The next new darling of DSOs: Implant dentistry

Kevin Cumbus.
Kevin Cumbus.

If you are a dentist who has 20% or more of your revenue attributable to implants and over $1.5 million in revenue, you have one of the most valuable practices in the U.S. today. This was not the case a year ago.

Looking back

Twenty years ago when the consolidation of the dental industry was in its infancy, nearly all the investors were focused on buying general practices. Back then, practices were plentiful, they were in great locations, and every year many new dentists graduated from school to join these practices as associates.

Additionally, general practitioner (GP) practices had recurring revenue through their hygiene department. Hygiene regularly represented 20% or more of a practice’s revenue. It helped de-risk cash flows and dependency on the dentist.

The combination of a recurring revenue aspect and de-risked cash flows (the less risky the cash flows, the more valuable a business) proved to be highly attractive for investors, leading them to begin buying GP dental practices. Soon, buyers were everywhere. Many of the great businesses had already sold and it became harder to get a return on investment due to rising valuations (more demand + less supply = higher prices).

A move to specialty dentistry

Soon, savvy investors began looking for alternatives in dental investing, which led them to begin building dental service organizations (DSOs) in pediatrics, orthodontics, and, recently, oral surgery and endodontics. At one point in time, these specialties were considered too risky to invest in due to the key man risk (which is the risk of a practice or business placing dependence on one individual).

Specialty practices are in many cases heavily dependent on referrals from other providers. And if the specialist were to exit, those referrals could dry up.

Investors slowly got comfortable with this key man risk through post-sale employment obligations and the race was on. In the last three years, oral surgery and endodontic practices -- once completely ignored by DSOs -- became some of the most sought-after businesses, and as a result, traded at some of the highest multiples we have ever seen.

Consolidation in the specialty space has been swift! It is estimated that orthodontic, oral surgery, and endodontic practices are more consolidated than GP practices today. Before this wave of consolidation occurred, we know of many specialists who at the end of their career simply locked their doors and walked away from their business. But in the last three years, the specialists we have worked with have received considerable collections for their business. My how the times have changed!

Investors are always looking for the next great thing. You see it all the time. Investors flocked to Facebook when it was hot, then to Tesla, and do you remember the pop in the shares of Zoom during the pandemic? Now, investors are looking for ways to capitalize on the giant strides in artificial intelligence “AI”). So, what is the next big thing in dental?

There is a new darling for investors: Implant dentistry

In recent months, investors have begun to discover the value of practices focused on implant dentistry. Private equity groups and newly formed invisible DSOs/DSOs have expressed an interest to us in implant-specific businesses and practices that have at least 20% of their revenue attributable to implants. Since late last year, implant-focused practices have sold well above the average GP practice, and we anticipate that to continue well through 2024.

Doctors who aligned with DSOs early in orthodontics, oral surgery, and endodontics have enjoyed the monetization of their equity. This wave is here today for implant dentistry.

There’s still time, but it won’t last forever

Implant-driven businesses are receiving some of the highest valuations we have seen at Tusk. We talk with hundreds of doctors every year and conduct a complimentary no-obligation practice valuation for their business. Our team can provide insight into how your overall practice value could be impacted in a sale if you choose to act sooner rather than later.

Kevin Cumbus is the founder and president of Tusk Partners, an M&A advisory firm focused exclusively on large and group practices that want to partner with a DSO or private equity group.

The comments and observations expressed herein do not necessarily reflect the opinions of, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.

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