DSO consolidation and industry trends
There is no doubt that the dental practice landscape is changing. Before 2018, the majority of practice sales were private, sold from one doctor to another. Today, Dental Service Organizations (DSOs) and private equity firms dominate the conversation, and more and more doctors are gravitating towards the corporate sale.
With the increase in practices consolidating into DSOs, some may even feel that DSOs will completely take over.
7 Pillars, a transition advisory firm that specializes in helping doctors partner with DSOs, is well acquainted with the trajectory and trends of private equity firms, DSOs and similar groups.
“Private equity firms have realized that over the last five years, the dental industry is a really good place to park money,” 7 Pillars Senior Vice President Michael Jarvie said. “There are not many industries and businesses out there that reach the kind of margins that dental practices can do. On top of that, there’s an incredibly high barrier to entry requiring several years of education, and it’s difficult to technologically replicate what a doctor does with the human touch.”
With that being said, is all of dentistry headed for the DSO tunnel? What if doctors have a greater interest in private practices? Will there be any left for them? Michael shares what he sees on the horizon for the dental industry.
Current DSO Consolidation Among the Dental Industry
Per Michael’s estimation, there are about 350 DSOs across the country as of July 2024. Across the dental industry and all 50 states, 20-25% of practices are consolidated into DSOs. General practices are on the higher end at 22-27% consolidated, orthodontic practices are at 18-22%, endodontic practices are at 12-15%, oral surgery practices are at 18-22% and periodontal practices are at 8-12%.
The pace at which practices are consolidating into DSOs has been fast. This surge started in late 2018 and 2019, and after Covid, it ramped up an exponential amount due to interest rates being at an all-time low and practices bouncing back from Covid closures.
“When interest rates are low, that can speed up the velocity at which merger and acquisition transactions happen because money is cheap and groups have more access to capital,” Michael said. “We have seen a little bit of a slowdown in consolidation over the last year and a half due to the rise in interest rates. It’s still moving at a quick pace, but it’s slower than what it was in 2021 and 2022.”
Despite the slowdown, it doesn’t appear that DSOs are going away anytime soon.
Gravitating Towards Major Metro Markets
Consolidation is growing even faster in major metro markets, which include cities like Dallas, New York, Miami. It’s easier to recruit associates to those cities, and because most practices in those cities have already consolidated, DSOs will likely be tough competitors for private practices.
“The way I equate it, is by looking at grocery stores,” Michael said. “Over 80 or 90 years ago, we had mom-and-pop grocery stores everywhere. Over the last 50 years, they’ve been consolidating into maybe 12 major brands across the country. It will be interesting to see if a similar trend plays out in dentistry.”
TAKE NOTE
What differentiates DSO consolidation from the major grocery brands is the development of the “invisible” DSO. While the DSO operates behind the scenes, the practice retains its brand, and a patient may never know that it’s a corporate practice. Therefore, even though a practice may not have the same name as another, it still could be owned by a DSO.
A Possible Great Extinction: Will Either Private Practices or DSOs Disappear Eventually?
With high interest in DSOs, many think that private practices are going to disappear, but there are also people who believe that DSOs will eventually fail.
“In the beginning, a lot of doctors got a bad taste from corporate dentistry and for good reason,” Michael said. “There were groups out there that rebranded practices, demanded how patients were treated and controlled schedules. DSOs and private equity companies have learned from that. These private equity companies want to make money, and they learned the best way to make money in dentistry is to make sure their doctors and their patients are happy. They want the practice to keep doing what it was doing to make it profitable in the first place.”
The bottom line is neither are going away anytime soon. Rather than pitting DSOs against private practices, we suggest thinking of them as two viable transition options.
“DSOs are just a tool,” Michael said. “They’re not the right tool for every situation, but they can be a great tool in certain situations.”
DSOs can be attractive to doctors who want stable employment while reducing risk and workload, especially with managing the business aspects. For current practice owners, it’s a viable option if they don’t have many options for finding a buyer or aren’t interested in the traditional associate-to-partner/owner process.
The corporate sale also benefits financially-set owners who want to finish their career with a firm transition plan that allows them to practice clinically and oversee their practice, while taking some of the chips off the table.
While DSOs can be helpful in many cases, there’s still room for private practices. Not all DSOs buy every type of practice, not all of them buy in every state and not every doctor wants to be in a DSO. Many practice owners still choose to sell to an independent doctor, and many buying doctors want to be in control of their own practices.
Owners may be looking for a specific type of buyer personality, they may want the transition to play out a certain way, or they may have a vision for what they want their legacy to look like after they leave. Because of the specific needs of different sellers, there’s still going to be that market for selling privately.
Finding Your Path
It’s not a matter of which option is right or wrong; the only answer you should focus on is finding the right one for you.
Whether you want to buy or sell a practice, NDP strives to support your transition goals and help you find your path. Reach out to our team to discuss your situation and questions.
If you’re considering a corporate sale, 7 Pillars can help you maximize your practice value and meet your transition goals with a DSO partner. They keep your best interest in mind by helping you understand the market conditions, navigating corporate offers and walking you through the process.
LEARN WHAT TO EXPECT FROM A DSO TRANSITION
If you’re exploring the idea of selling to a DSO, you want to ensure your goals align with this transition path. NDP’s affiliate companies Cain Watters & Associates and 7 Pillars have teamed up to deliver a robust DSO transition seminar on September 13-14, 2024 in Frisco, Texas. Learn more here.
