.): The surge in demand for pediatric dentists and orthodontists will continue into 2024. This is driven by the continued growth in the child population, the recognized need for early dental care and the expansion of government reimbursement programs. As goes pediatric dentistry, so goes orthodontics. According to the Bureau of Labor Statistics, the employment of orthodontists is projected to grow 4% by 2032.
Pediatric dentistry and orthodontics will be a big part of DSOs' movement into specialty care. Pediatric dentistry is especially attractive to DSOs because demand is very strong, operating costs are less than other specialty practices, there is a steady stream of recurring revenue through hygiene services and profits are greater.
Why 1 DSO leader is following the housing market
Mike Friguletto. CEO of Beacon Oral Specialists (Dallas): One of the things I look at is the housing market, and the reason I pay close attention to that is because it is a good indicator of what markets and communities are growing in population. There is optimism that a real estate developer will be able to sell those properties, which means that there are people with jobs who can afford to buy those houses. To me, that's a very good indicator of if the economy is coming back. If we're looking at expanding in that community, that is a good sign because others are investing in it as well. … I’m also watching new car sales, house sales and unemployment. Sales of durable goods, like cars, is a good way to know if the economy is coming back.
DSO 'buying spree' could hit a wall in 2024, 1 exec says
Josh Davis. Chief Development Officer of Imagen Dental Partners (Scottsdale, Ariz.): Dental in a lot of ways has trailed the consolidation that happened in medicine. [In] medicine, you have a lot of large corporate entities. You have large integrated health systems that have vertically integrated specialties, from primary care up through all the surgical specialties. A lot of large health systems have created their own insurance plans and their own self-sustaining environment. Dentistry is still largely a cottage industry and there are a lot of single-doctor practices out there that are seeking a lot of the same administrative and professional supportive services that a lot of medical doctors were years ago. But medicine and dentistry are decoupled, they're not integrated. So I see dentistry really where medicine was maybe 10 years ago from a consolidation standpoint [and] from a professionalization of the business and setting standards. There's a whole lot of opportunity to create efficiency in dentistry where a lot of medicine has been consolidated. There's also this desire by doctors to have that level of professional support. Those are the parallels. I think dentistry has just moved a little bit slower along that path than medicine has.
DSO consolidation to increase as business costs rise, 1 exec says
Deborah Brown, DMD. CEO of My Community Dental Centers (Petoskey, Mich.): Consolidation in dentistry will certainly continue as the cost of doing business keeps increasing. We will see more group practices for both general and specialty dentistry. Also, as the baby boomer generation retires we may see increased sales of their practices to DSOs. New dental school graduates will be joining these practice models because their debt load drives their income requirements.
DSOs could begin to merge amid economic challenges, 1 exec predicts
Richard Hall. CEO of U.S. Oral Surgery Management (Irving, Texas): I do believe we are likely to see some consolidations of DSOs this year as some will begin to merge, and that will be driven somewhat out of necessity more than strategically. I do also see that the back half of 2024 and the first half of 2025 could present much more favorable markets, so it's really about weathering the storm for some of these DSOs and MSOs that are in a tight capital position right now. If they can make it through to the back half of 2024, I think things will improve from that point forward.