How Can DSOs Be So Competitive and Still Profitable?
The DSO model of operating dental practices has some unique benefits.
In this article we’ll describe some of those differences and show how they are advantageous compared to the traditional model.
As DSOs continue to grow in importance, it’s worth considering the impact they will have on the industry.
Private equity financed, No debt
One of the primary advantages of DSOs is that they are private equity financed and do not rely on leveraging debt.
Most DSOs do not rely on bank loans for financing. This means they do not have to contend with market conditions that make lenders dry up in adverse economic circumstances.
They are private equity financed and have virtually unlimited capital to put into worthy investments.
DSOs have highly developed methods of evaluating practices for profitability.
Therefore, they can be very willing to invest handsomely in acquisitions that fit their model of operation.
Since DSOs use the Multiple-of-Profit valuation model (link to Article 2), they are willing and able to pay much more for profitable practices than other doctors, their traditional acquisition competitor.
Their motivation is to generate an investment return for the investors in their fund.
There are two primary models that DSOs use to operate.
One is the acquisition or affiliation model.
In this model DSOs partner or acquire an existing practices and keep all of the existing branding. This is the most common operating model.
This is so that they can keep all of the existing identity and goodwill the dentist has built up over the years with their community.
The second is the de novo (built from scratch) branded model. It is less common than the first.
This method is basically a retail strategy similar to the Gap or the Apple store. The operator identifies desirable markets and develops a new location in that market from scratch.
All of the practices operate under the same brand and pursue an aggressive direct to consumer marketing strategy.
Operational Expertise Makes Each Location Much More Profitable
One of the main competitive advantages DSOs leverage is that of operational expertise.
They are able to use many optimization strategies to increase the value and profitability of already-profitable practices.
These have a compounding effect and can produce a return on investment within just 3-5 years, even after paying the owner for acquisition.
If a dentist owns equity in the practice they can share in these profits yet again after receiving their initial buy-out price from the DSO.
For example, driving new patient acquisition is the primary focus for many dentists. However, it’s just one part of making a practice more profitable. A practice can be made much more profitable by retaining existing customers for a longer period of time or by offering additional services on-site that increase average patient value.
Some other ways DSOs increase the value of a practice include:
- Increasing capacity through buying more equipment or remodeling
- Developing and retaining more top talent
- Improved accounting practices
- Reducing expenses of supplies
… and many other factors add up and compound to produce good returns for investors.
Many of these advantages are only available for those who are willing to wait for those investments to produce a return. Private equity fills this gap.
For solo owners who rely on bank financing, it can be difficult to acquire the capital necessary to make these investments.
Each improvement also increases the complexity of a practice and that requires different management skills to keep everything running smoothly.
As traditional investments such as stocks and bonds lose their luster, capital is increasingly being attracted to the dental industry.
This is how the DSO model is transforming the dental profession while increasing market competitiveness, profitability, and clinical capabilities.