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 favo
rable 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.
Debt Financing Running Out
DSOs rely on debt to make deals. In any given transaction, the cash that a seller receives is from the buyer’s lender (sometimes up to 100%) not the PE company or DSO’s balance sheet. Lenders limit the amount of debt they provide DSOs based on the amount of earnings before interest, taxes, depreciation, and amortization (EBITDA) in any given acquisition and the total EBITDA inside of the DSO (aka, the DSCR or debt service coverage ratio). As the cost of debt goes up, lenders’ appetite to fund deals drops. Most DSOs will be in great shape to get deals done for the first half of 2023, but there is uncertainty around the second half of the year.
If you are considering selling in 2023, you need to act now to be on the front end.
Returns for Rolled Equity in DSOs Varied Widely
Several DSOs recapped in 2022 and some did not provide dentists who rolled equity the returns they expected. We know from some dentists who made deals in 2019 that when the deals were done and the wires hit, they were only offered their money back on their equity roll—meaning no return on the money they invested. On the other hand, there are DSOs that returned 2.5–3.0x cash on cash return to their dentists who rolled equity in their DSOs. As we all know, there are no guarantees on the value of stock (remember ENRON?) but don’t take any deal with rolled equity without speaking to an expert who knows the facts around the historical returns. It is critical that you fully understand the value of the shares you’re rolling your proceeds into.
There's never a bad time to know the true value of your practice.
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IPOs of DSOs Are Coming
Most elite groups (i.e., groups with 250+ locations) have been talking about taking their businesses public for years. With the markets plummeting in 2022, those dreams were put on hold (the number of IPOs in 2022 was at a six-year low). Why would they consider going public? Valuations for publicly traded DSOs are likely to trade at 20–30x future earnings compared to private-market valuations of 12–14x trailing 12 months earnings for similarly sized assets. In short, they can more than double the value of their business with an IPO. If you are considering a sale, it could be a good time to hitch your wagon to some of the groups considering an IPO in the next 24 months. Warning: Not all DSOs are going to make this transition smoothly.
Summary
If you are considering selling your practice or group, act soon. The market is frothy with buyers and Q1 of 2023 promises to be a buying frenzy. There are signs of a cooling market during the second half of the year. This slowdown would be offset by an improving US economy and a decline in interest rates. If we do face a slower second half of the year, expect to see DSOs get creative with deal structure as they must grow to meet investor demands.
If you would like TUSK to review an unsolicited offer from a DSO, schedule a call to ensure you're getting the best deal for your practice.
About TUSK Partners: TUSK Partners (“TUSK”) provides M&A Advisory services in the dental industry. TUSK has completed over $750M 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
