No doubt, the unexpected and historic pandemic that has affected the entire world hit dentistry with gusto. It could be argued that dentistry was one of the hardest-hit industries.
With over a decade of DSO experience, working with hundreds of dental groups of all sizes, totaling 4,000 locations in 42 states, we began 2020 confident that the year would bring vigorous growth and consolidation. That prediction quickly dissolved in March – replaced by unprecedented office closures and plummeting revenues. Our recession-proof industry was being put to the test. Would we fail or would we prevail? We know the answer now.
The events and subsequent lessons of 2020 gave us a new-found buoyancy as we learned to reshape the dental landscape to create an industry that will now be pandemic-proof. Many critics of the DSO space thought mass bankruptcies were inevitable. However, the surge in DSO bankruptcies never came to pass. In fact, something else completely happened.
The thought of another pandemic-type experience proved to be too much for some solo practitioners to stomach. Dentists who were once on the fence about selling – or just didn’t want to endure another catastrophic event alone – have decided that now – right now – is the time to affiliate with a DSO or dental group. Expediting retirement, succession planning, forming strategic partnerships and platforms is the lifeline that many practice owners want and need.
Post-shutdown, consolidation rebounded. And it ramped up quickly. Allegiances, alliances and consolidation accelerated and is back to the pace of early 2020 as people anticipate a new administration. What they may have pushed off to 2021, they may want to capture in 2020 for capital gains rates purposes.
One of the biggest questions the industry is asking currently is if funding is going to continue to be available. Funding is there. Bankers and other lenders are continuing to provide healthy loan amounts. Private equity reinvestment in the dental platforms is starting to come back as well.
New trend lines
As we emerge from COVID-19, we see new trend lines occurring. Evaluating general practitioners, many are operating at near or above what they did last year, same time. As we monitor the trailing 12 months we are seeing trends that are not too far off of their 2019 full year. Certainly, many practices were impacted by missing a minimum of two months of full operations and as they opened back up had to enact new sterilization procedures that lessened their patients per day metrics. Practices are evaluating how this is impacting their daily procedures and quickly adjusting to the new normal.
We’re also measuring EBITDA and some key expense categories. Although COVID has impacted EBITDA and revenue, we are seeing many practices that adjusted quickly to the pandemic, helped along by federal aid funds, where EBITDA is progressing at or near 2019 full year numbers. Further, we are seeing practices coming out with a healthier cash position and balance sheet than anticipated. As we continue to monitor practices across the regions, we are seeing certain geographies performing well, including the west coast and mountain west regions. In addition, we are starting to see specialties perform at a healthy level with increased consolidation amongst specialties.
Daily net production is another new trend line. Some in the industry had predicted a 20% down take this year, but that doesn’t seem to be coming to fruition. Reason being, patient volumes may have decreased for various reasons, but the production per patient has been offsetting some of those downticks. Practices have been able to spend more time with patients and are allowing for improved treatment planning and ensuring an excellent patient experience.
Planning for 2021 and beyond
As this wild year comes to a close, many eagerly and anxiously await what 2021 has in store for our industry. Dentistry is still a strong marketplace, and as far as consolidations, they will not just stop for the next four years with a potential new administration. Probable tax implications have to be planned for accordingly, as well as what their net cash flow is going to be upon their exit. With that, we are already planning on several large group transactions that we are working on which will occur in 2021 and beyond.
Looking ahead we see two important business sectors emerging:
- The next wave of consolidation is going to be specialty only – ortho, endo, and oral surgeries. We are already seeing several specialty-based groups. At some point, we will see a grouping together of multi-specialty and multidisciplinary practices.
- There has been some international consolidation (where they already have ownership in a DSO in another country and they are looking to expand into the US) during 2020, but we expect to see more of that soon.
Written by Mike White, CPA
As you plan for 2021, take time to consider the opportunities that may be available and your goals. Mike and the team at CliftonLarsonAllen (CLA) have deep industry insight and are invested in your success. They are ready to assist you in building your practice back through effective cash flow management and help you develop your personalized success plan today.
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