Rising costs of capital, practice profitability and consolidation of specialty practices are three trends dentists and DSO executives are keeping tabs on.
Here, dental professionals answer the question: What consolidation trends are you following in the DSO and dental industry?
Note: Responses have been slightly edited for clarity and length.
Chris Anderson. Chief Compliance Officer of Rock Dental Brands (Little Rock, Ark.): Deals. I am a firm believer that the acquisition market will go up and up. Also, [I am also following the] CMS ruling upon expanded coverage through the government.
Jeffrey Carter, MD, DMD. President of US Dental Surgery Network (Nashville, Tenn.): I follow with interest the parallel growth of the general dental DSOs and the new wave of specialty roll-ups. The former is a business to consumer (B2C) model while the latter is not quite identical. As the ecosystem continues to mature, there is likely to be a convergence of the general practice and specialty platforms. Both companies need to find ways to expand market share and same store sales. The number of specialty practices for acquisition is more finite than the general practice opportunities. Ultimately the B2C companies will realize that their long-term success is based on their relationship with the customers that are controlled by the larger general practice DSOs. At this point there is likely to be more consolidation of the specialty services into larger multispecialty platforms.
Kevin Cumbus. President of TUSK Partners (Charlotte, N.C.): The consolidation in the specialty dental space has been breathtaking. We are doing so many transactions and remarkably high multiples across all specialties. It will be very interesting to see if these valuations hold firm in the months and years to come.
Barouir Deirmenjian, DDS. Smiles West (Mission Hills, Calif.): Consolidation is continuing with private equity groups and strategic groups being more conservative and cautious on the dental assets available.
Scott Dudley, DMD. CEO and Founder of Branin Partners (Lafayette, Colo.): Valuations. Cost of capital is rising and I expect this to negatively impact valuations. Inflation and specifically employee costs are eroding margins. Patients and staff are increasingly less reliable. Churn is putting pressure on human resources and daily operations. Are no-shows and cancellations a reflection of an entitled customer and can you create enough value to compensate? What will the impact of the Massachusetts Insurance law be on the rest of the country? As experienced and highly productive dentists retire, how are succession plans going to address the five to 10-year business outlook, with dentists arguably less capable and potentially more likely to want to work less.
Martin Dymek. CEO of Navigate Surgical Technologies (Vancouver, British Columbia): The continued growth of DSOs is the market's most compelling consolidation story, as more solo practitioners sell their practices and fewer new dentists choose the private practice route. The delivery of dental care will be forever altered as dentists move from owners to employees. The tech segment of the dental industry appears ripe for consolidation and acquisition as the large dental companies continue to add new products in pursuit of a more perfect end-to-end digital workflow.
Elliott Feldman. President of Empower DDS (Oakwood Village, Ohio): We see practice profitability as the largest driver of consolidation into DSOs. If the practice loses control of overhead, smaller levers like supply costs tend to get focus. The hunt for cheaper supplies and reduction of other menial expenditures normally cost the practice more than they save. After that, we tend to see changes in staffing or hiring. The owner doctor may not be able to afford the market rate for new employees or raises when requested from existing employees. Once we see significant staffing turnover, moving to a larger DSO is normally the next step. The hope is that a DSO can help control overhead and expose a larger pool of talented employees. Strong DSOs can help balance a practice's books and take on a few bad quarters to get the practice moving in the right direction.
Steve Gill. Owner and President of Chapman Gill International (New York City): Some trends I am following include the cumulative impact of profound continuous change in and on every player in the dental ecosystem, the unfolding of new opportunities and unprecedented new challenges, the growth of DSOs and the challenges of achieving and sustaining peak performance, the ebb and flow of private equity investment in the dental industry and the progressive integration of dental ecosystem players with medical groups and hospitals.
Mick Janness. CEO of Oakpoint (Raleigh, N.C.): We continue to track and monitor all transactions across the space. We do so by leveraging our industry contacts at the various investment banks and stay close to quarterly investment bank publications. We believe the market will continue to experience larger consolidations as the top-tiered aggregators seek growth. Further, the specialty consolidation is interesting to watch for a myriad of reasons. As the specialty platforms grow, the shortage of available specialty doctors will prove challenging for the DSO industry. At Oakpoint, we focus intently on recruiting top talent and have deep industry relationships with program directors at the dental schools.
Patrick Jarvis. President and CEO of Dentistry on Purpose (Birmingham, Ala.): I think an interesting trend you may see or start seeing in DSO is that many are not wanting to grow through de novo startups and are rather electing for the existing practice acquisitions. I believe that this can be attributed to faster and more immediate cash flow position.
Abe Kasbo. CEO of Verasoni (Parsippany, N.J.): There are two distinct trends right now in dental, and each has their own unique ecosystem. DSOs and consolidation continue to march forward, albeit at a slower pace because of the macro environment and dentists who have made a concerted decision to stay independent are more intent than ever on implementing better business practices across the board to thrive in the face of competition. From a marketing perspective, we're seeing more DSOs and independent practices opt for managed marketing services to achieve significant savings and gain efficiencies on their marketing enterprise. This is mirroring trends in other sectors such as medical and financial services. We're also seeing practices of all sizes direct their brand marketing specifically towards recruiting team members to address staffing challenges prevalent in the market at this time.
Robert Klaus. President of Unique Dental Scheduling (Jefferson, Ind.): The trends I think we are paying attention to would be shifts in growth postures. In the first half of last year, we had the sense it was pedal to the metal for growth by most private equity-owned entities. That seemed to shift quite a bit towards the end of the year; our assumption is that the cost of capital to acquire changed, and thus could have a meaningful impact moving forward to slow the growth rate of acquisition for those types of entities.
Frank Martinez. President of StrategicClean America (Long Beach, Calif.): The recent pandemic laid bare the importance of cleaning protocols and office conditions. It will be interesting to track DSOs with established and proven cleaning protocols and how they are able to integrate their new office acquisitions with these successful practices.
Alex Morrison. CEO and Clinical Director of Morrison Dental Group (Chincoteague, Va.): If you thought the consolidation in dental practices was moving at a breakneck pace, the consolidation among labs is lightspeed. Local labs vary so much in terms of quality and price that group practices and DSOs have to move to larger footprint labs to meet their needs and keep pace. Cost of manufacture remains one of the biggest problems for DSOs and group practices when dealing with stagnant reimbursements so finding ways to produce good quality items at a more reasonable rate is imperative.
Dustin Netral. President and CEO of Vista Verde Dental Partners (Carmel, Ind.): There are some interesting trends with how affiliations are structured which are increasingly focused on creating value for all constituents involved. There is a greater interest in practicing dentists in having greater economic upside and continued improvement in support and resources. We are also beginning to see the intentional integration of dentistry with other health care services such as medical and vision. Large and small groups are in the early stages of proving this out such as Pacific Dental Services and Westwind Integrated Health with regards to body and oral integration. Hero Practice Services is a great example of integrating vision and oral health needs. This focus on the mouth-body connection will drive a mindset shift towards treating the entire patient rather than symptoms of the mouth versus the body.
Melissa Turner. Chief Hygiene Officer of Cellerant Consulting (Washington, D.C.): The recent spike in consolidation in the American dental industry has been predicted for some time now, with the addition of an accelerated spike due to the impact of COVID-19. We are seeing consolidation not only happen with mergers and acquisitions in the DSO/MSO/multisite practice arena, but also in the dental product, service and tech industries. For example, the telehealth, automation and digitalization offerings now available since the pandemic are allowing dental practices to increase their patient load while running more effective clinical schedules and more efficient business models. The successful dental practices of the future are the ones who intentionally take advantage of today's trends and innovations.
David Williams. CEO of QualDent (Mount Laurel, N.J.): I look at geographical locations the acquiring DSOs are assuming. Going forward, geographic diversity will be a key to the future business's financial valuation.