DSO 'buying spree' could hit a wall in 2024, 1 exec says

DSOs may have to slow down their growth or reorganize their business as macroeconomic challenges continue into 2024, according to Josh Davis, Imagen Dental Partners' new chief development officer.

Mr. Davis joined Imagen last month with two decades of experience in multisite healthcare and dental leadership. 

He recently spoke with Becker's about his new role, the company's slow and steady growth strategy, and the trends he will be following next year. 

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

Question: How has it been in the new role so far?

Josh Davis: It's been amazing. I've been unbelievably impressed with the level of talent within the organization, from the highest part at the executive suite level, down to folks I've met who are working in the front office [and] in the dental clinics. The other thing that's been very welcoming is we just have this great culture that's developing. Healthcare is such a local phenomenon, and when you're trying to do stuff on a multistate, multisite level, one of the hardest things to do is find a culture that's meaningful [and] engaging. What I've seen so far is that there's a lot of engagement around our support center team in the mission and values of the organization. As an executive leadership team, they really walk the walk and talk the talk.

Q: What interested you in joining Imagen Dental Partners?

JD: I've spent roughly 20 years in multisite healthcare, and I've worked in pretty much every environment in health services. So I've worked in the not-for-profit setting, health systems, academic institutions, I've worked in large Fortune 500 companies, and I've worked in private equity-backed businesses, but there's always unique challenges from a management perspective in any of those businesses that don't always completely align with what it really takes to build real value in an organization over time. If you look at most of the DSO space, they're private equity-backed businesses. Private equity serves a great purpose in the world, but you're on this three- to five-year window, and a lot of times the decisions you need to make in your business aren't three- to five-year decisions. They're 10- or 15-year decisions.

A lot of our partner doctors in this business have built their practices with their blood, sweat and tears, making long-term decisions, things that will take years to play out in the interest of creating long-term value. And so that's exactly what I saw in this business, the fact that it's decoupled from private equity. It's completely founder-owned and operated. We don't have institutional capital. We're not beholden to a group of investors that say we need to exit in four or five years. So we can make decisions, capital investments, that may not pan out in that time frame but are in the best interest of building real wealth creation and value in the business over the long term. I also have spent the last four and a half years or so in dentistry. Prior to that, I worked in medicine. I've come to love working with dental professionals and working in the dental industry. I think there's a whole lot of opportunity and the future's very bright for this business. 

Q: What are some of the differences between the dental industry and other areas of healthcare you've worked in?

JD: 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.

Q: How do you intend to use your past experiences in healthcare and at other dental companies to inform the decisions that you're going to be making in this new role?

JD: The good thing is that because there is this history in medicine of what's worked and what hasn't worked, I can take a lot of those learnings and pull those forward into dentistry. It's not all apples to apples, and there are unique challenges in dentistry that need to be thought of differently … In our model, partnership alignment is key. We have a joint venture model where the doctors retain ownership at the practice level. They have real skin in the game. They also continue to get their professional compensation, so they're compensated for the work that they do, and they also take equity in the parent company of Imagen. So there's complete alignment from that perspective. And I think that's probably one of the biggest things, understanding models in medicine that didn't work and how you can better align with doctors in the dental space going forward. I think the model that we have does a really good job of that.

Q: What goals do you have for yourself in your new role?

JD: Just talking about next year at a high level, strategically, I want to continue to build and grow density in our existing markets. We're in 15 states now. We want to remain laser focused on continuing to grow in those existing markets and supporting the partners that are in those markets into the future. The future is really bright. I've got some goals around how we [can] eventually support our [general practice] partners in developing specialty services. From an organizational perspective, I want to ultimately build the greatest corporate development function within a dental organization that's ever existed with a great culture, with highly engaged professionals on my team. So I want it to be a great place to work because we spend so much time together. There already is a great culture here, so I just want to continue to carry that torch and build upon the foundation.

Q: Are there any trends from the dental or multisite healthcare industries that you're following right now?

JD: I think, broadly, it's the same thing that's on top of a lot of folks' minds: macro environment and where the economy is [and] where the capital markets are. If you look at our industry right now, there are a lot of businesses that have struggled in 2023 for various reasons. So I'm continuing to follow those trends. I think our business is well-positioned and healthy. We've remained disciplined. The last couple of years, folks have been on a buying spree in a lot of ways. Capital was cheap and folks were undisciplined in the way that they were buying and who they were partnering with, and then not able to ultimately deliver on the value proposition. Whereas in this business, we've been highly focused on what we do well and what we don't and continue to methodically grow at a rapid pace. We're at 86 locations now. We're going to hit 100 soon, but [we've built] infrastructure to support sustainability into the future. The biggest trend I'm following right now is just seeing a lot of the fallout from the buying spree and cheap capital that's happened over the last few years, and seeing how that's ultimately affecting those DSOs and their doctor-partner equity shareholders.

Q: What will DSOs need to be successful while dealing with these economic challenges in 2024?

JD: They really have to be able to understand the levers in the business, the cost structure of the business, and stick to the value proposition that they present and what they can actually deliver. [Some DSOs] promised a lot over the last few years with the expectation that they were going to put the services and the support in places they go. Many have had to slow down on the acquisition side and start to work on cobbling together the value proposition that they originally offered but now can't deliver on. 

I see it as an opportunity for us because we have been disciplined in our approach. We have not grown at a pace that gets over our skis from an operational capacity standpoint. So where a lot [of DSOs] are retracting going into 2024 or have to rethink and potentially reorganize their business to think toward the future, we can just continue to methodically grow at a steady pace and deliver on that original value proposition. 

Q: What are some of the biggest changes you've seen in the dental industry?

JD: I've got a short window of time that I've been in the dental industry, so the biggest thing I think was COVID-19. Pre-COVID, doctor sentiment was generally different around independence versus partnership. I think that swung significantly in 2020. Folks faced with potentially losing their life's work rethought the value of hedging their business and bringing in some professional management to help them take some of the chips off the table in terms of the value that they had created in their business to date. That's probably the single biggest thing. Then, you saw that significant ramp up in 2021 through 2022, the buying spree, and now folks are sort of retracting and trying to figure out, "How do we reorganize and rejigger this thing so that we can deliver our own value proposition and continue to grow?" So I think it's just been the evolution of the mindset of doctors. 

The other thing is, it's been interesting to see the average age of the selling or partnering doctor has ticked down. When I first came in pre-COVID, you saw a lot [who] were maybe five years or a couple of years out from thinking about retirement, whereas that mindset has changed. In the last few years, I have seen younger doctors who are seeing that they can partner their practice, they can create an economic wealth engine for themselves from that, create a better quality of life earlier in their career than I would've expected, and frankly, what I saw when I was in medicine earlier in my career.

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