2019 was one of the most active and exciting years in the DSO segment of the dental industry. In early February, we published 2019 Recap & 2020 Predictions from 18 Dental Support Industry Thought-Leaders. Then COVID-19 hit. And it hit dentistry hard. Now that the DSO industry has started its recovery, we are revisiting those thought leaders for an update on their predictions for 2020 and beyond. Below are their thoughts as we all continue to navigate these unprecedented times.
Steven Jones, Co-Founder & Chief Development Officer at CORDENTAL
Earlier this year, I predicted that the momentum of change in the dental industry seen in 2019 would continue in 2020. I think we can all agree there is a momentum of change this year, but not the change we all expected! The impact of COVID-19 on the industry has forced us to step back and reevaluate our priorities. Designing, implementing, and ensuring compliance of policies and procedures relating to protecting the health, safety, and welfare of our patients and employees quickly became the focus. Navigating the myriad of documents released by the CDC, OSHA, ADA, and multitude of state boards of dentistry within each of our states was a time-consuming and necessary task in order to safely reopen our practices. Securing an adequate supply of PPE was another challenge that required hours of manpower. But we successfully traversed all of the challenges that were placed before us and hopefully came back as strong or stronger than before.
The industry is not the same as it was pre-COVID-19. For many of us, the primary focus is on strengthening our existing operations and not as much on acquisition growth in the near term. Having spoken with a number of dental brokers and colleagues within other DSOs, I continue to hear the same message – not as much deal activity as earlier in the year. Deal structures are different as well. Determining the true value of a practice is more complicated and there are new questions. Do you base the value on the trailing twelve months pre-COVID-19? Has the practice come back to pre-COVID-19 levels? If not, is there anticipation it will? As such, there will likely be more holdbacks and earn outs than ever before on those deals that move forward.
The future still holds a degree of uncertainty. For the industry, that means we all remain engaged in the latest developments with the need to quickly respond. But because we have more knowledge of what to do at this point, the response is easier and quicker than earlier this year. I know we are all ready for the “new normal” and the ability to reacclimate to whatever the future holds for us. The dental industry has weathered many storms in the past and it will continue to do so through this one.
Roshan Parikh, DDS, Head of Dentistry at Walmart U.S.
We are (still) living in unprecedented times. We all expressed some version of this sentiment on every virtual Zoom call in March and April, sometimes 10-15 times a day. Little did we know that 100+ days later, we would have to start re-expressing a similar sentiment. In the M&A arena, there is a concept of deal fatigue where the buyers/sellers have been working on the deal for so long that they develop mental and physical fatigue towards the deal, as time goes on. In 2020, I believe we are suffering from a prolonged “year fatigue” filled with more questions than answers.
In the dental industry, the impact of the pandemic and COVID19 is something that can potentially be quantified right now with metrics that Marko Vujicic’s ADA HPI gives us, suggesting that we are leveling off at 70% of pre-COVID19 patient volumes and collections. PPE quantity doesn’t seem to be an issue anymore, but my thought always goes to the future in conjunction with the present. If right now, there’s still some pent up patient demand, what will happen when that demand diminishes? With 45+ million Americans currently unemployed and an unquantifiable number underemployed, companies are looking to find ways to shore up profitability for shareholders amongst substantially decreased topline revenue. It seems like an uncertain recipe to then strongly suggest there will be more uncertainty to come. DSO consolidation will continue to accelerate, and those that were in trouble before the pandemic began, might be left making some tough and non-strategic choices for their companies. Like Warren Buffet says, “Only when the tide goes out do you discover who’s been swimming naked.”
I am certain of one thing; time is the new commodity. Now, more than ever.
Walmart Health opened our first location in September 2019. As much as retailers have spoken and/or have been rumored to be thinking about entering the realm of healthcare, Walmart became the first big-box retailer to enter the murky complex waters of US healthcare. Walmart Health’s practice of saving patients time and money through providing service seven days a week with a transparent, Every Day Low Prices (EDLP) cost model, combined with its structure of multi-modality healthcare (medicine, dentistry, hearing, vision, labs, mental/behavioral health all in one location) has the potential to majorly revolutionize the convenience and effectiveness of healthcare far beyond what we have become accustomed to as the industry standard.
We recognize we can make an impact by increasing access to quality, affordable and convenient healthcare as we invest millions of dollars and expand Walmart Health into Florida in 2021, which is home to the second highest number of Walmart stores in the country. It’s also where we launched our $4 generic prescription program more than a decade ago. We will continue to find better ways to serve our customers, all centered around helping give them more of their time back as well as helping them save money in the process.
The combined crises of the COVID-19 pandemic, the economic recession and subsequent loss of health insurance for millions of Americans have reinforced the vulnerabilities of our healthcare system. At Walmart Health, we understand that this means our customers need us now, more than ever. We don’t take this responsibility lightly and are committed to helping our customers save money while living better, and healthier lives.
Brian A. Colao, Member & Director of the Dental Service Organizations Industry Group at Dykema
At the beginning of 2020 some (including myself) predicted the potential for a recession but no one predicted a global pandemic. Although dentistry has historically proven to be recession proof, it unfortunately was not pandemic proof and for the first time in history dental practices nationwide were shut down except for emergency treatment. This created an “artificial” recession due to a public health crisis and not a financial or economic crisis. Over the last few months dental offices have been reopening on an unprecedented scale.
Most experts agree that the long term outlook for dentistry is as strong as it has ever been. I expect the industry-wide evolution and consolidation of dental offices to DSOs to continue unabated from at least 2021/2022 forward once we finally move past the pandemic.
However, the short term future for the remainder of 2020 into early to mid-2021 does contain some uncertainty surrounding whether additional government shutdowns will occur and whether any such shutdowns will include dental offices. In fact, the short term future of the DSO industry hinges on this issue.
Therefore, if the dental offices remain open:
1) the M&A market will continue to pick up steam and fully recover;
2) organizations that have recovered to their pre-COVID-19 numbers will receive pre-COVID-19 prices;
3) organizations that have not fully recovered may have to accept less cash at closing in lieu of earn out opportunities or postpone equity events until they have better recovered; and
4) There is no reason 2021 cannot be a big comeback year and I would expect all but a small number of organizations that were struggling pre covid to make a full recovery or even experience growth by the end of 2021.
However, if the dental offices were to shut down again on a nationwide scale, then;
1) the M&A market will likely stall out;
2) the damage done to dentistry and the DSO industry will likely be catastrophic; and
3) virtually all organizations will be at risk for severely negative economic outcomes.
It is therefore critical that dentistry be declared essential and our government officials recognize the value that dentists bring to the overall health and well-being of individuals so that dental offices will never be at risk of closing again.
Jeromy Dixson, CEO at Dental Capital Partners & The DSO Project LLC
The continued emergence of specialty DSOs. I expect that trend to continue into 2020 and beyond as investors search for “blue oceans” with less competition for rapid expansion than is found in the more competitive “red ocean” general dental space.
Some short-term deal disruption and revision to deal structures has occurred between investors and DSO’s. A full spectrum of regional realities and responses exist in response to the pandemic, creating ranges of responses from investors and DSO’s including on hold/cautious to aggressive/expanding. As a result, some downward alteration to valuations (~2x decrease) and performance earn outs are present with some deals in process; however, many deals continue to proceed with EBITDA calculations based on pre-COVID performance as long as there is a clear ramp back to normalcy occurring in 2020. Mid to longer term I continue to expect the original acceleration of consolidation predictions to occur..
This statement holds as true now as it did prior to the pandemic with some minor, short term contingencies.. The impact of general economic uncertainty, a presidential election in November and variable conditions at the state level have created short-term valuation uncertainty. The result has been a slowed market for larger DSO transactions in many cases. Conversely, the market for single or small group acquisitions by existing and well capitalized (not overleveraged) DSOs is experiencing heightened activity and interest.
Short to medium term valuations appear to be slightly decreased as middle-market banks have or are rolling back leverage ratios in response to market uncertainty and portfolio companies tripping covenants due to direct pandemic fallout. With less aggressive PE competition in the short term, I expect large DSOs to hold an advantage in acquisition opportunities at least through 2020.
Mike White, CPA, Principal, Health Care, CLA (CliftonLarsonAllen LLP)
As we sit here in the middle of 2020 no one would have predicted a global pandemic that shut down many industries but one would say dentistry was hit the hardest. I reflect back on the prediction that I along with many other industry leaders believed in 2020 being a banner year for consolidation and growth. In many ways the year started off as many predicted to a busy start with many transactions and discussions around consolidations and mergers. This all came to a halt for much of the country at the end of Q1 and we had practices closed or at less than 25% capacity for as much as 10 weeks while they scrambled to evaluate EIDL, PPP, and the safety of their team and patients. As practices continue their journey of re-opening there are so many more considerations that practices have to work through in addition to their pre-COVID discussions on mergers. Deployment of new safety procedures, filling schedules with a large unemployment rate across the country, and teams and patients that are gaining comfort in the new normal.
With that said majority of our practices are growing or exceeding their pre-COVID shutdown rates of capacity, team members are coming back to work, and patients are filling chairs. In addition the consolidation market has in many cases picked up where it has left off at least in forms of discussions. As we continue to work through these discussions we are seeing parties have discussions on the rebound and recapture of patient loss after the practices open back up. We are seeing practices take new measures for team and patient safety and we are seeing teams come together at a new level which is in many cases positively impacting the culture of the practice. There are many discussions with new equity players in the market place, equity groups looking to continue their expansion, along with continued consolidation amongst the strategic and larger DSOs. As discussed earlier in the year we continue to see specialty coming to the forefront of discussions and activity. Discussions with funding partners are continuing to progress in a positive light as the industry continues to acknowledge the importance of dentistry and support the expansion and efficiencies of DSOs.
As cases continue to grow across the country the resilience and optimism in the industry will prevail. We do anticipate activity continuing to pick up the remainder of the year as parties have identified how to protect themselves with seller carrybacks and COVID holdbacks being introduced into the transaction. Further as some individual practices and smaller groups thought about growth without the funding of a larger entity through a pandemic may bring new discussions to light as we push into the latter part of the year. As you read this we hope that everyone is staying safe and healthy.
Gary J. Pickard, Senior Director, Government & Industry Affairs, Pacific Dental Services
When I originally wrote my predictions for the new year and what I thought it would look like for Dentistry I of course had no idea the world would experience a pandemic that would last months, and which will likely impact us for years. 2020 has been a tough year for many people. Those in the dental industry, like many industries, saw business shut down and revenues plummet. Millions became unemployed virtually overnight with our industry being one of the hardest hit.
That being said, I’m very bullish about the future of Dentistry, and Dental Support Organizations (DSOs) specifically. DSOs and those supported by DSOs pivoted quickly at the start of the pandemic, proving just how integral they are to the industry, focusing on emergencies and implementing enhanced technologies and protocol such as Teledentistry and same day restorations. They benefitted from a broad network of support and expertise, from marketing to real estate; cutting costs, increasing and improving patient outreach. As we educated legislators and public health officials they quickly realized that oral healthcare professionals are a vital component of our healthcare system, and thus we were one of the first in healthcare to open back up. Thanks to work by trade associations such as the Association of Dental Support Organizations (ADSO), and others, patients returned quickly to dental offices. The rebound has been strong.
While PDS may not add as many new locations as we had originally planned, we are still opening new offices, helping to support more oral healthcare professionals realize their dream of being a hygienist, or dentist (as an associate or even an owner). PDS will still be cementing our position as a leader in medical dental integration with the implementation of Epic’s dental practice management system into our ecosystem. I expect more dentists and patients to integrate, and a greater expectation by patients of such integration. The link between oral health and overall health is undeniable. We’ve seen several other organizations move in this direction as well so we’re likely to see massive progress over the next six to twelve months. If anything, COVID is accelerating this progress. Early studies show that good oral health provides greater defense against the virus. Two other studies recently suggested a link between periodontal disease and Lupus and Dementia! Dentistry is critical and essential. It also continues to be extremely safe. The CDC has yet to have a confirmed report of an outbreak of the virus in a dental setting – that’s because we’re infection control experts.
PDS is also still an integral part of a coalition pushing to add medically necessary dental care to Medicare. If COVID hasn’t shone a bright enough light on the importance of Dentistry I don’t know what will.
When I said this year could very well be the year of disruptors, I had no idea how accurate I would be. New delivery care models continue to appear and are being embraced by the masses, spurring new and unique partnerships. I think there will be greater experimentation and early adopters following a few key leaders. Technological advances are helping to drive this change, improving patient experience, transparency, and ultimately patient access and care. There are more opportunities than ever before. One opportunity in particular that is surfacing and being discussed regularly at state dental board meetings and by legislators is the idea of dentists being able to offer their patients diagnostic tests and administer vaccines. When you hear this I’m sure it seems so obvious, but North Carolina was the latest of only a few states to pass such legislation and that was an emergency bill to address COVID. Oregon passed similar legislation a couple years ago to address a flu epidemic in the region.
One area we all must address, is the staffing challenges we’re facing, though dentists have questioned whether they need as many as they had in their office prior to COVID. This could prove to be a challenge for dental assistants and hygienists who are late to return back to work. Either way, it is likely to be a one of a few major concerns for 2020.
Jon Fidler, Founder & CEO Fidler and Associates
Prior to the shutdown in mid-March we saw a record number of executive placements with plenty of movement and upward mobility within the industry. Obviously, there was a bit of a pause at the beginning of the lockdown as groups let the dust settle and put a plan together to move forward.
Although most of the industry came to a pause (like the rest of the world) we were surprised to see a number of smaller and mid-sized groups continue along the executive hiring path.
We believe this is due to their management of funds and a positive outlook envisioning the backside of the lockdown will create opportunities for growth. They believe this will allow them to be structurally ready when the opportunities arise.
The introduction of Walmart into the DSO/multi-location group practice landscape continues to be a tremendous boost for access to dental care and will create multiple opportunities as they continue to structure.
We continue to see an increase of placements (similar to 2019) and searches within the specialty focused groups (oral surgery, endodontics, etc) as those offices were able to remain partially productive depending upon their states regulations.
With the positive expectation of a productive economy and need for dentistry there will always be a battle for top talent. This continues to be a main differentiator between organizations. Although some of the senior, top-level executives will remain with their current groups this can open up a niche for candidates who are seeking to improve their title/responsibilities. While most groups are not on pace for a “normal” year of production, we continue to foresee plenty of executive movement and opportunities for 2020.
With everything considered we are excited to see what 2020 has in store for the group dental industry and look forward to connecting the top talent in the industry with the top opportunities.
Chris McClure, Chief Operating Officer, Aligned Dental Partners
Considering where the economy was headed in late March and early April, the dental economy currently finds itself in a surprisingly bullish position. Most of Aligned Dental Partners’ practices have set new records for production in June and July and are poised for a profitable second half of the year. This strong post-Covid reemergence is largely due in part to pent-up patient demand, however most practices have full hygiene and doctor schedules for the immediate 90+ days. The most notable impact that Covid has had on dental practices is the shift in the job market. It is now an employer’s market with a massive influx of furloughed, laid-off, or out of work dentists, dental assistants, and dental business professionals. One exception to this is the scarcity of dental hygienists who continue to be in high demand and low supply.
Merger and acquisition activity, initially having stagnated in Q2, has substantially picked up in Q3. While many deals were re-traded and devalued by 1-2 turns of EBITDA from some major DSOs in the US and Canada in the last few months, Aligned Dental Partners is facilitating more mergers today than ever before for dentists and specialists. Entrepreneurial dentists and dental groups are choosing mergers as their preferred method of consolidation for various reasons. In the current lending environment, access to capital and the speed that banks are processing loans has become greatly strained. Mergers require very little capital on the front end and provide immediate synergies and a substantial increase in value for all parties. Additionally, facilitating a merger today does not require the sale of either party’s business, which is advantageous currently while valuations have dipped post-Covid.
Aligned Dental Partners’ future outlook for the remainder of the year is cautiously optimistic. We take an “aggressive-conservative” approach when supporting our clients through M&A; by that we mean we are aggressive in pursuing growth opportunities but are conservative in our deal structures and risk-mitigation strategies. This same aggressive-conservative approach is how we look towards the second half of 2020; Aligned Dental Partners sees abundant growth opportunities, organically and by M&A, for group practices and emerging DSOs, but is conservative about how to structure deals with uncertainty during this second wave of the pandemic.
Aziza Abed, Founder & CEO at PURE Health Dental
Covid-19 truly tested our industry’s leadership. How employers reacted to the pandemic will be a testament to their character and remembered for years to come. The actions we took, the protocols we put in place, the PPE we provided, the additional training along with emotional intelligence all were necessary to preserve a safe harbor for both patients and teams. Covid-19 absolutely put perspective in everyone’s lives. Relationships and the emphasis on “People” played a vital role during this pandemic. It was no longer about the “dentistry”.
Indeed, we did have to shut down, but with dental health care providers being in the very high exposure risk to known or suspected SARS-CoV-2 category by OSHA* we truly needed to research and educate ourselves on this virus and how it would affect our environment before we could continue normal operations. Fortunately, for many of us, the shutdown was short-term. Thankfully, we are currently experiencing a positive momentum. Many of the emerging dental groups that I have talked to are exhibiting year over year same store sale increases. Patients are being more cognizant of their overall health and want to take better care of themselves. A recent study completed by NADG revealed that there was a 31% increase in patient’s comfort in visiting the dentist, surveyed from April 2020 (29%) to July of 2020 (60%).
I predict we will see a surplus of available acquisitions as well as real estate opportunities. A good will purchase merge into a denovo may be a good route to go so that all the new social distancing guidelines and regulatory compliance protocols can be factored into the design. This just may be our “norm” going forward so we need to make the necessary adjustments in our practices that will allow our teams and patients to feel at ease and safe for now and the future to come. Preservation of cash flow, regulatory compliance, Social media, on-line scheduling, simplification of processes and enhanced technology should be a DSO’s top priority. Our biggest adversity is going to be in talent acquisition. Dental hygienists have become scarce in many of our states. Sign on and Retention bonuses are a great option.
What will happen if we have to shut down again? The good news is we are in this together, survived the first time, we can most definitely survive again! Gratitude goes to the ADA, GDN and ADSO whom continue to support and advocate for us. We are now prepared. We will be able to continue with ER care whether through tele dentistry or live visits, continue working our previous claims, enhance our websites, social media presence, internal processes and ER marketing. It’s crucial to have diversity in our doctor’s scope of services. Emergency care requires doctors that are skilled in endodontics and oral surgery so make sure you have someone on staff that can provide those services to your patients. Let’s continue to keep our vision and stay the course.
David Branch, Principal at Viper Equity Partners
So, the big question is where dentistry stands today after a three-month shut down, or not, of the industry. DSOs handled the pandemic in a very organized and successful manner. Staff was furloughed, communication with patients was brisk and reopening strategies were put in place and executed with precision. The industry is strong and hyper-organized and came out of the haze proving that dental consolidation is here to stay.
One major observable change in the buying appetite of DSOs has been the size of the practices they look to purchase. Small, overpriced offices proved to be problematic in the shutdown, a lesson that needed to be learned. We are seeing high demand for practices in the $2 to $3 million range with eight plus operatories and two providers becoming the new norm on the smaller side. Medicaid remains very unfavorable and geography has really become a focal point. Basically, from a business standpoint the buying side of the industry has really matured.
The market is very active with multiples still in the 5 to 7x range of EBITDA, the same as they were last winter. Buyers are back in the market and moving aggressively to get deals under LOI and closed by the end of 2020. This July was our busiest month in terms of deals going under LOI in our 11 years in business. The markets are bloated with capital, and PE firms want to get the money on the street. Well-positioned offices have an amazing opportunity to join a DSO right now and should not doubt that the rest of the year will be anything but a positive trend in industry growth. What we want to communicate to everyone is that there is no reason to think that the deal side of the industry has been hurt when in fact, it’s more active now than it was a year ago.
We also have seen a huge wave of sellers coming to market. Many of these are the younger doctors we predicted would be abundant in 2020. Now more than ever it makes sense to be part of a large organization, to take some chips off the table and have a deep-pocketed partner on your side in case we experience another situation like this year’s. Sellers can expect reasonable hold backs by buyers to let numbers reset. They should also expect caution as buyers evaluate present numbers, taking into consideration the recent spikes after reopening as temporary factors while volume works back into a normal pattern. All in all, we stand on our forecast of 2020 being a tremendous year for dental consolidation.
Darin Acopan, EVP/Partner at DEO: The Dentist Entrepreneur Organization
COVID-19 has provided all owners, from one location to 1,000+, clarity and time as to where improvements need to be made within their business. We saw many of our members use this time to network with other owners in order to create systems and strategies to address opportunities that allowed them to get ramped up quicker than their peers as shelter-in-place restrictions have been lifted. Owners that had access to groups like the DEO or ADSO seemed to fair much better than those who were making decisions on their own.
A Sr. faculty member of the DEO, Emmet Scott stated on a recent podcast, “COVID-19 didn’t change anything, but it accelerated everything.” We see owners that were once 3-5 years from retirement trying to exit today. We also see those that wanted to build a multi-location group purchase practices at all-time lows. Seller-financed deals also seem to be on the rise as a result of tightening from lenders.
Getting access to information was also impacted by COVID-19 as most DSO conferences were canceled, postponed, or in the case of the DEO forced to go virtual. It will be interesting to see how information gets disseminated for the remained of the year, I think many of us are encountering fatigue from the weekly freemium content that is being produced. The thing that will remain true regardless of market condition is that there is already someone that has created the outcome you are looking to achieve- you just need to know who that person is and get aligned via the same organization or group rather than reinvent the wheel.
Neil Krugman and Eric Scalzo, Waller Lansden Dortch & Davis, LLP
As with most industries, the dental industry was hit hard by COVID. The impact was exacerbated in many geographies due to government orders prohibiting most forms of dental services. With this uncertainty, DSO transactions were largely paused at the end of Q1 and many DSOs remain hesitant to jump back into acquiring new locations. Despite the uncertainty, we have seen a small handful of groups run towards the fire in an attempt to grow. Over the past several weeks some new PE and family office-backed platforms have closed on their first locations and other newer entrants into the space have affiliated with several new locations. It is our expectation that this trend will continue.
There are a handful of COVID related issues that need to be considered for those looking to enter or re-enter the acquisition game at this time. Discussions around valuation and COVID-related holdbacks are at the forefront of everyone’s mind, but buyers should also be considering the potential changes to operational efficiencies, government order compliance, availability of PPE and the impact of PPP/EIDL loans when evaluating an add-on target. Sellers should be prepared to answer many of these questions in connection with the sale process.
Another byproduct of the pandemic is a heightened interest in teledentistry products among dentists, payors the public and investors. In many instances, the relationship between the teledentistry company and the dentists in its network is built upon the DSO model or a variant of the DSO model, which may represent another leg of industry growth.
While the long-term effects of COVID are unknown, we see more independent dentists realizing the value of DSO affiliation during these tough times. The access to capital, business advice and regulatory guidance that DSOs can provide their affiliated practices can be a major selling point for future DSO affiliation.
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