The DSO field could be looking ahead to an interesting future as companies work through current economic challenges, one industry leader says.
Vincent Cardillo founded several DSOs before launching Maeva Dental Advisors, which provides C-Suite services to dental groups​ and professionals interested in investing in DSOs. His company is continuing to help practices and DSOs boost growth with the recent launch of the Pronto practice performance system.
Mr. Cardillo recently spoke with Becker's about how the DSO field has evolved over the years and what DSO leaders can expect to see going forward.
Editor's note: Responses were lightly edited for length and clarity.
Question: How have you seen the DSO field evolve since you launched your first DSO in 1990s?
Vincent Cardillo: We decided to do a de novo because we had a model. So we just would open new locations, and it worked. And we'd do a lot of advertising. Back then, in most of the models, all the dentists were employees. Then it kind of moved into, all right, we'll give you some stock options. Then it was, when we buy you, we'll let you keep some equity in. Now, they're doing these joint venture deals where [it's], okay, we'll buy a portion of your practice and let you keep growing. So it's definitely evolved because the dentists have seen that the private equity firms have been very successful in making more money after they sell again. So they've been structuring deals where they can be part of the next sale also.
Q: What are your thoughts on the current state of the DSO field?
VC: At the moment, there's a little bit of a low on the market because of the high interest rates, and a bunch of these groups got into trouble with their covenants because the interest rate jumped and they couldn't pay it back, so now everyone's worried about organic growth. I think the consolidation is going to continue. There's so much Wall Street money in this industry, that it can't stop. There are more and more technologies coming into the industry, which may make it a little bit difficult in the practice. That's why we developed our technology called Pronto, where you're bringing in data. So I think what's happening is these practices are beginning to get more and more data driven, even though they were before with private equity. I think these new technologies that are coming out are going to assist with that. You got AI reading X-rays, which is all great, but you have to get the dentist to believe it. So when the dentist doesn't believe it, it's a problem too.
I think it is going to be very interesting to see how [the consolidation] plays out. What happens to these smaller groups or mid-size groups that don't make it? I guess they sell the practices back, or they just shut some down. So we will be seeing that. Right now, everybody's everybody's hot on implant practices. They've gone through the whole cycle of all different types of practices, and it seems like the last one is implants, and now people are getting into sleep [practices]. So, I think it [will continue] to grow, and when it continues to grow, there are more opportunities.
Q: Are there any other dentistry trends that you're following right now?
VC: We're seeing ortho numbers down this year, which some people say ortho numbers are an economic indicator because parents are going to get braces for their kids, but they're not going to get them for themselves. The average ortho practice is I think 70% kids and 30% adults. If you're down 20% it's because the adults' discretionary income is dropping. In other cycles when we've seen that, we've seen [general practitioners] start to get hit nine months later. But we're seeing a little bit of a slowdown. A number of the groups we work with are doing well, but as we meet other people to work with, we're seeing their numbers down, or prospects we're talking to are not making decisions because the numbers are not there.
This whole interest rate thing has been a problem, number one, for valuations for the dentists. If interest rates go higher, that means private equity is going to pay more, so they're going to pay the dentists less. You have these ups and downs of pros and cons of DSOs. Now, because of this, I think there's going to be a little bit [more] cons of the DSOs because all of these dentists who got into this deal saying, "In five years, we're going to sell and I'm going to make five times my money." Well, that's not happening. That's ended in the past two years. There are a number of deals that went to market that didn't sell. They didn't sell for a high number, and they didn't even sell for a lower number. They just didn't sell. So all these dentists who thought they were going to get all this money and are not getting it, they're going to start telling their story. Five years ago, everyone was [saying], "Look, I got in. I got involved. I sold. I got all this money," so everyone wanted to get in. So the story is a little bit different right now, but we've seen this in the past. This happened in 2000 with the internet boom and bust. We had the internet boom and bust, and we saw dentistry go away for a few years, and then it came back after five years or so. So this isn't going away right now, but you're seeing a lot less people bidding on transactions, and if they are, the private equity people are being much smarter about deals.