Organic growth of dental practices and dental groups has become more attractive to potential investors in the DSO space as they look for sustainable growth to support future expansions.
Stacking EBITDA and flipping, a method that groups and investors used in the past to generate quicker returns, has fallen out of favor. In the current marketplace, organic growth and companies that can consistently create organic growth is what stands out to investors.
Sacramento, Calif.-based Straine Dental Management, which supports dental practices in 14 states, is focused on navigating the current internal and external challenges in the industry while continuing to grow organically.
Kerry Straine, CEO of Straine Dental Management, and Jeff Staser, the company's CFO, recently connected with Becker's to talk about the state of the dental investments, how dentistry has changed over time, and how the company is creating growth going forward.
Note: Responses were lightly edited for clarity and length.
Question: How has the dental investment space changed and evolved?
Jeff Staser: The stack EBITDA and flip model that was prevalent six to eight years ago when people were lining up to get involved in that has changed. The investors are a little bit smarter today and now they want to see organic growth. That lends itself well for us having an operating model. We're focused on organic growth and that's what's going to appeal in this marketplace, is the organic growth that we can create. Knowing how to do that makes us feel very comfortable where we're at as a company, knowing how to make changes on a day-to-day basis to get that organic growth.
Q: What challenges are DSOs currently facing?
Kerry Straine: There are external challenges and internal challenges. You've always got rising labor costs and rising expenses. If you don't know how to support the clinical team with the right advice to help integrate services that will get the lift in revenue, you're going to have diminished margins. Externally, I think there's some irrational offers being made, because people are getting close to recap and they've stalled it. So there's some last-minute equity boosts that groups are looking at.
Q: How do you plan to grow and expand this year?
JS: From an expansion perspective, I think that we see a lot of opportunity out there. What we're looking for, from an acquisition perspective, is a partner and somebody that we know is willing to go with us on this partnership and share in the equity events that are forthcoming. Our eyes are focused on what the future is going to hold, because we're trying to create something that's going to last versus just a buy-and-flip strategy.
Q: What are your goals for 2025 and beyond?
KS: We'd really like to acquire about $100 million worth of revenue, which should push out about $20 million more in EBITDA. That $100 million could easily be 40 practices at $2.5 million each.
We will recap and bring in an equity partner in 2026. That is our timeline, and I don't want to push it off to '27 or '28 or '29 because our doctors have that expectation. If we're selling the asset at a point in time when the market might not be the greatest, we're not going to sell all the asset. We certainly realize that, but we'll have the right partner to capture the next wave of growth.