Selling smart: The return(s) of DSOs in 2024

Ryan Mingus.
Ryan Mingus.

While activity in the dental mergers and acquisitions market slowed this past year, the second half of 2024 is expected to be an active period. Learn how your dental practice can benefit from this opportunity.

Current state of the market

Activity in dental mergers and acquisition markets has slowed over the last 18 months. The interest rate environment has drastically shifted the buy-side environment from its recent peak in 2021. 

Getting deals done has become more complicated than ever, however, with the right experience and a broad and competitive buyer pool, deals are still able to get done that both buyers and sellers are excited about. 

From a sell-side perspective, the number of inbound calls from doctors/owners has not slowed down! The common threads we continue to hear are that employee retention, wages, supply costs, general administrative tasks, and technology costs continue to create headwinds to maintain profitability and overall growth. 

Many dental practice owners are reaching out because they have heard that dental service organizations (DSOs) solve some or all these pain points, but they want to know more about what a partnership with a DSO could look like. 

DSOs were specifically designed to streamline dental practice operations by offering business support, economies of scale, professional development, marketing, technology integration expertise, and collaborative opportunities that incentivize growth. DSOs can produce more efficient and profitable businesses that produce economic returns for investors and partner doctors. As such, they have become more and more attractive to sellers who are feeling fatigued from the current operational environment. 

What to expect from DSOs in 2024: The good news

Tusk recently connected with several of the top investment banks that work in the DSO space. Specifically, their role is similar to Tusk’s position in that they represent private equity (PE)-backed DSOs that are looking to sell to the next PE sponsor that will take them into their next phase of growth. 

When a DSO sells to another DSO, it is called a recapitalization event or a “recap.” This event typically occurs every three to six years. 

Why do recap events happen? Recaps happen when the current PE sponsor achieves its growth goals and it is ready to liquidate its position and return dollars to their investors and partner doctors. 

The top investment banks that Tusk spoke with indicated that the second half of 2024 will be a very active time for them and that there will be a number of large DSOs recapping. This is great overall news for the market because it validates that DSOs do in fact create value in the industry and return equity to investors and partner doctors. 

What does this mean to a doctor that has not affiliated with a DSO?

The spectrum of deals will include some groups that recently recapped, some that are about to recap, and others that might just be getting started. Below are pros and cons of affiliating with a recently recapped DSO, one about to recap, and partnering with a new DSO. 

Partnering with a recently recapped DSO 

  • Pros: A recapped DSO is a sign of a well-run, stable company that has produced a return and liquidity to investors and partner doctors and one that has a low level of risk.
  • Cons: Once a group has gone through a recap or several, the upside on the return is likely less than a new startup. You will likely have to wait three to five years for the next recap event. 

Partnering with a DSO about to recap

  • Pros: There is a high likelihood of a return on your equity. You get a greater portion of your proceeds in cash earlier in a cycle.
  • Con: The return on equity will likely be a lower return than the doctors that partnered earlier in the cycle because they have more time for the equity to grow. 

Partnering with a brand-new DSO 

  • Pro: You can get ground-floor equity that has a very high upside at a recap event.
  • Con: These are riskier investments because there is a great deal of work and skill that goes into starting a DSO and getting it to its first recap event.

The point of it all

Diverse DSO partnering options, each with unique benefits, promise a dynamic second half of 2024 for dental practice acquisitions. DSOs are looking to make up ground from market headwinds in 2023. To take advantage of this opportunity, you must take steps to prepare your business for partnership in the coming months. Tusk can help guide you through choosing the right partner for your practice at the highest price. 

Ryan Mingus is managing director of Tusk Partners and has more than 12 years of sales and leadership experience in the dental and healthcare industry, most recently as the business development director for strategy and optimization at Align Technology Inc. Mingus earned his bachelor's degree in economics and business from the Virginia Military Institute and his Master of Business Administration from the University of San Diego. He also held the rank of captain in the U.S. Army National Guard. 

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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