How You Can Make Massive Profits from the Dental Market Disruption

There is a major event that is permanently transforming the dental profession.

The Dental Market Disruption is upon us and the reasons why can be shocking and surprising.

If you are a dentist this will definitely affect you…

… Because the root cause is a fundamental shift in the economy that is dramatically increasing the value of dental practices.

Today, approximately 18-20% of dental practices are affiliated with a DSO. 

Some trade insiders predict that by the year 2025 that percentage will grow to 50-65%.

At the same time, the traditional buyer (and founder) of dental practices is changing to favor DSOs.

There is a growing pool of potential sellers while potential buyers are getting fewer and fewer.

In turn, DSOs are transforming to best meet the market’s dentistry needs and provide higher levels of service while retaining the positive aspects of doctor-owned practices.

Many dentists are also seeking to partner with someone that can provide operational support and expertise to help them grow their practice and access capital.

If you own a dental practice then this will have huge implications for your future as a dentist and business owner.

Each section below links to a separate article that goes into greater detail:

• Dentistry Market Disruption - The Reasons Why
• How much is your dental practice worth?
• How Can DSOs Be So Competitive and Still Profitable?
• What kind of dentists DSOs want to work with

Dentistry Market Disruption - The Reasons Why

Dental Service Organizations (DSOs) are rapidly transforming dentistry at an increasing pace. 

At the same time, new dentists entering the profession are choosing not to start their own practice.

There are two main reasons for this:

• Private equity / capital sees dentistry as a low-risk business model that produces substantial profits on a consistent basis
  
  
• New dentists are choosing to forgo the additional debt required to invest in a new practice. According to the American Dental Education Association, 2019 dental school grads finished with an average of $284,000 in educational debt.

The stock market and traditional investments have been losing their appeal for investors.

As such, investors are choosing to put their capital into profitable and low-risk businesses such as dental practices.

DSOs have developed to meet the need of investors who want to earn a return on their capital through actively managed businesses.

The capital for such investments is virtually limitless for high-profit practices that are well-managed and in a good location.

That means they value a practice based on how much profit a location can produce over the long-term.

Compared to traditional investments, the profit margin is a lot higher for lower risk. Therefore, DSOs continue to grow as they attract more and more capital from investors.

In contrast, dentists are choosing not to invest in their own practice because they already have high student loan debt.

Many would prefer the stability and predictability of a salary, rather than the responsibilities of managing and running a business.

Additionally, about 50% of new dentists graduating are female. On average, they are statistically more likely to work part time and less likely to opt for practice ownership.

DSOs are now firmly established as an attractive model for investors and consumers. As more and more capital floods the market, investors will be seeking a good place to put their money.

DSOs are predicted to take up an increasing share of the dental marketplace as a result. 

They are looking to grow and acquire as many profitable practices as possible so they can leverage their operational advantages for maximum return.

Click here for more detail on this topic: Dentistry Market Disruption - The Reasons Why

How much is your dental practice worth?

Now that we know the forces at work, let’s discuss how much your practice could be worth. 

There are multiple factors at play, the most important being profitability.

Valuation is largely based on who is looking to buy. This will play a big part in how much you can potentially get.

There are TWO main types of buyers:

Dentists: Who are starting their own practice, or growing their own

DSOs: Dental Service Organizations who want to operate your business as an investment

Dentists who buy will usually need to take out a bank loan. 

That means the bank must qualify them based on credit-worthiness, collateral available, and other factors.

This means dentists purchasing power is limited by the amount of capital a bank will lend them.

According to the last 20 years of data, a dentist can pay up to 60-80% of top line revenue.

DSOs use a Multiple-of-Profit valuation model because they don't need to borrow money from a bank. In essence, they have virtually unlimited capital to use for profitable investments.

Even more capital is expected to become available in the next several years as an increasing number of investors seek low-risk investment options.

DSOs can pay up to 2-3x yearly profit for the right kind of practice. They are usually interested in medium-sized and large practices that earn over $2 million a year in revenue. Larger, multi-location practices are also very desirable.

Other factors include:

• Location - Proximity to a sizeable population and access to services
• Profitability
• Size - Multi-site businesses are preferred
• Integration of systems - How well the business is operated and integrated with other locations
• Connection to the community - Practices with a good reputation are valued for the connection patients have with their doctor
• Professional culture of the practice

Click here for more detail on this topic: How much is your dental practice worth?

3 - How Can DSOs Be So Competitive and Still Profitable?

By now you may be wondering how DSOs can be so attractive in the marketplace and yet remain profitable.

There are many advantages that are unique for this model that contrast with the traditional way a doctor-owned practice operates.

Typically, a doctor-owner also practices dentistry in the location they own. This gives them a front-row seat to the operations of the business.

While they earn from their clinical skills, they must also contend with the challenges of running a business.

The primary disadvantage is that a dentist also has to face competing interests that take away from earning money chairside.

Issues such as developing marketing campaigns, administration, accounting, and personnel issues such as training and dealing with office politics.

This can mean a lot of headaches and distractions for a dentist who simply wants to focus on treating as many patients as possible.

It also means that many opportunities to optimize the operation of the business are ignored.

A doctor-owned practice will also miss opportunities due to lack of capital. It may be advantageous to invest in a new location, new equipment, or training for their staff, but many doctors would be unable or unwilling to take out the bank loans necessary.

DSOs are not limited by the same capital constraints as doctor-owned practices. They can invest in improvements and optimizations that will be profitable in the long-term.

Simply put, the access to capital and improved business processes results in lower costs and higher profits for DSO-affiliated practices.

As DSOs continue to grow in size their impact on the market will be felt as dentistry becomes more competitive.

Click here for more detail on this topic: How Can DSOs Be So Competitive and Still Profitable?

What kind of dentists DSOs want to work with

When the DSO trend was starting a natural partnership developed between dentists approaching retirement.

As mentioned before, the growth trend of corporate dentistry is accelerating and the scope of dentists DSOs work with is expanding.

There is an enormous demand from DSOs to acquire and work with as many profitable practices as possible.

This does not necessarily mean a decrease in quality from the patient’s perspective, either. In fact, competitiveness is increasing as practices maximize the quality and services offered.

So what kind of practices do DSOs want to work with?

Many DSOs will partner with doctors and keep them in the business to continue to earn a salary and a percentage of profits after a sale has taken place. However, this is optional and not all dentists choose to stay in clinical practice.

DSOs tend to favor medium to large practices that produce a minimum of $1 to $2 million in revenue per year.

These tend to be multi-doctor practices with a minimum of six to seven chairs. However, staff sizes can vary since practices may offer a wide variety of services.

There isn’t a cut and dry specification, simply parameters that DSOs prefer to work within. This guides their search for profitable investments.

Currently, there are more and more sellers of dental practices but a shrinking pool of potential buyers.

This allows DSOs to have a good choice of potential investments, even though they are strongly motivated to grow.

They are in the business of acquiring and optimizing practices and are buying practices daily.

As such, many DSOs would prefer to work with a dentist who appreciates and values the operational expertise and capital that can be leveraged for even more growth.

It is common for dentists to retain equity and a percentage of profits. The doctor may choose to continue to work and earn an income from their clinical skills, even though it’s not always required.

Click here for more detail on this topic: Types of dentists DSOs want to work with