The mergers and acquisitions (M&A) world is largely cyclical. There are ups and downs, good and bad times to sell one’s business. Over the last five years, we have only seen dental practice values increase. So, the question we are often asked is, “How much longer can they go up?”
If you spend too much time watching the news or reading the financial press, it can feel as though we are only one day away from financial ruin, but the story in the dental economy is a different one. Demand is high across all specialties and GP practices, and new capital is entering the market with great regularity, keeping valuations high, for now.
Recovery of specialties
There is no doubt that specialty practices recovered faster than most general dental practices over the 2020/2021 timeline. As such, we saw a glut of specialty practices come to market in 2021 and 2022.
New dental service organizations (DSOs) were formed around them. Existing general practitioner (GP) platforms began incorporating them into their existing footprint.
The demand for those practices was incredibly high, and many specialists cashed in on record exits with favorable back-end terms. This feeding frenzy is definitively not satiated, and specialty continues to be an incredibly hot vertical within dental M&A, often selling at a full turn higher than many of the unsolicited offers from DSOs circulating the market.
General practice recoveries spur demand
Due in large part to the lag in recovery by GPs, along with the market pivot toward specialty practices, GP M&A fell down the list of priorities for many acquiring entities in 2021 but saw a strong recovery in 2022. We are seeing more general dental buyers in the space and fewer general dental practices for sale than at any time in the last several years.
For nearly every GP practice, there is a line of buyers ready to pay top dollar for appropriately positioned large practices and groups, and there are remarkably few options available for them to pursue.
As an organization, we do not see this trend slowing down soon. We believe there will be an ongoing shortage of GPs to satisfy the array of buyers.
A new funding cycle is approaching
Private equity-driven organizations, which include most of the larger DSOs in the space and an increasing number of small to midsize DSOs, traditionally undergo a recapitalization of funding every four to six years. This provides an opportunity for the existing investors to receive the yield they have been seeking while allowing a new pool of investors into the fray.
This timeline often has a lead-up period prior to the recapitalization that includes a very aggressive growth/acquisition phase for the corresponding DSO and more competitive offers being submitted. There are a significant number of these buying entities that are heading into this phase in their funding cycle and will be coming to the table with increasingly competitive offers.
Few great businesses on the market combined with an increasing number of competitive buyers and improved financials over 2022-2023 equate to an ideal time frame to receive favorable enterprise value and exit parameters when selling your practice.
It has been a robust M&A market for many years, and the multiples we are seeing currently remain high and dwarf the exit multiples from 12 to 24 months ago. Although many buyers have a fresh stack of capital and can continue to pay rich multiples for dental businesses, some buyers are bowing out of competitive processes.
Not all buyers/DSOs are created equal from an ability-to-pay perspective. Thus, the buyers that cannot pay market for deals today are going directly to dentists and groups in the hopes of buying them directly at below-market rates.
What I love most about this business is that it is ever-changing. No two days are the same, no two DSOs are the same, and what they are looking for when acquiring your practice changes by the month. As a result, we must recanvas the market each time we take a new deal to market to find the right buyer at the right price with the right structure. It is not easy, but it sure is exciting.
In closing, I feel great about the 2023 dental M&A markets, but the question is, “How long will this cycle last?”
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.
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