We Have Experience With DSOs

WHAT IS A DSO?

Wikipedia defines DSO’s as: Dental Service Organizations, also known as “Dental Support Organizations”, as independent business support centers that contract with dental practices in the United States. They provide critical business management and support to dental practices, including non-clinical operations.

In a handful of states (such as Arizona), you are not required to be a dentist to own a dental practice.  However, in most states (like Texas), only a dentist can own patient records.  Therefore, the legal structure of a DSO is constructed to comply with state regulations by consisting of a doctor entity (owned solely by a dentist) which owns the patient records and another corporate entity (the DSO entity) which owns all of the tangible assets of the practice (equipment, furnishings, marketing collateral, lease, etc.) and ultimately controls the net cash flow (EBITDA) of the practice.  Sophisticated DSO’s are designed to leverage their centralized infrastructure (services including accounting/bookkeeping, legal, compliance, marketing, HR, etc.) to support their partner offices from a business/administrative perspective while allowing the doctors to maintain their clinical autonomy. 

DSO’s are the fastest growing segment of the dental market and range in size from 1-10 offices (known as “emerging DSO’s”) to over 1,000 offices (Heartland Dental).  While emerging DSO’s are often backed by traditional banks or private investors, the growth of larger DSO’s is being fueled by Private Equity. Wikipedia defines Private Equity as: investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded. 

Private Equity is particularly interested in the dental industry for several reasons:

  • The dental industry has experienced consistent revenue growth over the past 20 years.
  • Dental practices enjoy one of the highest levels of profitability of all niches in the medical space and typically sell for very reasonable multiples of EBITDA compared to other industries.
  • The dental industry is highly fragmented, which provides investors with the opportunity to organize the market, optimize practices, and take advantage of the economies of scale previously discussed.
  • There are a larger number of practice owners/potential sellers who are looking for liquidity and support from a business perspective.
  • Demand for dental services is relatively inelastic in relation to changes in the economy

 

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