Dentistry Market Disruption - The Reasons Why

There is a massive disruptive change hitting the dental profession NOW.

Dental Service Organizations are making their mark and transforming the industry by buying many practices and changing the way practices operate.

In short, competition is increasing as DSOs leverage their deep capital-rich pockets to invest in operational advantages that are challenging the way solo practice owners do business.

At the same time, the profile of a young dentist is changing. Many young doctors are opting not to leverage debt to buy their own fledgling practice outright. 

This means that the traditional buyer of doctor-owned practices is disappearing just a new type of investor is stepping in.

DSOs are here to stay - This article will explain in broad strokes what this means for the dental profession.

You will also see why you may want to work with DSOs and the unique advantages of doing so.

At this time, there are only two types of buyers in the market: DSOs and Doctors

DSOs are able to pay much more to acquire a practice than doctors, the traditional buyers. The reasons for this will be explained now.

Typically, any doctor wishing to buy a practice will have to borrow from a bank. 

Any bank has limits on how much they are willing to offer a single lender, like a doctor. 

On top of that, they will ask for collateral in the form of business assets.

In today’s environment, banks are willing to loan 60-80% of top line revenue to a credit-worthy borrower.  (The exceptions to this range are very rare.)

What this means is that in the case of doctor-to-doctor transactions, the ultimate limit to this type of transaction is how much a bank will loan.

This is one of the main challenges of selling a practice today and why DSOs are stepping in.

While the traditional buyer of practices is declining in number and purchasing power, a new type of buyer is stepping in and filling the gap.

In contrast, DSOs can pay more for practices than a traditional doctor to doctor transaction because they do not need to borrow money from a bank. They have all the capital they need.

They have capital and use a different valuation formula and can pay more as a result.

They don’t have to deal with banks and therefore are virtually unlimited in how much they are willing to pay as long as a practice is profitable enough.

They use a Multiple-of-Profit Valuation Model and will pay a multiple of the final profit margin a dental practice produces. 

This means a DSO could be willing to pay 2-4 times of your top line profit!

Contrast that with the up-to-80% a doctor-to-doctor transaction can generate and you can understand why many dentists choose to affiliate with or sell to DSOs.

More capital than ever seeking profitable investments

More and more capital is coming online as an entire generation of  Boomers retire who are seeking high-yield, low-risk investments.

Dental practices are seen as ideal investments in this regard with a massive growth potential as individual offices are made more profitable.

These types of businesses are seen as an ongoing enterprise that will bring in long term cash flow from the perspective of the investors.

There are less traditional buyers of practices now as less young dentists are able to afford the debt necessary to buy a practice.

Dental education is too expensive for young dentists to take on the additional debt necessary to purchase a practice.

More and more dentists are female and on average they tend to work part-time and are not interested in owning a practice outright.

DSOs have the expertise to grow a successful practice even more by improving operations, training, accounting, etc. Expertise that a solo dentist practice owner does not have.

What this means for you

As a dentist and practice owner your options for retirement, exiting the business, and building even more wealth will be affected by the increasing role of DSOs.

Even if you never plan to sell, understanding the operational expertise a DSO can bring to your local market means having a long-term strategic plan is more important than ever.

However, for those willing to consider a partnership this would present a unique opportunity to sell for a much higher than expected return. 

It also means a new set of challenges in preparing to deal with a new type of partner with different expectations and capabilities.