Dental Practice Reporter

By Davis Householder, Managing Director, MycoManagement.

From an investment perspective, the dental industry checks every box on the private equity (PE) wishlist. It’s a recession-resistant business with recurring revenue that can’t be automated or offshored. As the industry is still fairly fragmented with a high percentage of independent offices and new dentists graduating each year looking to enter a sector that’s becoming increasingly burdened by rising compliance and overhead costs, there’s a large pool of individuals who are willing to join a dental support organization (DSO). By doing so, they trade some control and potentially ownership, ideally for comprehensive administrative and business support, while also benefiting from the costs the DSO affords them via economies of scale.

As a result of these factors, PE capital in the dental sector has never been louder. Over 161 PE deals occurred in 2024, which was higher than those in any other healthcare industry. Looking at the trends, it seems as though these deals will continue to increase before an eventual drop-off when the DSOs themselves form into the final stop in the pipeline for dental professionals rather than independent practice ownership, as was the norm just a few decades ago.

But does the ready availability of both capital and a source of support mean dentists should be quick to accept PE offers? The answer to that question is complicated and requires an understanding of how working with or being owned by a PE firm can impact the sale of a dental practice and what the individual dentist’s goals are.

How does selling a DSO owned by private equity compare to selling an individual practice?

When it’s time to sell a dental practice, the practice owner has a variety of options. In the past, selling a practice used to be a pretty informal process, and oftentimes the original owner would just hand off their practice to a younger dentist they’ve been working with, like someone in the family. Though that’s changed in more recent years as dentists and other professional service-based business owners have come to realize they can affix a dollar amount to the relationships they have with their patients or clients.

But when it comes to potential buyers, a PE-owned DSO will generally offer a higher headline number than another individual practice owner or small dentist group can. However, with a DSO sale, translating that headline number to the true value of the sale is complicated.

Taken to the next level, the scale achieved by a large DSO with a proven track record will always drive a higher sales multiple than a single practice run by your local dentist. An individual practice can change hands at around five to eight times its earnings before interest, taxes, depreciation, and amortization (EBITDA), whereas a DSO platform can go for nine to 15 times EBITDA or more.

While the bump a DSO brings can be enticing for a dentist, the reality is that the spread between the individual practice multiple (i.e., the ROI the individual dentist actually sees) and the DSO multiple ends up being the arbitrage the PE firm is counting on capturing and earning when it eventually sells the assembled group.

The selling dentist does share somewhat in that upside, but only if they rolled equity, and then only as a minority owner if they have any ownership at all. In most modern DSO structures, it has become very commonplace for the more financially savvy PE-owned DSOs to deny or sidestep the question of equity or actual ownership at all when they’re negotiating against individuals trained in a medical field.

How does the sales structure impact the payout a dentist receives?

The key to determining the value of a PE deal is understanding the structure underneath the price that establishes equity and related factors. In most cases, that structure is more important than the actual price itself, as it determines the amount the seller will actually hold in their hands versus something just written in a contract.

When a sale takes place, the closing cash is the only guaranteed amount. The rest of the value is an earnout tied to future performance and, potentially, equity rolled into the platform. This rollover is where the real risk lives for both the buyer and the seller.

The first factor to consider is that the earnout and equity are illiquid for years, which can be problematic for dentists who want to leverage a large payout to fund a quick transition into a post-practice life.

Dentists also need to consider that the value of the earnout and equity depends on how the entire DSO platform, not just the individual practice they sold, performs post-close since equity is tied to the buying entity as a whole rather than their singular operation. With that type of structure, the seller’s equity sits behind the buyer’s preferred shares, meaning the seller is only paid after the buyer.

Consequently, if the platform underperforms or fails altogether, any payouts that come after the closing can end up being a fraction of what was modeled, or potentially nothing at all.

Overall, dentists will find that a PE buyer tends to offer the highest price, but the advertised multiple is part headline and part illusion. A portion of it may depend on certain contingencies or cash that won’t be accessible for years. In certain structures, none of the portion ever reaches the dentist and is instead rerouted to the PE-owned platform.

Because of the complications of the structure, assuming the highest offer is also the best offer can be a big mistake. Finding a solid deal requires reading past the illustrative example laid out at the start and digging into the material legalese, as the structure dictates what ultimately ends up in the dentist’s wallet. In certain cases, multiples advertised on the front end may as well be vanity plates.

Which dentists benefit most from selling to private equity?

Private equity deals typically work best for dentists who have built a strong practice and are willing to continue building it for a period after the sale closes. Those are the conditions that attract PE-owned DSOs and lead to the biggest payout.

A PE-backed deal can be excellent for dentists with larger practices who are willing to keep working for several years and want both a payout now and a shot at a bigger one later. That type of deal will typically benefit a younger dentist more than an older one. A dentist in their forties has time to wait out the platform’s eventual sale, while a dentist in their sixties who wants a clean break and the money in hand is usually better served selling to another dentist.

Those who are solo practitioners below the size that draws a competitive process will often find a PE deal works against them. Because there is no real bidding or platform multiple in play, these dentists will be forced to accept a lower number, sign a non-compete, become an employee, and collect none of the premium that made private equity attractive in the first place. For dentists in this position, a straight sale to another dentist is simpler, cleaner, and better.

In the end, however, even optimal conditions can fail to deliver an optimal outcome if the structure of the sale is heavily tilted toward the buyer. Regardless of how perfect a practice appears for a PE offer, dentists need to know what they are actually locking in at closing, what is truly at risk on the back end, and whether they can trust the particular buyer to deliver the future payout they are counting on.

Get those answers right, and private equity can provide a great outcome. But get them wrong, and the headline multiple was just bait. The biggest number is not the same as the best deal. Confusing the two is the most expensive mistake a dentist can make.