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In a recent episode of Beyond the Operatory by Dental City, Brian Colao, Director of the DSO Industry Group at Dykema, explained the macroeconomic forces currently shaping the DSO M&A space.
The conversation draws on his decades of experience advising middle-market dental transactions and paints a thorough picture of the most critical drivers of transactions (or lack-there-of) taking place today. We are sharing impactful insights from the episode for Group Dentistry Now to continue educating on this topic that is relevant to so many of us.
2025’s “Failure to Launch” Shapes 2026’s Slow Recovery
2025 was set to be a strong recovery year with lower interest rates, declining inflation and geopolitical stabilization. And then it wasn’t.
Instead, interest rates stayed mostly flat while inflation remained stubbornly high, and global conflicts added to the uncertainty. This all contributed to what Colao refers to as the “great M&A drought” as transaction activity overall remained low.
With last year not playing out as predicted, Colao expresses cautious optimism for 2026 but still expects the recovery to be gradual. Interest rates are slowly declining, and inflation appears to be stabilizing, paving the way for a “few players getting back in the [transaction] pool at a time”. This will likely lead to a slow and steady increase in activity starting now and continuing through 2027 and 2028.
Cost of Capital & Valuations – a New Reality
During the peak DSO M&A years (2019–2021), historically low interest rates created an environment of abundant, inexpensive capital. This fueled aggressive dealmaking and drove EBITDA multiples to record highs—highs that simply don’t have the conditions to exist in today’s dental landscape.
While many sellers are clinging to 2021 valuations, Colao stresses they must adjust to today’s higher cost of capital to have realistic transaction expectations. Today’s dental buyer is far more scrupulous, ensuring they perform due diligence and insist on fair valuations to avoid overpaying, which has led to a reset in pricing across the market.
Multiples remain the central driver of valuation, but they have declined from their peak levels. For larger DSO transactions, multiples once reached 13–16x EBITDA but have fallen closer to 9–10x. For smaller practices, which briefly saw multiples around 7x during the peak years, valuations have returned to more traditional ranges of 5–6x. This current correction, while painful for some sellers, represents a return to more sustainable pricing for long-term stability.
Market Challenges Still Linger
Beyond macroeconomic conditions, Colao highlights key structural challenges within dentistry that still linger.
First, the disconnect between rising costs and stagnant reimbursement rates. Unlike many industries that can pass increased costs directly to consumers, dental practices are constrained by insurance and government reimbursement structures—forcing them to find other ways to offset rising costs.
The primary solution for practices lies in innovation and operational improvement. This includes:
- Driving same-store growth through increased patient volume or higher utilization of existing patients
- Conducting rigorous cost management and efficiency analysis
- Leveraging new technologies to reduce costs and improve productivity
The second challenge facing players in the DSO market is recapitalization delays. Many dentists who sold to DSOs in recent years rolled over a portion of their equity, expecting a second transaction within three to five years. However, due to the slowdown in M&A activity, many of these have been delayed, causing a standoff between dentists expecting payouts and sponsors waiting for a return on their investment to maintain investment cycles. Because the initial capital hasn’t moved as efficiently as predicted it slows down overall market activity.
Finally, the rapid increase in interest rates beginning in late 2022 forced DSOs to face the large amounts of debt they had taken on at low interest rates—and figure out how to manage them with much higher borrowing costs. For many organizations this looked like layoffs, restructuring, and in extreme cases lender takeovers. All to ensure they could stabilize operations and remain financially viable.
While many of these market challenges have largely been worked through, what has come out of them is both investors and operators realizing that sustainable financial structures are critical for transaction success.
The Costco Perspective
Perhaps the most important takeaway from the episode is the industry’s shift toward greater operational discipline as a driver of success rather than relying heavily on M&A-driven growth.
Colao shares an analogy from a conversation he had with executives at Costco, who emphasized their disciplined approach to expansion: only opening a new store after maximizing profitability at existing locations.
He suggests that dentistry is now adopting a similar mindset focused on:
- Understanding financial performance at a granular level
- Improving margins and efficiency
- Prioritizing same-store growth alongside acquisition strategies
This shift represents a positive and lasting change that will strengthen the industry over time.
Conclusion
The DSO M&A landscape continues to transform, shifting from rapid expansion to a focus on fundamentals. The current environment—characterized by disciplined investing, realistic valuations, and a renewed focus on operational excellence—may ultimately lead to a healthier and more sustainable market.
Although market recovery will be gradual, Colao suggests that the industry is moving in the right direction. For DSOs and independent dental practices alike, success will depend on adapting to this new reality by embracing innovation and building resilient, efficient operations that can thrive regardless of economic conditions.
To listen to the full conversation with Brian Colao, check out the episode on Beyond the Operatory.
To experience the future of dental distribution for your practice, Dental City can help with all your procurement solutions in a customized fashion. Contact Rylee Berg at 1-800-353-9595 x192 or visit us at Dentalcity.com. We are excited to help dental practices optimize their supply ordering process.
