Dental Acquisitions Guy

Candid thoughts + learnings on what it's like to build and scale a dental support organization (DSO). Talk dental to me.

[Dental Acquisitions Guy @DSOguy]

@phanimedler @dtmorgan18 Definitely a trend. Most DSOs tend to avoid these practices because of fear that they’re less recession resilient and more dependent on the founder. But I’m sure those assumptions will be challenged as it keeps getting more competitive to acquire practices.

[Dental Acquisitions Guy @DSOguy]

@ALEXANDERRR9 My experience is that most people mean well in this space, regardless of their affiliation status. It’s not easy to have that level of discipline and foresight at the end of a sale process when everyone is exhausted and just wants to get back to their day job

[Dental Acquisitions Guy @DSOguy]

Watching in real-time as a DSO is imploding from negative SSS and churn. If you only get one thing right in building a DSO, make sure it's structuring alignment with the selling doctors.

[Dental Acquisitions Guy @DSOguy]

@DentistryUnder1 Want to avoid doxxing myself in any way so let's just say middle market.

There's no one answer, but in general, you should ensure that the selling dentist has a reason to care about the future performance of THEIR clinic. A non-compete & 20% rollover just doesn't cut it.

[Dental Acquisitions Guy @DSOguy]

@bendigodentist @peterboulden Likewise enjoyed the podcast, though I think you meant to tag in my Irish twin @theDSOguy

[Dental Acquisitions Guy @DSOguy]

@chris_hilger For those that are prioritizing integration but still using multiple DPMS solutions, they're either using a simple BI tool like Jarvis that already integrates with a number of DPMS or they're working with consultants like E78 to build out their own EDW

[Dental Acquisitions Guy @DSOguy]

A common misconception I've noticed is the influx of people entering the dental industry believing it's a simple roll-up.

I don't blame them - I also once thought it was easy. The dental industry has most of the hallmarks of a prime roll-up sector. It's "highly fragmented," with economies of scale and "synergies" potential (quotes intentional), which appeals to a particular audience.

(Note: I'd ask anyone with the "PE is harmful to healthcare" mindset to refrain from discussing it here. It's a complex issue, and I don't necessarily disagree. Let's save that for another conversation.)

Visit any dental conference and you'll find dozens of "emerging DSO" CEOs managing 2 to 10 locations, brimming with optimism. They dream of becoming the next MB2, sure that a few more acquisitions will solve all their resource problems.

Unfortunately, they're blissfully unaware of the challenges ahead as they scale up. They'll face new regions to support, different DPMS systems to integrate, accounting and A/P to manage, and payroll and benefits to standardize.

The reality is that the team and systems needed for 10 locations is totally different from those needed for 40 locations, and there's a no-man's land in between.

With 10 locations, you're too small for C-level executives but are now confronting issues they would typically resolve. And you're still too small for those DSO platform acquisition multiples. Welcome to no-man's land.

At 40 locations, people begin to take you seriously. Assuming $1.5 million AUV and 25% margins, you're at a solid $15 million of 4-wall EBITDA and finally starting to eek into the universe of middle-market PE buyers. The immense challenge of building a genuine platform from there deserves its own discussion, but you've "made it." Now, you must persuade potential investors not to slash your EBITDA in half because they think you’ve under-invested in your corporate infrastructure.

If this seems overly pessimistic, it's because it is. Most individuals in these situations are likely making a lot of money assuming they haven't taken on excessive debt. However, I want to debunk the myth that "roll-ups are easy", which a younger, naive DSOguy once believed. It's a brutal challenge that requires a metric ton of effort, a great team, and a healthy dose of luck.

Just ask anyone who's done it before; they likely have some form of PTSD they discuss weekly with their therapist.

Will you make a fortune? Possibly. There’s certainly opportunity for those willing to put in the work. But there are definitely easier paths. Just make sure you go in with your eyes wide open.

[Dental Acquisitions Guy @DSOguy]

Like most things in life, I think it’s nuanced. I had to learn from targeting things that were too small the hard way, which is great because it built up some scar tissue. But I also kinda wish I’d had a bit more self-confidence to begin with and tackled something larger from the start. Could’ve shaved off some years.

[Dental Acquisitions Guy @DSOguy]

@QSRguy Great list! Would love to know if this is your pre-LOI list or how you space them out otherwise. Given the speed of growth, I’m guessing most deals must be brokered and within a franchise.

[Dental Acquisitions Guy @DSOguy]

@RobertMSterling

[Dental Acquisitions Guy @DSOguy]

@bentigg Right? Harris Williams is super active in this space but 7% is the lowest estimate I've heard by a factor of 2, including from other MM bankers/consultants

And appreciate the heads up! Just figured out how to change DM settings - they should be open now

[Dental Acquisitions Guy @DSOguy]

@DentistryUnder1 Completely agree provided they have >4 chairs, especially if you can get geographic density. I think there’s a lot of merit to partnering with young doctors to acquire under-performing practices from doctors ready to retire. You provide the support and they get some equity.

[Dental Acquisitions Guy @DSOguy]

One dirty secret of the DSO industry is that we're already in the 2nd wave of consolidation.

I've been in countless pitch meetings where the story is "dental is only [20%] consolidated, we've got so much room to grow!" - but the tune behind closed doors is a bit different. 1/6

[Dental Acquisitions Guy @DSOguy]

@DentistryUnder1 @bentigg Great example of why scale is so powerful in roll-ups. We can add new practices within our existing geography with minimal additional overhead while still improving 4-wall margins through supplies/sg&a efficiencies. But that does make it sound way easier than it actually is…

[Dental Acquisitions Guy @DSOguy]

@DentistryUnder1 Also, completely agree with even 50%+ being “unacquirable”. Living through this has made me look at de novo models with a lot of envy…

[Dental Acquisitions Guy @DSOguy]

@DentistryUnder1 There are different perspectives on this but would say $500k 4-wall EBITDA is the targeted floor so $1.5-2mm in collections. Personally, I think the opportunity set is much greater if you’re open to $250k+ of EBITDA and focus on other attributes when acquiring.

[Dental Acquisitions Guy @DSOguy]

@DentistryUnder1 @bentigg It’s pretty common at scale among DSOs, particularly if they have any significant specialty mix. Probably more nuanced to say 20-30% depending on the mix and level of corporate cost burden.

[Dental Acquisitions Guy @DSOguy]

As with most things re: timing a market, it’s probably smart not to count on this as a strategy. And it doesn’t work if you’re not a very appealing acquisition target in the first place. But if I had a strong practice and no rush to sell, I would absolutely keep my eyes peeled.

[Dental Acquisitions Guy @DSOguy]

Thinking of selling to a DSO and want to get top-dollar for your practice? Timing is waaay more important than you think. You just need to do this one weird trick… (spoiler: it’s not weird and more luck than a trick.)

Go piggy-back off a DSO’s sale.

[Dental Acquisitions Guy @DSOguy]

Think of it this way: the incumbent investor gets multiple arbitrage on the new EBITDA (16x - 10x = 6x), the new investor gets a larger group with better EBITDA margins (assuming no incremental corporate costs), and the practice gets a crazy premium. It’s a win-win-win in theory.