By Troy Jones, M&A Advisor, Professional Transition Strategies.
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.
That’s where DSOs come in. They offer an array of options for doctors selling their practice, including cash up front for the sale or even an equity stake. Those equity stakes can yield an average return of 60-80% on a two to five-year time horizon for a recapitalization event. Equity arbitrage opportunities like this are especially appealing to young dentists who want to build generational wealth since the industry will likely see more recapitalization events similar to the previous example over the next five to 10 years as consolidation continues.
So, why are private equity groups so gung ho about investing in dentistry? They see the industry’s value and resilience. And, as more and more dentists hear about friends and colleagues receiving DSOs offers that many individual dentists can’t replicate, they’re curious about the value of their practice.
The Pandemic Caused Major Shifts in How The Industry Operates
Not only did the pandemic disrupt our way of life, but it also had a major hand in reshaping dentistry. Despite many uncertainties caused by lockdowns and fear of the pandemic’s fallout, the industry proved to be resilient. In fact, most practice rebounded back from the lockdowns with some of their best numbers ever in 2021.
Although the bottom lines for many dental practices bounced back nicely, labor shortages are still taking a huge toll on them today. Data from the Journal of Dental Hygiene shows that one in 12 hygienists were ushered out of dentistry during the pandemic. With fewer hygienists available, many dentists have been scrambling to replace them or even performing those duties themselves, which cuts into their time working with patients and handling other practice responsibilities.
Speaking of those other responsibilities, many dentists often enter the field because they want to prioritize patient care – not the administrative aspects of operating a practice. The pandemic only exacerbated this by making the business side of owning a practice all the more challenging. Since younger dentists often carry higher study loan debts than their counterparts closer to retirement age, it’s enticing for these folks to offload these administrative hassles onto DSOs.
What’s Next for the Industry
Although we’re currently facing economic uncertainty, private equity interest and investments in the sector are growing. The industry is about 40% consolidated at this point, and it’s expected to increase over the next five to 10 years. Not only that, but more DSOs are cropping up. This benefits doctors because DSOs must be much more competitive to attract sellers, which can tee up many dental entrepreneurs with impressive equity arbitrage opportunities.
It’s always important to remember that not all DSOs are the same, but many focus on business administration. It’s also imperative that they generate value for their doctors because they rely on dentists to handle many of the clinical operations. This symbiotic relationship works for many doctors who want to work with patients, but don’t want the added stress of managerial tasks like HR, marketing, etc.
If you’re interested in exploring a practice transition or learning more about the options available, the best first step is to get a valuation of your practice. Also, it’s immensely helpful to work with an experienced dental practice broker you trust to lay out what your practice’s value is and your transition opportunities. Even if the time isn’t right to sell, it’s always best to know your options.