Growing DSOs that are not prepared for further expansion could lose out on the consolidation game, according to NextLevel Founder Gary Kadi.
Mr. Kadi launched the DSO with eight practices in August. He recently spoke with Becker's about the DSO's plans for growth this year, the trends he's following and how economic challenges could affect the DSO field.
Editor's note: Responses were lightly edited for clarity and length.
Question: What are your DSO’s top priorities in 2024?
Gary Kadi: Our first priority is to double our current size, both by attracting new practices to join NLDG, as well as growing the EBITDA of our current practices.
At this point, all of the so-called "early adopters" have joined DSOs, so we are now working to educate what we call the "mid-adopters." These are practice owners who are a little more analytical, a little pragmatic in their decision-making and who need more evidence-based education before deciding to join. The mid-adopters are also likely in the middle of their career, so they’re looking at decisions that will have longer ramifications for them, as they still have a decade or more of practicing ahead of them.
We understand that joining a DSO isn’t just a transaction. It’s a transformation of their entire life and career. It’s emotional and works with the very things that create a practice owner’s identity. That’s why we’ll be focusing heavily on education and personal connection, showing practice owners how joining a DSO like ours will not just give them cash in a bank account but will transform their lives, their teams and their patient care for the better.
Q: What are two to three key strategies in place to expand and grow your footprint?
GK: We’re creating pods around our existing successful partners. Through local, invitation-only educational events, we’ll help connect vetted practice owners with doctors who are already successful, so these mid-adopters can see and learn from the experiences of the pioneers who have already successfully made the transition. Through events like these, we’ll help practice owners get an honest, accurate view of what their lives would be like and also help get them prepared so they can successfully join themselves.
We’re also holding live and virtual workshops, as well as webinars through a residency I have with a successful dental magazine. Our foundation in coaching and consulting really gives us an edge over other organizations that come at the transaction from a purely financial viewpoint. We know how to educate so that practice owners become empowered individuals. I’ve always said that when we share intelligent things with intelligent people, they’ll make intelligent decisions. Our goal is to put every practice owner in the driver’s seat so that they know they are in control and can make the right choice for themselves, their team and their practice.
Q: What are the biggest challenges facing DSOs in general today?
GK: 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.
Q: Many DSO execs are expecting slower growth and a challenging economy. What are your thoughts on this?
GK: I’ve found that companies can experience significant growth when the economy is uncertain. Many Fortune 500 companies experienced their best growth off the backside of the great recession and the pandemic — times that were not considered economically strong at all.
Here’s why: many companies start shrinking as soon as they hear about economic uncertainty. 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.
Q: What are the top trends you are following now?
GK: Mid-career adopters: This is a great, untapped market of practice owners who could greatly benefit from DSO consolidation but have waited until now to test the waters because they thought consolidation was only for late-career doctors who were close to retirement. Through education, they can see that joining a DSO will help them secure their financial freedom and let them focus on the things they love best about dentistry for the rest of their career.
Staffing supply and demand: Staffing continues to be a challenge for most practices, but the deeper issue that most practice owners might not realize is that beyond finding the right [dental assistants] or front-office staff, they need to be focusing on finding and training highly capable associates. Without having a fully-trained, highly mentored associate ready to step in and keep the practice’s production and profits high, practice owners will struggle to join and succeed in a DSO.
Recapitalization: We’re far enough into the industry consolidation now that groups are starting to recapitalize … or fail to do so. This is something we need to pay close attention to. What are the groups that successfully recapitalize doing? What can we learn from them? By the same measure, we need to take a close look at the groups who fail to recapitalize. What can we learn from their missteps? This will certainly help us create stronger, healthier groups.