Percentage of Dentists
Affiliated With DSOs
2015
A Smart Growth Investment in a Fragmented Market
Dental Support Organizations:
By Brian Buebel and James Nugent
7.4%
10%
$163B
$128B
42%
55%
Projected Dental
Industry Revenue
Percentage of Businesses Operating Normally as
of January 2021
2019
2025
2020
Non-DSO
DSO
DSOs provide nonclinical support to dental
practices, allowing dentists to focus on patient care.
DSO Defined
The DSO model is gaining traction in the market because it offers substantial benefits for patients, practitioners and investors. DSOs provide dentists with better access to capital and efficiencies of scale that allow them to leverage new technologies and best practices.
This equates to less time spent on administrative responsibilities and more time spent seeing patients. For patients, that means better care, and for investors, enhanced profits.
DSOs by the Numbers
Dental support organizations (DSOs) offer
potentially successful investment opportunities,
but all opportunities are not created equal.
To strike a successful deal, investors must identify DSOs that have strong alignment with dentists, provide quality support services on a consistent basis and have a clear and achievable growth strategy, whether driven organically and/or by acquisition.
— Doug Brown
The emergence of the DSO model came at the right time. They started gaining traction in the mid-1990s when dentists were graduating with hundreds of thousands of dollars of student debt, making it difficult to open a standalone practice. Over the last 20 years, the business of dentistry has become incredibly complex and highly competitive. To succeed alone, dentists must have financing and understand the nuances of marketing and reimbursement. If that’s not you, affiliating with a DSO may be your best option.”
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Expert Interviews
Click through the blue dots to learn about
myriad of administrative and support services provided by DSOs.
The DSO Model
• Risk Management
• Insurance
• Legal and Contracting
• Compliance
LEGAL
• Talent Management
• Recruitment
• Business Development Support
• Total Compensation Benchmarking Administration
Human Resources
• Payroll
• Accounting
• Billing and Collection
• Financing and Capital Management
• Budgeting
• Accounts Payable
Finance
• Marketing
• Information Technology
• Office Administration
• Centralized Call Center
• Scheduling
• Purchasing
Operations
Clinical care, quality assurance and peer review are all managed by the dentist, not the DSO.
Clinical Care
Michael Lindley
CEO,
D4C Dental Brands, LLC, a portfolio company of Cressey & Company
Doug Brown
Executive Committee Member
and Former President,
Association of Dental Support Organizations
Eric Scalzo
Partner,
Waller Landsen Dortch & Davis, LLP
— Eric Scalzo
On its face, it’s an outsourcing model, but that’s not what makes DSOs tick. It’s more than just duct taping practices together. They bring professional management, operational efficiencies and capital to the dental industry.”
“
— DOUG BROWN
Large DSOs will not be
able to move the needle
by continuing to purchase one-off practices. To really make an impact, they will need to start acquiring smaller DSOs.”
“
DSOs that are well capitalized by private equity (PE) sponsors with strong balance sheets are well prepared to acquire and integrate other entities, whether stand-alone practices or other DSOs.
Opportunity:
Merging Small DSOs
Growth Opportunities for Investors
— Michael Lindley
For lenders looking to turnaround a distressed
DSO, there may be an opportunity to sell off assets
to local players that fit into smaller networks. Individual practices may be worth more
as one-offs in certain cases.”
Opportunity:
Acquiring Distressed
DSOs to Sell Assets
— Eric Scalzo
I expect we will see continued diversification
of DSOs into specialties (endodontists, oral surgery, etc.) and that larger DSOs will begin to backfill their general dentistry DSOs with more specialists.”
Opportunity:
Finding the Right Mix
of Specialtiess
— Doug Brown
DSOs are a great place to invest. But you have to be careful about the business you are investing in.”
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• Are dentists aligned to
the future vision for the
organization?
• Is the governance model
sustainable, flexible and
mutually beneficial for both
dentists and investors?
• Is there a model for quality
control, training and peer
review?
Leadership Alignment
• What technology assets
(equipment, dental lab,
information, etc.) does the
organization already own?
• What technology assets do
they need to be competitive
and provide the best care?
• What investments are
required in the near term?
Modern Technology
• Is the organization
geographically positioned
to do well in current and
adjacent markets?
• Is the organization in the right
place to get the right payor mix?
• Are there opportunities for
growth in the organization's
area?
Geographic Location
The decision to acquire or merge with a DSO is a serious one, and investors should seek the answers to these essential questions before cementing a partnership.
Questions for Investors Vetting Potential DSO Acquisitions
• Is top talent available for
key roles and positions in the
market in which it operates?
• Does the organization have high
turnover or other indications of
staff dissatisfaction?
Staffing Challenges
• How has the organization
performed financially over
the last several years?
• How have dentists managed
the financial performance of
the organization, including the
compensation and capital
structure?
• Are there service mix
opportunities?
Financial Performance
• Does the organization have
a strong growth profile?
• Can the practice add services
and grow market share by
investing in new technology
and expanding specialties?
• Does the organization have
a plan for and pipeline of
potential acquisitions
(individual and group)?
Growth Profile
— Doug Brown
Some DSOs are building a system of 30 to 40 practices they can sell to a larger DSO, but that approach is not without risk. Those with the right management, however, may do very well.”
Challenge:
Market Saturation
— Michael Lindley
Growth opportunities abound, but lender engagement may impair investors’ abilities to
execute on growth.”
Challenge:
Lender Engagement
— DOUG BROWN
Some states are welcoming DSOs and others are putting up roadblocks so as to minimize disruption in
the dentistry space.”
Challenge:
State Regulations
“
Despite ample opportunities in the DSO space, investors must strategically sidestep a few common challenges to ensure success.
Potential Challenges for Investors
— Eric Scalzo
You need to be sure you
can trust the dentists to understand the DSO’s business model, deliver great care and have some sense of business acumen.”
Challenge:
Dentist Collaboration
The outlook for DSO investments is bright but not without pitfalls. Investors should carefully and strategically select their targets to ensure they initiate the right partnerships. As with any other investment, targeted due diligence is critical to confirm the alignment of values and goals before the deal is signed.
As with medical practices in the mainstream healthcare space, the dental industry is ripe for consolidation and most experts agree that the gap between the number of solo practitioners and DSO-affiliated dentists will continue to close over the coming decade.
The Future of DSO Investments
About the Authors
Gregory Park
Gregory has over 30 years of investment banking and consulting experience advising organizations in multiple areas, including on business strategy and transformation, mergers and acquisitions (M&A), and capital raising, whether debt or equity.
Brian Buebel
With more than 25 years of experience, Brian is a trusted adviser to organizations across industries and primarily in healthcare and life sciences. He has a track record of leading clients to successful outcomes through restructurings, reorganizations, refinancing and other transactions, providing advisory services and in interim management positions, including CEO, president, chief operations officer and chief restructuring officer (CRO).
James Nugent
Jim has more than 35 years of experience advising organizations on business plans, transactions, financial management, corporate restructuring, performance improvement and merger integration. He specializes in working across a broad spectrum of the healthcare and life science industries and serves as CRO during restructuring situations.
View Bio
Contact
View Bio
Contact
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Contact
1
2
3
— Michael Lindley
For lenders looking to turnaround a distressed DSO, there may be an opportunity to sell off assets to local players that fit into smaller networks. Individual practices may be worth more as one-offs in certain cases.”
Opportunity: Acquiring Distressed DSOs to Sell Assets
— Eric Scalzo
I expect we will see continued diversification of DSOs into specialties (endodontists, oral surgery, etc.) and that larger DSOs will begin to backfill their general dentistry DSOs with more specialists.”
Opportunity: Finding the Right Mix of Specialties
— DOUG BROWN
Large DSOs will not be able to move the needle by continuing to purchase one-off practices. To really make
an impact, they will need to start acquiring smaller DSOs.”
Opportunity: Merging Small DSOs
“
Huron asked three industry experts to share their insights on the challenges and opportunities of DSO investments.
1 - https://www.ada.org/en/publications/ada-news/2017-archive/march/hpi-7-4-percent-of-us-dentists-are-affiliated-with-dental-service-organizations
2 - https://www.ibisworld.com/united-states/market-research-reports/dentists-industry/
3 - https://surveys.ada.org/reports/RC/public/YWRhc3VydmV5cy02MDA2ZWQ5MjEyZmU5NjAwMTBjZjdlMzktVVJfM3BaeGhzWm12TnNMdjB4
Sources
— Michael Lindley
If practitioners are retiring early and not going down a
DSO pathway, that allows existing DSOs to pick up market share.”
Opportunity: Purchasing Individual Practices
— Eric Scalzo
DSO investors have to make sure all contracts work for both parties because, in times of trouble, you often turn to documents that were signed in good times to find they were drafted without potential downsides in mind. This leads to conflict.”
Challenge: Contracting and Legal Concerns
— Eric Scalzo
You need to be sure you can trust the dentists to understand the DSO’s business model, deliver great care and have some sense of business acumen.”
Challenge: Dentist Collaboration
— DOUG BROWN
Some DSOs are building a system of 30 to 40 practices they can sell to a larger DSO, but that approach is not without risk. Those with the right management, however, may do very well.”
Challenge: Market Saturation
— Doug Brown
Some states are welcoming DSOs and others are putting
up roadblocks so as to minimize disruption in the
dentistry space.”
Challenge: State Regulations
“
— Michael Lindley
Growth opportunities abound, but lender engagement may impair investors’ abilities to execute on growth.”
Challenge: Lender Engagement
— Eric Scalzo
DSOs will continue to be an attractive opportunity for investments because they are essential to American healthcare. They provide another avenue for dentists to obtain access to capital and increase access to care.”
“
— Doug Brown
There will be an explosion of emerging DSOs run by young, smart dentists or businesspeople over the next decade,
and it will be very challenging for many solo dentists to compete with them.”
— Michael Lindley
The funnel for M&A within the DSO space keeps getting bigger. The recent environment has created better visibility to the value proposition for being part of a large and well capitalized DSO.”
MANAGING DIRECTOR
MANAGING DIRECTOR
MANAGING DIRECTOR
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• Vendor Management
• Scheduling
• Purchasing
• Marketing
• Information Technology
• Office Administration
• Centralized Call Center
• Equipment Management