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Selling Smart: The Return(s) of DSOs in 2024

Current State of the Market:

Although activity in Dental M&A markets has slowed over the last 18 months. TUSK completed more transactions in 2023 than in 2022. Our clients continud to see very high valuations for their business amidst market headwinds. The interest rate environment has drastically shifted the buyside environment from its recent peak in 2021.  Getting deals done has become more complicated than ever, however, with the right experience and a broad and competitive buyer pool, deals are still able to get done that both buyers and sellers are excited about.

From a sell-side perspective the number of inbound calls from doctors/owners has NOT slowed down!  The common threads we continue to hear are that employee retention, wages, supply costs, general administrative tasks and technology costs continue to create headwinds to maintain profitability and overall growth.  Many dental practice owners are reaching out because they have heard that DSOs solve for some or all these pain points but want to know more about what a partnership with a DSO could look like.

DSOs were specifically designed to streamline dental practice operations by offering business support, economies of scale, professional development, marketing, technology integration expertise and collaborative opportunities that incentivize growth.  By doing so DSOs are able to produce more efficient and profitable businesses that produce economic returns to investors and partner doctors.  As such they have become more and more attractive to sellers that are feeling fatigue from the current operational environment.

What to expect from DSOs in 2024: The Good News

TUSK has recently connected with several of the top Investment Banks that work in the DSO space. Specifically, their role is much like TUSKs in that they represent PE-backed DSO that are looking to sell to the next PE sponsor who will take them into their next phase of growth.  When a DSO sells to another DSO it is called a recapitalization event or “recap”, this typically occurs every 3-6 years.  Why do recap events happen?  Recaps happen when current PE sponsor achieves its growth goals, and it is ready to liquidate its position and return dollars to their investors and partner doctors. The top investment banks that TUSK spoke with indicated that the second half of 2024 will be a very active time for them and that there will be a number of large DSOs recapping.  This is great overall news for the market because it validates that DSOs do in fact create value in the industry and return equity to investors and partner doctors.

What does this mean to a doctor that has not affiliated with a DSO? 

TUSK prides itself on bringing the entire spectrum of buyers to our clients through our marketed sales process.  The spectrum of deals will include some groups that recently recapped, some that are about to recap and others that might just be getting started.  We walk our clients through the pros and cons of each of the DSOs, their offers and their corresponding equity to ensure our client makes the best decision for the future of their business.

Partnering with a recently recapped DSO:

  • Pros: Sign of a well-run, stable company, that produced a return and liquidity to investors and partner doctors. Overall sign lower risk equity.
  • Cons: Once a group has gone through a recap or several the upside on the return is likely less than a new start up. You will likely have to wait 3-5 years for the next recap event.

Partnering with a DSO about to recap:

  • Pros: High likelihood of a return on your equity. You get a greater portion of your proceeds in cash earlier in a cycle.
  • Cons: The return on equity will likely be at a lower return than the doctors that partnered earlier in the cycle because they have more time for the equity to grow.

Partnering with a brand-new DSO:

  • Pros: You can get “ground floor” equity that has a very high upside at a recap event.
  • Cons: These are riskier investments because there is a great deal of work and skill that goes into starting a DSO and getting it to its first recap event.

The Point Of It All

 Diverse DSO partnering options, each with unique benefits, promise a dynamic second half of 2024 for dental practice acquisitions. DSOs are looking to make up ground from market headwinds in 2023. To take advantage of this opportunity, you must take steps to prepare your business for partnership in the coming months. TUSK is by your side and can help guide you through choosing the right partner for your practice at the highest price.

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