The recent Dykema DSO Conference in Denver shed light on the current challenges and transformations within the dental service organization (DSO) market. This event highlighted crucial factors affecting DSOs, such as rising inflation, increased interest rates, longer deal closures, and changing deal structures.
Inflation and Interest Rates Impacting Profitability
One of the primary concerns discussed at the conference was the impact of record interest rates and persistent inflation on DSOs. These financial pressures have significantly reduced profitability across the sector. Inflation drives up operational costs, while higher interest rates make borrowing more expensive, affecting day-to-day operation, long-term investments, and acquisitions of new offices. These challenges are forcing DSOs to reassess their financial strategies and look for new ways to maintain profitability and structure future acquisitions.
Deals Taking Longer and Selling for Less
Practices and DSOs are now selling for 1-2 turns or multiples lower than what they traded for 18-24 months ago. Deals are taking longer to close as there is increased scrutiny from the board on each deal, primarily due to the economic pressures of inflation reducing profits and the higher cost of capital with rising interest rates. This makes buying a practice more expensive therefore the board of the DSO and the Private Equity Partner has to assess risk more closely than before when capital was lower, and supplies and labor was less expensive. Compounding these issues, reimbursement rates are falling, further squeezing profit margins and complicating financial planning for DSOs.
DSOs Entering Receivership
A striking statistic shared at the conference is that 23 DSOs have entered receivership over the past 12 months. This trend reflects the severe financial pressures and operational challenges facing many organizations in the current economic environment. These receiverships underscore the need for DSOs to refine their operations and enhance their financial resilience to navigate these turbulent times. Despite these hurdles, there is evidence that DSOs in receivership are successfully working with their receiver to stabilize the situation, protect interest of their creditors and turn the business around through restructuring and operational efficiencies, ultimately resulting in many DSOs bouncing back and becoming stronger.
Evolution of Deal Structures: The 80%/20% Shift
The conference highlighted a significant shift in deal structures within the DSO market. Previously, heavy cash deals were common, often structured as 80% cash and 20% stock or retained equity. However, today’s deals are evolving, with a higher percentage of stock or equity being offered. DSOs are now presenting deals with closer to 30-40% equity, compared to the 20% seen 1-2 years ago. This change reflects the market’s adaptation to new economic realities and the need to keep operating capital healthy while still attracting dentists to partner with their organization.
Conclusion
The insights from the Dykema DSO Conference underscore the complex and challenging environment DSOs are currently navigating. Rising inflation and interest rates, extended deal closures, reduced valuations, and the increasing number of DSOs entering receivership all point to a market in flux. Despite these hurdles, this period of adjustment will ultimately make DSOs stronger operationally and better equipped to support their dental partners. There are many well-managed DSOs that have not over-leveraged themselves and are proving to be adaptive and resilient. Overall, the DSO market remains strong, and these economic challenges will weed out the weaker players. For dentists looking to partner with a DSO, it is more important than ever to thoroughly vet potential partners to ensure they are aligning with a robust and capable organization.
– Tommy Newton, Principal at Xite Company
About Xite
Xite Company is a national leader in healthcare real estate and practice sales, boasting an established reputation committed exclusively to representing doctors since 2013. With a transaction volume surpassing $1 billion, our expertise spans across practice sales, start-ups, brokerage, demographics, development, and project management. We are committed to empowering healthcare professionals, helping them flourish as entrepreneurs and practice owners. Leveraging evidence-based data and profound industry knowledge, our dedicated team ensures a seamless journey in all real estate endeavors, from office space selection and complex construction projects to strategic practice transitions, maximizing value every step of the way.
For more information, visit https://xiteco.com