Doctors with an entrepreneurial mindset are always looking for opportunities to grow their practice. Some will go the traditional route, using bank financing to open new locations or acquire practices, perhaps with a goal of building their own dental service organization (DSO). Others will seek a strategic partnership with an established DSO instead.
Your best path forward depends on your goals, but it’s important to understand that the industry’s current status on the consolidation curve gives you a unique opportunity — one that won’t last forever. Here’s a closer look at how the dental industry’s equity arbitrage market is evolving and what it means for you.
Understand Dental Industry Consolidation
Looking at how equity arbitrage transformed medical marketplaces in the past is instructive: Harvard Business Review analyses show that about 60% of providers participate while 40% do not. The participation rate is consistent across fields.
Industry consolidations are a one-time opportunity, so it’s critical to understand the consolidation curve so you can leverage it to drive growth. Any doctor who will be practicing over the next three to five years, regardless of age, has an opportunity right now to participate in an equity arbitrage consolidation market.
About 40% of dentists won’t participate — they’ll open a dental office, serve their communities and eventually sell their practice for 60% to 80% of collections, which is what most dentists did 10 years ago. Others plan to grow solo practices on their own and eventually sell the organization they’ve built to a DSO.
But if you own multiple practices or are planning on growing with new locations, you can participate in equity arbitrage events via a sub-DSO strategy now, leveraging the growth of your practice footprint as an investment vehicle. It’s a smart move because the growth trajectory of a solo practice will never outpace the growth of equity value in a group of practices.
Use a Sub-DSO as a Wealth-Building Tool
A sub-DSO arrangement gives practice owners access to wealth-building opportunities in the equity arbitrage consolidation marketplace without taking on the risks of growing a practice by traditional means. In a sub-DSO, the practice owner transacts their business for a large upfront payment and typically retains a percentage of ownership. The equity isn’t held at the DSO or practice level – it exists in a holding space that allows room for expansion.
This can be a huge advantage for practice owners. There’s a saying in the dental practice startup sector: Operating one practice is easy, two is taxing, and three is make-or-break. That’s because it’s difficult to acquire and centralize the infrastructure and expertise you need to support additional practices, such as acumen in marketing, credentialing, hiring and firing, accounting, etc.
If you choose to partner with a DSO, you won’t have to face those headwinds alone. A strategic partner can remove risk and help shoulder the cost of growth because they already have the administrative infrastructure in place. You can plug into it and grow exponentially as a majority or minority partner and owner/operator of a sub-DSO.
Professional Transition Strategies (PTS), a company that facilitates dental practice purchases and mergers & acquisitions, today announced it was included in Inc. Magazine’s annual Inc. 5000 list for the fourth consecutive year. PTS ranks #1487 with a three-year revenue growth of 317%.
“Receiving recognition from a distinguished program like the Inc. 5000 for the fourth year in a row validates the effort and expertise our team brings to the table for dental entrepreneurs as they navigate the industry’s consolidation wave. I’m so proud to have this team represent and grow our company,” said Kyle Francis, president and founder of PTS.
The 2023 honorees represent companies that have driven rapid revenue growth despite facing hurdles like inflationary pressure and the rising costs of capital.
“Running a business has only gotten harder since the end of the pandemic,” says Inc. editor-in-chief Scott Omelianuk. “To make the Inc. 5000—with the fast growth that requires—is truly an accomplishment. Inc. is thrilled to honor the companies that are building our future.”
One of the best parts of being a dental practice broker is that I’m given a unique line of sight into new trends in the industry. Something that we’ve been noticing at Professional Transition Strategies (PTS) is that the average age of dental entrepreneurs selling their practice is getting significantly younger.
In fact, most doctors we worked with before the pandemic ranged from 55 to 58 years old, as many of them were gearing up for retirement. Now, the average age of a dentist selling their practice with us is down to 44 years old. And we suspect this is a phenomenon happening all around the country.
So, what’s causing this huge drop in age?
There are a couple factors at play, but it comes down to two major components: the industry’s consolidation wave and the fallout from the pandemic. The sweeping consolidation happening across the industry is highlighting new opportunities for dentists – and many are taking advantage of them. Coming out of the pandemic, many businesses and industries reshuffled their operations which lends itself to changes in dentistry.
Here’s a closer look at why younger dental practice owners are choosing to sell their practice sooner rather than later.
Consolidation Gives Way to Equity Arbitrage Opportunities
As dentistry is undergoing industry consolidation, it’s given rise to many new financial opportunities for dentists, which contributes to this trend. Private equity backed dental service organizations (DSOs) provide an alternative to traditional partnerships. In the past, many dental entrepreneurs on their path toward retirement would bring in an associate to take over after they stepped away; however, associateships have an extremely low success rate, making them an undesirable route for many.
Dentists and all other types of healthcare providers who operate one or more offices as a business will reach a point when it’s time to make a career transition. It could be because a dentist with a solo practice wants to sell the business and retire. Or maybe a dentist wants to expand into new locations, join a dental group through a merger or acquisition deal or sell the practice to a dental service organization (DSO).
In every case, the actions the dentist takes prior to the transition will ultimately affect the outcome by creating or losing practice value. The value of a dental practice is always in motion; it is either gaining or declining in value, never static. So, to enter a transition period in a position of financial strength, dentists need to identify a practice transition timeline and maximize practice value at the right time. Here are some factors to consider to build value.
Optimize Your Practice With Greater Productivity
Increasing practice productivity is one way to add value, and there are two ways to do it: Welcome new patients to the practice or offer more services to existing patients. Whether you intend to scale up by expanding to new locations or are looking to improve practice value, it’s critical to optimize efficiency at your current location before taking any other steps. Your choices for optimization will depend to some extent on your current physical facility.
Your location’s size, layout and diagnosis infrastructure like CAD/CAM, lasers, radiography, etc., are relevant because in theory, a practice that focuses mainly on preventive dentistry needs two full-time hygienists to drive demand for restorative work. In a solo practice, five operatories are ideal because they allow the dentist and hygienists to take care of scheduled patients and have room to manage emergencies, overflow whitening, walk-ins, etc.
The average facility varies by region, but generally speaking, if you add professionals (dentists or hygienists), you must have the infrastructure in place to support their work. If that’s not possible in your current location, you can either upgrade the current infrastructure by expanding the facility or adding office hours to offer more appointments (early or late weekday hours, weekend hours, etc.).
Find the Right Work-Life Balance
Another factor to consider when thinking about ways to maximize practice value is that some choices entail trade-offs that can affect your work-life balance. For example, if you add professionals to your team and/or expand into new locations, you’ll spend more time managing people and facilities. It’s important to make sure you’re okay with that by identifying your personal quality-of-care threshold and being mindful of it while making decisions.
Some highly successful practices are owned and managed by dentists who willingly accept a higher level of fixed overhead in exchange for more personal time. Some extend their reach by adding partners, hiring more support staff and/or keeping longer office hours so they can work shorter shifts to have more family time. It can work well if everyone agrees on the priorities.
The bottom line is that each dentist needs to find their own equilibrium, and many factors are critical in finding that balance, including the number of people you manage and the types of procedures you perform. The practice will require capacity to achieve the right balance, so identify your comfort level and act accordingly.
Professional Transition Strategies
