After a slow 2022 driven by increased interest rates, we experienced some normalization in Dental M&A in 2023.  Here are four trends from 2023 that will impact 2024 deal activity:

• Significant Portion of Buyside Remains “Pencils Down”
• New Platforms Being Formed to Replace Nonactive Buyers
• Buy-Side is Being Much More Selective
• Deal Structures Vary Widely

Your dental practice serves as your primary source of income and, likely, your most valuable asset. Selling a dental practice is a significant decision that goes beyond the typical real-estate transaction.

With patients, team members, and your professional reputation at stake, careful planning is essential as you are effectively swapping cash flow from the business (taxed at ordinary income tax rates) for a lump sum of 5–10 years’ worth of cash flow on which you will only pay long-term capital gains at today’s rates. You only get one chance to sell your business—make sure you make a well-informed decision.

It’s a common conversation we have when approaching prospective sellers, “How much more can you really improve my offer? Why would I pay someone to negotiate on my behalf if I already have a deal in front of me that I’m happy with?”

In truth, most of our job isn’t to ensure you get a valuation that you’re happy with. It’s to ensure the valuation you receive holds up, and that you’re protected from the other trapdoors built into LOI’s that will impact your value down the road. Unfortunately, you don’t fully understand what your offer really entails until it’s too late.

If you are a dentist that has 20% or more of your revenue attributable to implants, and over $1.5M in revenue you have one of the most valuable practices in America today.  This was not the case, a year ago…

Looking Back

20 years ago, when the consolidation of the dental industry was in its infancy, almost all the investors were focused on buying general practices.  They were plentiful, in great locations, and each year many new dentists graduated from school to join these practices as Associates. Additionally, GP practices had recurring revenue through their hygiene department.  Hygiene regularly represented 20%+ of revenue.  It helped de-risk the cashflows and the dependency on the dentists.

Congratulations! Your business survived COVID and the reward waiting on the other side of the pandemic was the Great Resignation. You weathered that storm and now you are greeted with rampant inflation. Additionally, you are being held hostage by your team for more compensation. Now, the benefit of surviving all of this is a looming recession.  It has been a hard run, and likely only going to get harder. 

Like you all, I spend a lot of time reading the financial press. Each paper, website, and author have a unique perspective on the US economy. Although the news is great, I also seek out those in the know for their opinions as well. 

Lessons Learned From Industries Long Consolidated

We’ve heard a lot of late about the economic environment, financing rates, interest rates,  PE funding and valuation levels. It’s a veritable cacophony of conflicting thoughts, values and guidance. Largely missing from all of these are references to industries consolidated long ago which can give us some incredibly valuable insight into where we currently are, and where the industry aggregators may be moving in the future.

PICTURE IT WITH ME: you’re enjoying a relaxing Saturday morning at home. As you sit on the front porch reading the paper, you notice that the grass needs cutting, the dead limb over the garage did not come down by itself while you were practicing dentistry all week, and although the leaves fell months ago, you still haven’t removed them from the flower beds. There’s certainly some work to do outside. Not wanting to tackle the chores today, you wander inside.

 As you walk past the fridge, you glance at the long list of honey do’s placed up there weeks ago that continues to grow. As you pour another cup of coffee and think about how to get through this mountain of work around the house, the doorbell rings.

“I want a 9X on 1.8MM in EBITDA, 80% cash at close and no earnout!”

“I want an 8X on 550k in EBITDA, 100% cash at close and a 12-month employment agreement.”

I hear this all the time. At times, I must sit back and wonder where it all comes from and how these expectations began. There are a dozen funnels of information that can find their way into the general dental population, however I believe that there is a vast chasm between expectations and reality right now that simply has to be addressed, and the fault lies everywhere.

The Mergers and Acquisitions (“M&A”) world is largely cyclical.  There are ups and downs and good times and bad to sell one’s business. Over the last 5 years, we have only seen dental practice values increase.  So, the question we are often asked is, “How much longer can they go up?”

If you spend too much time watching the news or reading the financial press, it can feel as though we are only one day away from financial ruin, but the story in the dental economy is a different one. Demand is high across all specialties and GP practices and new capital is entering the market with great regularity, keeping valuations high, for now.

As we prepare for the year ahead, I want to share a summary of conversations I’ve had in recent months with IDSO/DSO leadership nationwide, as well as our insights on the dental mergers and acquisitions (M&A) markets.

Valuations Remain High

2022 was one of our busiest years. Our clients enjoyed rich multiples and favorable deal structures with the best DSOs in the nation. We currently have more deals in the market than ever, and we’re consistently seeing bidding wars and multiple offers. Buyers are complaining that they cannot keep paying these rich multiples much longer and that they must be selective in how they spend their money, but for every buyer that bows out, two new buyers appear. There were at least 20 private equity- (PE) backed DSOs formed in 2022, and they must buy practices to grow and meet the needs of their investors. Q1 is always a fascinating time in M&A markets: fresh off the busiest M&A closing season, there are never enough sellers to meet buyer demand. Each year this results in bidding wars and premiums paid by buyers through the first four to five months of the year. The first half of 2023 will be fast-paced, resulting in excellent deals for sellers.