Why You Need to Know the Nuances of DSO Deals: The Dentist Money Show Podcast
With conditions fluctuating within the dental industry as more consolidation occurs, it’s important to know how to react to a buyout overture from a DSO. On this episode of the Dentist Money Show, Ryan interviews Brannon Moncrief of McLerran & Associates, who talks about current market conditions, how to understand practice value, and why a buyout might be a good move for some dentists but not for others.
Takeaways from the Podcast:
Evolution of DSOs: Dental Service Organizations (DSOs) have evolved significantly, shifting from primarily focusing on profit and volume to providing administrative support to partner dentists – now allowing for increased clinical and operational autonomy. This change has redefined DSOs as viable options for dental practices seeking relief from administrative management.
DSO vs. Private Buyer Valuations: DSOs are typically valued using the private equity model, based on EBITDA multiples rather than revenue. When a practice crosses roughly $1.5 million in revenue, its valuation under the DSO model tends to exceed that of a private buyer (often selling for two to three times the revenue).
Pros and Cons: Partnering with DSOs presents several pros and cons; benefits include higher valuations, de-risking by monetizing a portion of the practice’s value, and relief from administrative tasks. The drawbacks are more relevant for those with a longer exit runway who do not need administrative support. In this case, the loss of EBITDA (free cash flow) over time may outweigh the sale’s enterprise value (cash+stock).
Recaps: It’s critical to consider the likelihood of recapitalization events, which can significantly influence generational wealth. The recapitalization process often involves a private equity firm or a family office selling their DSO stake to another investor. It presents opportunities for existing investors and the DSO management team to liquidate all or part of their equity, usually at a higher valuation. However, the regional banking crisis has caused a lack of capital, affecting DSO recapitalization as the next investors usually use bank debt to fund the acquisition. With the decreased willingness of institutional investors to pay previously high multiples due to the banking crisis, many DSOs struggle to find suitable buyers for recapitalization and instead choose to return to the market later in hopes of better conditions.
Roll-ups: The concept of “roll-ups” in the dental industry involves grouping dental practices together as a single entity or DSO to obtain higher multiples. While the roll-up concept could work on a small scale with a few geographically close practices offering similar services, our clients are recommended to individually seek the best fit for their practice, considering factors such as valuation, the proper deal structure, and the appropriate buyer that aligns with their personal objectives.
