Samantha Strain, a partner with a boutique investment bank focused solely on healthcare, shares insights into strategies for understanding the evolving landscape of dental service organizations (DSOs).
Q: How has the DSO market changed over the past 2 years?
A: The DSO market has undergone significant shifts that have impacted the acquisition landscape. Historically, DSOs commanded high valuations, but recent market corrections have led to more measured investments. The following trends have emerged:
- Downward pressure on valuations. In the past, many private equity-backed DSOs aggressively pursued acquisitions, often overpaying for practices. Today, buyers are far more selective, leading to lower valuations.
- Shift in buyer behavior. Larger DSOs have temporarily paused acquisitions (“pencils down”), exercising greater caution due to economic conditions and internal financial restructuring.
- Importance of accurate valuations. A quality of earnings (QoE) valuation is now the gold standard. Brokers should conduct a QoE-lite assessment, performed by an experienced firm, to provide a reliable picture of financial performance.
- Macroeconomic factors. Interest rate fluctuations, inflation concerns, and economic uncertainty have shifted investment strategies, making financial diligence even more crucial.
These shifts highlight the importance of a well-structured transition strategy for dentists considering a sale to a DSO.
Q: What is driving the resurgence of doctor-led platforms?
A: A notable shift in the DSO market is the increasing preference for doctor-led platforms over investor-driven models. The resurgence of doctor-led groups is fueled by several factors.
First, there is an alignment of interests. Unlike investor-driven models that prioritize rapid expansion, doctor-led groups maintain a strong commitment to clinical excellence, ensuring patient care remains the priority. These groups adopt structured management and operational efficiencies that enhance scalability without compromising quality.
Investors are also drawn to well-managed, doctor-led groups with sustainable business models and strong financial fundamentals. In addition, private equity firms recognize the long-term potential of scalable doctor-led platforms, making them attractive investment opportunities.
For dentists, joining or forming a doctor-led DSO can offer a balance between clinical autonomy and financial growth while mitigating the risks associated with purely investor-driven models.
Q: Who are the common buyers in the DSO market?
A: There are 3 primary categories of buyers: strategic buyers, family offices, and private equity firms. Strategic buyers (existing DSOs acquiring practices to integrate into their long-term operational structure). Practices purchased by strategic buyers often have between $150,000 to $3 million in earnings before interest, taxes, depreciation, and amortization (EBITDA). Family offices (private wealth firms focused on long-term, sustainable growth). These buyers typically acquire integrated practice groups with between $3 million to $10 million in EBITDA. Private equity firms (these investors seek to enhance the value of DSOs for a future sale. Private equity-backed acquisitions generally target larger integrated platforms with $10 million to $25 million in EBITDA.
Each buyer type has unique expectations and risk tolerance levels, making it essential for sellers to align their financial and operational strategies with the right type of buyer.
Q: What should sellers consider when preparing for a DSO transaction?
A: Buyers are conducting more rigorous due diligence than ever before. Dentists looking to sell must focus on a few key areas. They include (1) financial performance (ie, a clear understanding of EBITDA, revenue trends, and cost structure, in addition to well-documented financial records improve credibility with buyers); (2) operational efficiency (ie, standardizing processes, implementing best practices, and maintaining compliance can significantly enhance valuation); (3) legal and regulatory compliance ensuring adherence to state and federal regulations is crucial for avoiding deal roadblocks; and (4) cultural fit aligning with a buyer’s long-term vision can lead to a smoother transition and better integration post-sale.
Sellers who proactively address these aspects can secure stronger deal terms and maximize enterprise value. Educating practices on EBITDA and financial performance is critical when transitioning from doctor ownership to a DSO sale. Smaller groups or platforms require an even more refined and structured process.
Q: How can sellers and investors navigate the evolving DSO market?
A: Successfully navigating the evolving DSO landscape requires expert guidance and strategic preparation. Key recommendations for both sellers and investors include: (1) working with financial and legal experts from the outset to help streamline negotiations and ensure an optimal outcome; (2) understanding market trends (ie, staying ahead of industry shifts, including valuation trends and buyer preferences); (3) maintaining a well-run, efficient practice with a solid growth trajectory will be more attractive to buyers and command better valuations; and (4) finding a balance between financial performance and clinical excellence.
By leveraging these strategies, DSOs and doctor-led groups can maximize their potential in an increasingly competitive market.
Ms. Strain, a partner at HealthStream, is a recognized expert in the DSO space. With more than 20 years of experience, she has structured and executed more than 200 buy-side M&A transactions, ranging from $100,000 to $25 million in EBITDA. She can be reached at [email protected].
