After a slow 2022 driven by increased interest rates, we experienced some normalization in Dental M&A in 2023.  Here are four trends from 2023 that will impact 2024 deal activity:

• Significant Portion of Buyside Remains “Pencils Down”
• New Platforms Being Formed to Replace Nonactive Buyers
• Buyside is Being Much More Selective
• Deal Structures Vary Widely

A substantial portion of the Buy-side Remains “Pencils Down.”

As much as 40% of the buyside went pencils down on M&A in the second half of 2022 and remained pencils down through the first half of 2023.  These groups decided to focus on organic growth while interest rates rose.  Their stated goal was to allow for the debt markets to settle and then ramp up M&A with a solid business in place that showed a track record of strong integration and financial performance.  Interest rates continued to rise in 2023, keeping most groups that went pencils down on the sidelines.  Most of the market believes that interest rates are beginning to settle, which has generated inbound inquiries to TUSK from groups that went pencils down.  Many conversations with these buyers have indicated they are ready to reengage in M&A by the end of 2023.

New Platforms Being Formed to Replace Nonactive Buyers!

Dental continues to attract TONS of interest from Private Equity Groups (PEGs)!  TUSK takes a handful of inbound calls every week from PEGs that want to enter Dental OR have recently created a new DSO through a significant acquisition and are now looking to be aggressive in the M&A space.  These groups have allowed TUSK’s clients the unique opportunity to join a group on the ground floor and benefit from a meaningful “second bite of the apple.”  There are, however, pros and cons of working with new groups because the risk profile of the equity roll can vary greatly.  We utilize our entire network to vet new buyers and help our clients make the RIGHT decision based on all available information.

Buyside is Being Much More Selective

Buyers active in M&A have become very pointed in their assessment of the assets they are looking to acquire.  Diligence lists have grown longer, and investment committees are taking a much deeper look than before.  In addition to diving deeper into the financial and practice management system data, they also look at fit and integration risk.  Buyers are focused on how each acquisition will be additive from a strategic perspective and what is the downside risk if we don’t integrate the business effectively.  TUSK focuses on understanding what each buyer is looking for from a target acquisition profile perspective and how each client works with their strategy.  This approach is excellent for the Dental industry because buyers are focused on building partnerships that generate organic growth post-close rather than just aggregating EBITDA.

Deal Structures Vary Widely

As the cost of debt increased for buyers, it was only a matter of time before historical deal structures/ valuations were impacted.  The groups that have remained active in M&A have taken a wide-ranging approach to changing their deal structures to account for higher interest rates on the debt they use to finance their deals while also making attractive offers to sellers.  Buyers know that sellers are acutely aware of the “multiple” they receive, and because of this, buyers have had to change the structure of their deals to keep multiples at the same level.  We have seen buyers introduce unfavorable elements in their deal to “window dress it” and save the stated multiple attractive.  TUSK must go broader than ever to bring a wide range of buyers to the table, make the process competitive, and for our clients to obtain the best deal terms possible.

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Summary

DSOs were built with lofty growth targets in mind.  Buyers cannot sit on the sidelines forever and hope that organic growth meets the annual growth targets they have set for themselves.  Now that interest rates appear to be settling, we expect M&A to pick up by Q2 of 2024 and that the second half of the year will be similar to 2021, which was the height of Dental M&A activity.  New groups are being formed each month and having an expert that can navigate a process of exploring EVERYTHING the market has to offer as a seller. If you’re looking to explore a transition in the next 12-24 months, you must start the preparation process now. If you’re wondering where your practice’s value stands today in preparation for the upcoming market conditions, don’t hesitate to pick up the phone and call TUSK. Contacting us today helps ensure that you exit at the top and maximize the value of your life’s work.