The DSO field is expected to rebound this year after a more sluggish 2024 thanks to increasingly positive sentiments about this economy.
The inflationary environment from 2023 and 2024 led some DSOs to scale back their expansion efforts in favor of organic growth initiatives to remain successful, while other DSO models began to falter.
MB2 Dental founder and CEO Chris Villanueva, DMD, told Becker's last year that he saw a decline in acquisitions from competing DSOs dealing with the growing cost of capital and issues accessing debt.
"We see competitors that once bid against us on deals beginning to slow down or halt their acquisition pace as capital runs out," Dr. Villanueva said. "Groups are beginning to run up against their debt covenants because they were too aggressive in paying higher multiples to accelerate growth. Unfortunately, many of these groups are now unable to generate the same-store growth needed to meet their leverage requirements."
Part of the slowdown also came from practices being hesitant to enter partnerships with DSOs.
U.S. Oral Surgery Management is one company that experienced a slower first half during 2024, with CFO Henry Moomaw describing the time period as "a little behind our expectations" due to macroeconomic factors and apprehension from partners.
"I think a lot of it was driven by the macroeconomic conditions and the interest rates being really high and just a lot of trepidation from partner practices that are out there," Mr. Moomaw told Becker's last year. "We're not aware of too many of them that we've lost to competition. It's just that they're not ready to join us yet. We do think the tide is turning."
USOSM prioritized recruitment of graduating surgeons to support its offices and organic growth while waiting for the economy to pick back up, and it ended up adding several more partner offices during the latter half of the year. It also secured $175 million in additional funding to support its growth through 2026.
USOSM CEO Rick Hall told Becker's in December that the company is feeling "bullish" about the business environment in 2025 due to more practices looking to management services organizations for stability.
"We had a good, solid year — probably not as good as previous years, but we're really excited about 2025 as the macro market conditions become a little bit more favorable, both as a result of the election in November and the reduction in interest rates that we're seeing," he said. "We average typically around three practices per month that we partner with, and we're confident that we're going to get back to that level of growth in 2025."
The organization has already added several partner offices in California, Pennsylvania and South Carolina so far this year.
Weston Spencer, DDS, the CEO SPP Dental Partners, said more DSOs are now ready to take the leap and dive back into the M&A market, which will lead to more activity even beyond 2025.
"There is a lot of money on the sidelines that has been waiting to be deployed, whether it's private equity [or] other groups holding on to some of that money ready to invest more and more soon, so just a ton of that is waiting to go," he said. "It feels like the last year or two, a lot of [DSOs'] focus has been on driving up the quality of their companies and working on having good value within the group and a little bit of M&A, and now it feels like everybody's just like, 'Okay, enough is enough. Let's go. Let's start partnering with more and more practices.' So, we expect a significant increase in what people thought years ago was a steady increase to probably speed up pretty quick over the next few years."
Robert Rubino, the CEO of Qualitas Dental Partners, told Becker's that it will be important for DSOs to be strategic about their acquisitions going forward to avoid past mistakes.
"Around 2021-22, you had a lot of irrational exuberance going on, in terms of acquiring, that bigger was necessarily better. Well, as we got to '23 and '24, a lot of those models did not perform very well. There was a lot of equity destruction in those models because there wasn't consolidation of the enterprise or wasn't an industrial logic to what they were putting together," he said. "We firmly believe that the successful partnership model of the future is also going to be one [in which] diligence is practiced very well, and understands how that new practice fits strategically into what they're doing. Ultimately, it's better for patients, it's better for the providers and it's better for the teams that are taking care of those patients. We're cautiously optimistic, but we're striking a cautionary tale to everyone."