Important Trends in Dentistry
What’s going to happen in dentistry over the next 10 years?
Just look at where the industry has been recently for a hint. You can expect continued growth of Dental Support Organizations (DSOs) and higher demand for dentistry in the consumer marketplace.
Dental trends was the topic of discussion when Brian Colao, Director of Dykema's DSO Industry Group and an expert on the corporate practice of dentistry, met recently with Amol Nirgudkar, CEO of Patient Prism.
From consolidation in the market to the bigger role of DSOs in the industry to the drive of private equity groups investing in dentistry, Colao and Nirgudkar laid out the unfolding trends you’re likely to see in the coming years.
Evolution and Consolidation
While the industry is still widely dominated by single, independent practices, you’re going to see the merger and acquisition trend speed up even faster, said Colao.
“We're seeing great evolution and great consolidation,” Colao said. “You see the evolution of dentistry from single, solo dentist-owned locations or dentist-owned group practices to DSOs. You also see consolidation in private equity groups — large DSOs, intermediate DSOs are buying up and acquiring offices.
“I think in the next 10 years you're going to see this white-hot M&A climate that we're in intensify, and you're going to gradually see all of those (independent) offices become affiliated, acquired and affiliated into DSOs or private equity groups.”
Colao predicts in 15 years there will be practically no solo practitioners left.
There’s a Party Going on in Dentistry
What’s driving the trend? Simply put: the demand for dentistry.
“Well, it's happening because dentistry has proven to be virtually recession-proof,” Colao said. “When we had our great recession of a few years ago, dentistry continued to thrive and excel. The demand for dental services is exceeding the supply of practitioners and dentists out there.”
So, the industry has become an extremely attractive segment of the economy for investors.
“You can see billions of dollars pumped into this space in the last few years, and it's like there's a party going on in dentistry and everybody wants to come to the party,” Colao said.
DSOs Will Invest More Aggressively
Ten years ago, only a few very large private equity firms wanted to buy the biggest DSOs, but now hundreds of funds, groups and investors want to buy up small multi-office practices, Colao said.
“Ten years ago, if you didn't have 30 or 40 offices, nobody was going to go into them. Now they'll go down and they'll buy three offices,” he explained.
Investors hope to buy a few offices, grow them to add more locations, then roll it all up to sell to a larger DSO.
“It's increasing the demand,” he said. “You have just an explosive —the most explosive M&A environment I've ever seen — going on right now.”
Colao said that from 2013 to 2033, the expected U.S. population is expected to outpace dental practitioner growth by 13 percent.
“This is a very significant statistic, because unless you a soften the requirements for foreign dentists to come to the United States, you're going to have an acute shortage of dentists,” he said. “Demand is going to outstrip the supply, and you're going to be able to charge more for it.”
And that makes the industry an attractive environment for investors.
The Dental Therapist Trend
A controversial, but growing trend is the emergence of dental therapists. These are licensed professionals that usually work within a practice, primarily to meet the demand from Medicaid patients and other underserved groups, especially in rural areas.
Depending on the license, they can do what dental hygienists do, but may also perform expanded duties.
“I've been to a couple of conferences where I've had the pleasure of interviewing and speaking with some dental therapists, and they're making a good living, and they like it,” Colao said. “There are a lot of dentists that are very resistant to it, and they are lobbying the legislature. They are filing lawsuits.
“They are doing things to prevent the ability of free-standing dental therapists from opening up offices.”
Colao expects to see more dental therapists thriving in rural areas, where there’s a bigger need for care.
“I don't think you're going to see them in Miami anytime soon,” he said.
DSO Market Share
Expect to see DSOs become a larger part of the industry over the next 10 years, Colao said.
“A couple of years ago when they published the DSO statistic, it accounted for about 4 percent of the market,” he said. “I think everybody agrees where we are right now, in August 2018, we're about 11 to 13 percent market saturation now. So, there's a lot of runway there.”
That trend is even changing the words dentists use to talk about their practices, Nirgudkar said.
“It’s the first time in my career I've seen clinical practitioners talk about an accounting term that I'm familiar with, which is called EBITDA, earnings before income taxes, depreciation, amortization,” said Nigudkar, “So, you go to a dental conference and you see a bunch of dentists talking about it, and I think, ‘Wow.’ And I’m an accountant.”
They’re using the ratio to value their businesses, because it helps you compare apples to oranges.
“EBITDA is the gold standard for valuing segments across an organization,” Colao said. “Think about the practice of dentistry. You may have 10 or 15 offices, EBITDA is the gold standard to value your organization across many different offices.”
It makes sense that the investment term would settle into dentistry since so many private equity firms are investing in the segment.
“The example I use all the time when I'm speaking with dentists who don't have a CPA is you can have a $2 million practice and it costs $1.8 million to operate that,” Colao said. “What is your EBITDA? $200,000. You could have a $1 million practice and it costs $600,000 to run that organization.
“What is your EBITDA? $400,000.”
In other words, the $1 million practice is more profitable than the $2 million practice. EBITDA allow dental practice owners to determine how valuable their offices are.
What about Multiples?
A multiple is the value of a business based on a multiple of its earnings. Is your office worth three times your earnings or 10? It depends on how many bells and whistles come with your company.
“Everybody wants to hear about how much money can I get? What multiples affect it?” said Colao.
He said there are two main types of transactions occurring in the market: Big DSOs with hundreds of offices and private equity firms investing in a platform it can grow. Expect to receive multiples of five to seven with DSOs and between five to even 18 with private equity groups.
The multiple can be affected in numerous ways: payer mix, practice integration and a sound growth plan.
“The first thing is payer mix,” Colao said. “The more Medicaid you take, the lower the multiple you're going to get because of the regulatory risks and the lower reimbursement. The second thing is: Are you integrated?”
To illustrate the value of practice integration, he likes to use the example of buying a house. If you’re looking for a fixer-upper, you’re going to pay less because you’re going to have to put in a new floor, re-roof it or do other things.
“But if the house is move-in ready, you're going to pay a premium for that,” he said. “Same thing with the dental offices. If you have an integrated technology platform, and you've got centralized billing, centralized collecting, a call center, centralized marketing, and you've got all of these things, people are going to pay a premium for that.
What if you don’t have all those features? Don’t worry, Colao said, in this market your practice is going to sell. They’ll just pay a lower multiple.
Private Equity Is Driving Multiples
The last thing that can affect the multiple is having a cohesive plan to grow your practice group that will entice a private equity investor.
“If you've got 15 offices and you want to sell to a private equity group — or you've got eight offices — private equity groups are not interested in just assimilating your EBITDA” like a big DSO, he said. “They're saying if you've got eight now, how can you get to 20, so we can roll it up and sell it a second time? And you've got to demonstrate that you're a competent operator and that you have a cohesive plan for growth that you can replicate and grow.”
In fact, private equity groups represent a significant factor in boosting the value of your business when you sell. Nirgudkar said.
“This is what private equity is actually doing, driving the multiples,” he said. “And it's important to understand that not all multiples are equal. You have to go deeper and understand what constitutes this and kind of get your organization ready from all sorts of infrastructure.”
The more integrated your company is, the higher the multiple, Colao said.
“If you're turning a profit or even struggling, you can most likely sell,” he said. “Almost everything is selling in this marketplace. But depending on your position through all the things we're talking about — payer mix, integration, a cohesive plan — you can dramatically impact the multiple that you get in this marketplace.”