DSOs will need to be more methodical with their investments and enhance their value creation for partner dentists in order to remain successful as challenges mount, several executives have recently shared with Becker’s.
Here is what five dental leaders have said on the challenges facing DSOs, and what is needed to succeed:
Dylan Bates. CEO of SALT Dental Partners (Phoenix): Organic growth is mission critical in being an integrated operating company. Gone are the days where you can just aggregate revenue and EBITDA and make it for the long haul. That train is at the end of the line. It’s unfortunate that there have been quite a few groups that have lost their way, become over-leveled, and have real challenges. We take a very close eye on that because many of those doctors that joined a DSO that ultimately becomes upside down — it’s their practice, it’s their brand, and if they’ve trusted that DSO and the leadership with their practice and with a lot of rollover equity, and that equity is now impaired or diminished or gone to zero. I hate to see stories like that. There’s too much of that in dentistry, and we know how that happens. We’ve seen it numerous times.
I have a very seasoned management team that have been in various multi-site healthcare, private equity-backed environments, and that perspective and that experience is so foundational to how we look at things. We know where the pitfalls are. We invest ahead of the curve. We build things with intention. We build things the right way, and it is unfortunate that we’ve seen quite a few groups lose their way and become upside down. The number of doctors that are in the crosshairs of that is disappointing to see, and it’s unfortunate. We’re definitively keeping that front of mind how we intentionally build SALT.
Mark Greenstein. Chief Growth Officer at Heartland Dental (Effingham, Ill.): So many of these [groups] grew in this 2018 through COVID period, so they’re less than 10 years old, and they grew just because interest rates were low. They didn’t put the energy into thinking about how to actually create value. I think they realized a few years ago when they couldn’t sell, now what are we going to do? So, they started to do the things that Heartland always does, and they’ve created more valuable assets. The quality of what’s out there now is better. Pricing expectations are more in line with the value that’s actually been created. They’ve actually started to create value in several dimensions. There are more doctors that have been there for a longer period of time, so it’s not just churning through doctors. That, to us, is a real signal of stability, how embedded they are with their communities and the overall quality.
Many of these startups from the last decade or eight years have finally recognized they weren’t going to sell. They recognized they had to create value to get the EBITDA to try to get enough of a return to make everybody happy, whether it’s the debtors or the equity holders, and they’re willing to monetize what they have because interest rates now are very high, so it’s very difficult for them to continue to grow the assets. They have to grow by creating value to get the pricing that would work for them, and that’s what we’re out there looking for. We’re looking for that quality at a fair price.
Ashish Bagai. Co-CEO at Vitana Pediatric & Orthodontic Partners (Plantation, Fla.): I think size matters to a certain degree, especially on the cost side. It does give you some advantages early on in the journey, whether it’s purchasing, insurance, payer contracting, et cetera, but we found that you get to a curve at 20 to 40 locations where that curve is really flat after that. So, I think it does give you an early advantage, but I’m not sure if that persists too much going forward. What we like to think is, be large enough to have those advantages, but then be small enough to have the people who make the decisions, the leaders, be close to the ground and drive top-line growth because I’m not sure top-line, same-store growth comes too much from size only. So, it does give you cost advantages, but not necessarily on the revenue side.
Geith Kallas, DDS. CEO of Smile Maker’s Dental Center (Tysons Corner, Va.): The cost of capital and growth is cyclical, but on a longer cycle. From 2019 to 2021, money was free. There were 4% loans and 15x EBITDA multiples. You could buy a practice, do nothing and make money on arbitrage. From 2023 to 2026, debt is at 9.5% to 11% and multiples at 6x to 8x. De novos cost 40% more to build. Interest rates will come down to 6% to 7% eventually, and multiples will recover. There is still the structural consequence: The era of “buy any practice and grow” is over for now. Only operators who can create EBITDA, not just buy it, will survive. A number of DSOs that grew on cheap debt will go bankrupt in the next 18 months.
Hamza Asumah, MD. Director of Operations for Juniper Services (Sparks, Nev.): Labor has definitely been a big binding constraint to growth. First of all, as a DSO, you have to pay more for labor now, especially for providers in the hygiene market. We recently acquired our Boise locations, which are a different model, and we saw the effect of the labor constraints on our two markets because we had already built the structures in our other Nevada locations. We’d never had a turnover. We have the same core hygienists we’ve had for a long time. We are just adding to that, for the most part, for practices we are expanding. So, we have been very good at retaining, but on the other side, in our Boise locations, we saw a lot of turnover. We had to remodel whatever we had there to suit what we have here for retention.
That being said, it’s very important that even in the midst of this constraint, we get more innovative. As much as that will constrain growth, you need to spend that extra amount of money to be able to sustainably keep growing as a practice. If you’re going to be growing at 8% to 10%, or let’s say 15%, those constraints will probably drop your growth down by 2% to 3% more, but it’s important.
