How the dental industry's consolidation wave impacts niche practices

As the dental industry undergoes significant consolidation, all types of dental practices are seeing opportunities for partnering with dental service organizations (DSOs). However, owners of niche practices, such as implantology, oral medicine, temporomandibular joint (TMJ), and biological dentistry, face unique challenges and opportunities in this evolving landscape.

The consolidation wave's impact

Many assume that with the dental industry consolidation wave, it's mostly general dentistry practices that are attracting the most interest. However, the influx of capital allows groups, including DSOs, ortho service organizations, and dental partner organizations to invest in and expand their portfolios, including acquiring specialized practices like implantology, oral medicine, TMJ, and biological dentistry that offer high profitability and growth potential.

As the consolidation wave progresses, the ownership landscape of dental practices will undergo a fundamental shift, with an estimated 70% of practices expected to affiliate with a group. This market stabilization will likely lead to a reduction in practice sale values, which is why niche dental practitioners may want to learn about and act on their transition options now. By planning wisely and taking advantage of the market, niche practice owners can boost their financial results and make a smooth transition in an increasingly DSO-dominated industry.

The appeal of niche practices to DSOs

Niche practices can be attractive to DSOs due to their specialized services and often high profitability. Many niche practices operate on a fee-for-service model rather than working with insurance companies, which piques buyers' interest, because fee-for-service practices traditionally have higher revenue and fewer administrative burdens associated with insurance claims processing. Also, these specialty practices can provide DSOs with new growth opportunities and the ability to diversify their service offerings.

DSOs often have specific buyer profiles and may be more selective when considering niche practices. The unique nature of niche services requires finding a DSO with the right expertise and interest. For instance, some DSOs specialize in high-end cosmetic or full-mouth reconstructive dentistry, temporomandibular conditions, sleep disorders, airway management, and other specialties. This is why niche practice owners may want to plan their transitions well in advance to identify and attract the right buyer, as well as to properly position themselves to attract DSOs.

The selling process: Niche vs. general dentistry

Selling a niche practice differs from selling a general dentistry practice. While both types of practices must demonstrate healthy annual collections, good earnings before interest, taxes, depreciation, and amortization (EBITDA) margins and overall financial health, niche practices have additional elements to consider.

One unique challenge is the "key man risk," where a significant portion of the practice's revenue is generated by a single provider. This factor can make prospective buyers nervous because of the risk of finding a comparable replacement who can replicate the primary provider's success and financial outcomes, especially considering the specialized nature of niche practices.

DSOs can help source replacements for sellers; however, a practice is more attractive to them if it already has a successor in place. Therefore, niche practice owners should strategize on how to mitigate this risk, such as by recruiting and mentoring potential associates well in advance of a sale. For example, a high-performing cosmetic practice might want to train a successor years before the owner plans to exit.

Understanding the personal and professional goals of your associates is crucial. Associateships have the highest failure rate of all the dental practice transition options, with only 20% succeeding.

Selling to a DSO has a much higher success rate, which is why it's the preferred option for many dentists. If you already have an associate on board, DSOs will likely appreciate it if they're willing to stay on, which can simplify the transition process.

That's why knowing the associate's aspirations and needs upfront, such as their openness to working with a DSO and the possibility of additional mentorship, can help avoid potential issues during the transition. Additionally, it's essential to ensure the associate's compensation is aligned with industry standards, which is typically around 30%. By addressing these factors, you can help facilitate a more efficient transition and improve the overall outcomes.

Transition options for niche practice owners

Niche practice owners have several transition options available depending on their career stage and financial goals. A few include the following:

1. A straight buyout: This option is ideal for doctors nearing retirement who seek a straightforward exit strategy. It allows the seller to sell 100% of their practice to a DSO, receive a lump sum, and either continue handling patient care or retire completely.
   
   
2. Joint venture: This possibility is suitable for midcareer practitioners who wish to remain actively involved in their practice while benefiting from the ample support and resources of a DSO. A joint venture model allows practice owners to retain some control and continue to grow their business, making it an attractive option for those who are not quite ready to retire. The perks of maintaining part ownership include profit distributions, having a say in the practice's operations, and continued professional growth.
   
   
3. Equity rolls: Available with both straight buyout and joint venture options, an equity roll allows the seller to roll some equity into the buying DSO as an investment vehicle, enabling them to maintain a financial stake in the practice's future success.
   
   
4. Gradual transition: For niche practices with key man risk, a gradual transition plan, where the current practitioner slowly reduces their involvement while mentoring a successor, is highly beneficial. This option not only ensures continuity of care and helps retain the practice's value, but it can also be a requirement by DSOs. Often, buyers expect the practitioner to stay on for a few years to train and support their replacement. This transition strategy can be implemented for any deal structure, including a straight buyout and joint venture.

Preparing for a successful sale

To maximize the financial outcome and ensure a smooth transition, niche practice owners should take the following preparatory steps:

• Valuation and strategic planning: Obtain a professional valuation to understand the practice's worth and identify areas for improvement. Strategic planning should include addressing any key man risk and devising a marketing strategy for the practice to appeal to potential buyers.
  
  
• Recruitment and mentorship: Begin recruiting potential successors early and provide them with the necessary training and mentorship. This can make the practice more attractive to DSOs looking for stability and continuity. Many DSOs have designed pathways for associates to have equity within the organization as a way to tie interests and goals.
  
  
• Financial health: Ensure the practice is financially healthy by maintaining industry-standard metrics for payroll, revenue, and expenses. Address any discrepancies to present a stable and profitable business.
  
  
• Early preparation: For general practices, planning usually starts five years in advance for a DSO transition. However, niche practices need to start earlier. The consolidation wave is expected to last less than seven more years. Having sufficient time is necessary due to the complexity of transitioning a niche practice and the time required to find a suitable successor for the retiring doctor.

Financial opportunities from consolidation

The consolidation wave presents many financial opportunities for niche practices. With over 375 DSOs in the market and growing, there is a diverse range of potential buyers with an appetite for different models. Some DSOs are willing to invest in niche practices if they align with their strategic goals and demonstrate strong financial performance.

While the total number of DSO groups is important, what's even more crucial is having an expert broker with deep acumen and established relationships with these groups. A skilled dental practice broker not only advocates for the niche practice, but it can also help the DSO understand the framework of the opportunity and how the niche practice can enhance its portfolio or offer diversification.

Bottom line

The consolidation wave in the dental industry offers exciting opportunities for niche practices, but the window to act is closing as the market evolves. With select DSOs actively seeking specialized practices, niche practice owners may want to plan their transitions now.

Obtaining a professional practice valuation is an essential first step to understanding your practice's worth and maximizing its financial potential. By addressing key factors such as succession planning, associate goals, and aligning with the right buyer, you can enhance your practice's appeal and secure a successful transition.

Working with a broker who has a national footprint and extensive relationships with DSOs across the country can provide the broad reach and expertise needed to navigate this market effectively.

Kim McCleskey is a practice transition consultant with Professional Transition Strategies. She has worked in dentistry for 30 years and is a certified professional business coach. She can be reached at [email protected].

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.