Where oral surgery investment is headed next

Investment in the oral surgery field is expected to pick up through the end of 2023 and in 2024 after a decline earlier this year, according to one exec.

Brian Hamilton is a managing director at investment firm DuneGlass Capital and chief development officer at Allied OMS, a management services organization supporting 46 locations and 65 doctors in 12 states. He recently spoke with Becker's about activity in the oral surgery field and outlooks on the market.

Editor's note: Responses were lightly edited for length and clarity.  

Question: What trends are you following among oral surgery transactions this year?

Brian Hamilton: Deal flow in healthcare transactions has been down in [the first half] of 2023, mostly attributed to higher costs of capital and tightening of credit availability. After a slower 1H, Q3 had picked up momentum, and we believe Q4 will be even better for two main reasons: target companies have lowered valuation expectations, while investors are anxious to invest their money in quality assets.

Regulatory changes haven't impacted transactions of this size. However, there continues to be a movement toward less restrictive covenants, such as noncompetes. This could be something to consider in 2024 and beyond.

Q: How did the decline in healthcare transactions in the first half of 2023 affect the oral surgery field? Now that momentum is picking up, how will this affect oral surgery practices?  

BH: Like most healthcare transactions, and specifically physician practice management companies, oral surgery transactions were down approximately 40% in the first half of 2023, over the same period last year. The slowdown was caused primarily by two things: a tightening of the credit markets, resulting in less available capital, combined with higher interest rates. The higher cost of capital has pushed down valuations, resulting in a valuation gap between buyers and sellers. As a result, many practices opted to invest in their current operations in an effort to grow profitability. As we enter the fourth quarter, we are seeing an uptick in activity and believe the year will finish strong as volatility in the credit markets starts to fall below late 2022/early 2023 levels.   

Q: How have investments in oral surgery differed from other dental specialties this year?  

BH: Specialty oral care experienced a significant amount of investment over the past five years, with capital deployed across all dental specialties. While 2023 has been challenging across the board, because of the size and profitability of oral surgery practices, many investors are still looking to enter the space. Valuation expectations have been challenging, as noted above, but the valuation gap is decreasing, largely because selling practices now recognize the increased cost of capital, and some platforms adjusted spending in the first half of the year to optimize operations. As a result, we expect oral surgery investments to pick up earlier than the other specialties, primarily because of this higher margin profile and lower exposure to commercial and governmental payers.

Q: Is it too early to tell where oral surgery/dentistry investment will go in 2024? 

BH: We believe many groups will be looking to deploy capital above 2023 levels and expect these investments will be in two distinct buckets: First, driving organic growth with investments in new office locations and the expansion of current offices at existing practices. The second is executing a two-pronged M&A strategy by entering new geographies and building density in existing strategies targeting increased scale and lower costs.

Q: How are noncompetes being used in oral surgery transactions?  

BH: Noncompete agreements are still ubiquitous and have been an important component of M&A transactions where the value in the transactions is greatly dependent on the selling shareholders continuing to create value. The FTC has proposed changes to noncompetes and, in some cases, removal of some of these restrictions.

It is too early to tell what may happen, but if the FTC does eliminate noncompetes, there are ways to configure both legal documents and payments to make sure there is still alignment between buyers and sellers on valuation and payment structures.

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