A decade ago, specialty DSOs were considered uncommon. Over the past few years, Group Dentistry Now has witnessed an acceleration of specialty-focused dental groups & DSOs.
- Why is the market changing now?
- What is the specialty rise attributed to?
- What does the future hold for the specialty market?
We asked six seasoned M&A specialists for their insights and thoughts on this trend. Here is what they said:
“Specialty DSOs are very attractive to investors because they typically have high profit margins, moderate to low expenses and have proven to be virtually recession and pandemic proof with considerable room for additional growth including integrating their services into non specialty DSOs in quickly growing joint ventures, collaborations and partnerships and utilizing direct to consumer marketing. For this reason, over the last few years specialty DSOs have received some of the highest multiples in the DSO industry and I would expect this trend to continue even in the face of the current economically challenged environment.” – Brian A. Colao, Member, Dykema DSO
“There has been a substantial rise in specialty-centric DSOs since 2015 with the formation of Smile Doctors and the Thurston Group. Specialty DSOs were historically not viewed as an attractive model by Private Equity for two reasons: the need for recurring revenue (Hygiene) and more new doctors to replace the selling doctors. Although these risks still exist today, Private Equity groups feel that it is an attractive business model given the large amount of debt that new specialists come out of school with and the shift in what younger specialists are looking for from a work-life balance perspective. We have seen the formation of countless Specialty DSOs in the past five years, and we have also seen changes in business models mid-cycle from many of them. Specifically, many that started as Endodontics or Oral Surgery ONLY models have shifted to a multi-specialty-based approach. This is something to keep an eye on because this is a substantial shift in an investment thesis mid-cycle not commonly seen in Private Equity Investments.” – Ryan Mingus, Managing Director, TUSK Partners
“It is a natural progression that specialty DSOs would be gaining momentum in the M&A market considering the success of general DSOs. If you look at other healthcare specialties that have been rolled up, it is common to see a trend where the rollup starts with the physicians that provide the more general procedures and then it moves to the specialties in that healthcare sector. We expect to see more specialty groups be created over the next few years, and we have already seen large general DSOs look closer at specialty practices in cities where they already have several general practices in order to provide more services to their existing patient base. It will be interesting to see if any groups decide to build out large multispecialty practices that could service a number of their general practices, much like a hub-and-spoke model seen in many other heathcare sectors.” – Tommy Newton, Principal, Xite Realty and Xite Acquisitions
“We’ve witnessed the steady rise of specialty-focused dental groups and DSOs due to a number of factors, including insurance coverage shifts, the consumerization of healthcare and a fairly crowded general dentistry space. There continues to be significant demand for these services today, meaning that specialty focused dental groups and DSOs haven’t yet fully saturated the market. As specialty care has matured, and with an expected runway of continued demand, we anticipate this will continue to be an area of growth and interest for larger investment companies.” – Diwakar Sinha, Co-Founder and Partner, Polaris Healthcare Partners
“In the last 7 years, there have been dozens of specialty only focused Invisible Dental Support Organizations (IDSO). There are now at least 14 Ortho only IDSOs, 16 OMS only, 10 Dental Trifectas (pedo, ortho, OMS) 5 Endo only and numerous multispecialty which have only perio, endo and OMS. In addition, there are now multiple, national pedo/ortho IDSOs. The newest entrants starting in 2022 are the half a dozen new implant and All on X groups eager for Super GPs, perio and OMS practices with at least 30% of their collections related to implants. With many of the specialty IDSOs accessing billions of new investor capital in the last 12 months, they are competing against each other for great specialty practices, and we are achieving record values for all specialties. 10x EBITDA is no longer an anomaly.” – Chip Fichtner, Principal, Large Practice Sales
“The dental space has been picked through hard by DSOs and other financial groups over the last 10 years. Due to tightening financial markets buyers want larger practices with multiple providers and locations. This opened up the oral surgery market starting in 2022 and has led to significant deals completed in a short amount of time. In general, this trend will continue as will the number of DSOs staying on the sideline until interest rates come down significantly to give PE groups and lenders less risk.” – Dave C. Branch, Founder, Viper Equity Partners