DSOs, private equity, and the future: An interview with Michael Roub

By Tony Edwards, DrBicuspid.com editor in chief

January 16, 2019 -- DrBicuspid.com is pleased to present the next installment of Leaders in Dentistry, a series of interviews with researchers, practitioners, executives, and opinion leaders who are influencing the practice of dentistry.

Michael Roub is the managing partner at Inflection 360, a consulting partner to healthcare practices and business owners. Roub has headed corporate development at multiple major healthcare firms, including a leading dental service organization (DSO). In his present capacity, he advises DSO clients and other healthcare businesses on strategic alternatives and merger and acquisition opportunities.

In April 2018, Roub wrote a column on his company's site charting out five trends for DSOs for the next five years. Since the column was published, we've seen some large transactions and acquisitions in the DSO space, such as Western Dental picking up more than 60 practices.

DrBicuspid.com conducted an email interview with Roub to see how these transactions might have changed his outlook and what's in the future for dentistry and DSOs.

DrBicuspid.com: Private equity firms seem to be heavily invested in the DSO space. When dentists ask you why these firms are doing so, what do you tell them?

Michael Roub
Michael Roub is the managing partner at Inflection 360.

Roub: Private equity firms are continuously looking for investment opportunities where they can create value and maximize their return on investment. DSO transactions in the past several years have been a very successful investment option. As firms typically look to invest in a given business for three to seven years, many firms have exited their first DSO investment and look to leverage their knowledge to create a similarly successful new investment in the dental space.

In addition, many firms not previously invested in the dental field have witnessed the success of other firms and look to participate in the industry with the expectation of being successful as well. With the dental industry being still so fragmented, both seasoned and new private equity investors see substantial opportunity to grow and to create value.

What do you mean by "substantial opportunity to grow"?

Even a small DSO with five to 10 locations could be an excellent base to begin developing a much larger DSO if the right management team is put in place. Although I would stop short of saying that every DSO is a smart investment (many practice-specific factors can impact their potential for success), in general private equity firms have been and will continue to be very proactive in exploring DSO investment.

We've seen some large acquisitions and significant milestones reached by some of the more established DSOs in the last six months. Will this practice of established, larger DSOs looking to expand continue?

With the substantial investment in DSO portfolio companies, private equity firms will continue to push for strategic growth, with acquisitions being the most rapid path to achieving this.

Effectively, the objective is to grow the revenue and profitability of the DSO to help justify a larger sale on exit to another private equity firm or strategic buyer. Even DSOs that do not have private equity investment will continue their expansion efforts to both stay viable and increase their value as competitors continue to gain size and scale in the marketplace.

“Many private equity firms with no prior dental experience are still very focused on finding the right DSO platform.”

Will there also be an expansion of smaller, perhaps newly established DSOs funded by private equity?

With so much interest in the DSO space, in general, there are multiple parties still looking to replicate the success of other private equity firm investments and DSO platforms. Many private equity firms with no prior dental experience are still very focused on finding the right DSO platform or developing their own to see successful returns.

So smaller DSOs are a way in for these firms?

A less expensive entry into the DSO space for some private equity firms will definitely center around a strategy of scaling from a smaller platform.

You can look at the success of Smile Doctors, which Thurston Group grew from a handful of orthodontic locations to more than 100 practices as a path that some private equity firms will look to as an excellent opportunity to scale.

Taken a step further, with Linden Capital Partners now the lead investor in Smile Doctors, they will look to continue scaling this now more established DSO via further acquisitions. So we will see some private equity firms that focus on building off a small DSO platform to ultimately exit their investment to another firm, which will then commit more capital and look to have significant additional growth of the business.

Is there a point at which a DSO can be too big? Once a DSO reaches the level of 700 or 900 practices, does it become too unwieldy to manage effectively?

As DSOs continue to expand, the management team must be adept at addressing the operational needs to support this growth. When a DSO has several hundred locations, this requires an experienced team that is adept at addressing issues at a practice level even though a given location may represent only a small fraction of the overall business. The corporate office needs to be able to successfully handle the demands of supporting additional sites, including billing, IT, human resources, and accounting considerations.

How do you address that if you are the management team? The development of strong regional teams can be one method to ensure the daily operations can continue to function at a high level and that any issues are readily addressed. If the organization is prepared and able to address this growth, there is no reason that expansion cannot continue indefinitely.

However, the one area that becomes increasingly challenging with size is culture. How does a group that has grown from a few dozen locations to several hundred maintain a consistent culture and sense of pride in the business?

Particularly when growing via acquisition, the consistency of culture becomes that much more difficult to manage. DSOs that have strong implementation processes and leadership will be able to quickly foster a positive work environment with new team members and locations.

In your column from April 2018, you brought up the idea of a "mega-DSO" merger. Is such a transaction still possible or likely?

As DSOs get larger, the potential group of private equity firms or strategic buyers (that is, existing DSOs) that can acquire these becomes more limited as not every firm has enough capital to afford the investment. However, there are still several extremely well-capitalized major firms that can look to add substantial DSO investments.

With Heartland Dental and Aspen Dental having such large footprints, other DSOs and their investors will continue to look to scale up. It's not hard to imagine that at some point a private equity firm with a group of more than 200 locations will look to acquire another business of similar size. Consider groups like Western Dental with 300 locations and Great Expressions Dental Centers, also with 300 locations. If Roark Capital Group (which owns Great Expressions), New Mountain Capital (which owns Western Dental), or another private equity firm were to combine these groups, you would have a 600-plus-location business in 11 states from coast to coast.

This would create a massive business, but it would still be smaller than Heartland or Aspen, which makes a mega-DSO merger such as this seem possible. When you consider that there are numerous DSOs with more than 100 locations, the potential seems even that much more likely that a mega-DSO merger will happen within the next 24 months as groups continue to jockey for market strength and ultimately higher multiples and valuations.


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