After a wonky, bar belled M&A market in 2021 with most transactions all coming in the first and last quarter of the year (#thanksCOVID), in 2022 we witnessed the most active dental M&A market in history. The market was driven by four major forces:
- Pent up demand on the buy-side
- Fears around tax increases from the Biden Administration
- COVID fatigue related to business ownership
- High demand for specialty practices
Pent Up Demand on the Buy-Side
PE-backed DSOs have one mission: GROW. They must grow for two reasons: (1) they have capital that has interest expense even when it is not put to work in acquisitions, and (2) the investors (limited partners) have an expected return that they are expecting the PEG to provide them. PE-backed DSOs all have a 60-month growth plan and exit once they hit their targets. In 2021, the debt capital markets all hit a pause on lending as everyone tried to figure out the impact of COVID on the economy. This pause in lending resulted in a pause in buying (across all sectors) as many of the deals in dental are completed with a blend of equity (cash) from the PE company and debt (up to 4-6x EBITDA) from a lender. Without the debt, deals don’t get done. In 2021, many DSOs we spoke with only hit a fraction of their goal for acquisitions, and that drove an insatiable demand for new practice and group acquisitions in 2022.
Fears Around Tax Increases
When we sell a dental practice or group, we have been able to negotiate an average blended Federal Tax Rate of around 24%. This is because the taxes our clients pay are a result of negotiation around the allocation of the purchase price and the tax treatment difference between fixed assets (taxed at the ordinary income tax rate) and intangible assets (taxed at the long-term capital gains rate). When President Biden was pressing to increase long-term capital gains taxes to north of 37%, panic hit. Were this to pass, the tax benefits of asset allocation on the sale would disappear. Just as an example, on a $3,000,000 sale, the net result of this proposed tax change would be an additional tax bill of $390,000! This fear of increased taxes drove many owners of practice and groups to press for a sale in 2021 that otherwise might have sat on the sidelines for another year or more.
COVID Fatigue
Although the business of dentistry faired very well coming out of COVID (many of our clients saw massive growth in 2021), it was hard on business owners. PPP, PPE, furlough, fire, hire, wage increases, employee shortages – it was no easy task to manage a dental practice, much less a group, during the thick of the COVID shutdown and reopen. As a result, many dental practice owners decided that it was time to sell and enjoy their life in other ways. I am not talking about fire sales, I am referencing great businesses with wonderful leaders who decided that they were ready to give up the reins and stresses of business ownership, take some chips off the table, and let someone else worry about payroll.
High Demand of Specialty Practices
Orthodontics and Pediatrics have had DSO acquirors for many years now, but it is not until recently that Oral Surgery, Endodontics, Periodontics, and Prosthodontists have faced high demand from buyers for their practices. In 2017 we represented a huge Oral Surgery Group in TX when they partnered with another group to form U.S. Oral Surgery. That one transaction was the first domino to fall. That trade and U.S. Oral Surgery’s success in the market paved the way for a new breed of DSOs focused exclusively on specialty practices. Since that time, we have played a major role in the formation of many new specialty-focused PE-backed groups. The demand for specialty practice is higher than ever, and it is reflected in the exit multiples.
Learn More About Practice Valuations in the Marketplace Today:
All of these factors fueled incredible activity in the M&A markets in the dental economy in 2021. So, what does 2022 have in store for us?
Low Supply of New Deals in Market Driving up Prices
- There are fewer deals in market in Q1 than in recent history.
- There are more buyers with more capital than ever before.
- This disequilibrium in supply and demand drives up prices and creates a sellers’ market.
- This seller’s market will disappear by Q4 of 2022 when the supply of businesses for sale returns to equilibrium levels.
To recap, M&A markets are expected to remain white hot until Q4 of 2022. Buyers are still at an acquisition deficit and are willing to pay premium prices for your business to fill the lack of acquisitions that 2020 created. Specialty practices will hold the reins when it comes to top dollar valuations and many new platforms are expected to form. If you have questions or would like to know the true value of your business, schedule a 30-minute call with TUSK. We would love to learn more about you and your business and educate you on what we’re seeing in the marketplace today.
About TUSK Partners: TUSK Partners (“TUSK”) provides M&A Advisory services in the dental industry. TUSK has completed over $650M of transactions across all specialties. With an in-depth understanding of the marketplace and access to 100’s of buyers nationwide, we help our clients confidently pursue M&A transactions that maximize their long-term value. With our significant collective experience of over 40+ years of dental practice transactions, we offer our clients solutions that help them achieve their strategic and financial objectives. For more information, visit https://tusk-partners.com
