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As the recent ADSO Summit confirmed, there continues to be far-reaching investor interest in dental support organizations (DSOs) as a way to participate in the large, growing, and resilient dental sector. Patient demand has rebounded well post-pandemic, and while there are complexities to navigate in terms of staffing and personnel, the outlook for 2023 and beyond is positive, and continues to improve.

In this article, senior bankers from Harris Williams Consumer Group and Healthcare & Life Sciences Group discuss the latest factors driving investor interest in DSOs and key value creation levers within the subsector.

Key Takeaways

• The dental market is large and growing, remains highly fragmented, and has proven to be recession-resilient, with significant opportunities to continue to consolidate and professionalize.

• With over 100 PE-backed DSO platforms today, the DSO model has proven to be highly effective in supporting dentists in a challenging operating environment, while providing investors with tangible growth vectors to create long-term value.

• Stand-out platforms have four key areas of focus: dentist retention approaches, specialization, consumerization, and efficiency.

Large, Growing, and Fragmented 

The $136 billion+ dental market is growing 6%+ annually and has shown its ability to recover from pandemic-induced demand fluctuations.¹ It also has much more growth potential, given significant untapped whitespace and a heightened focus on serving patients' needs in the specialty market. Among physician practice management (PPM) subsectors, dental is among the largest and most fragmented.

In addition, consumers tend to visit their dentists more frequently and with greater regularity than many healthcare providers. Today, approximately 65% of U.S. adults visit a dentist each year.² Geoff Smith sees a massive opportunity to continue to educate consumers on the importance of oral health as an entry point to whole-body health, driving even greater adoption.

“Nearly 20 years ago, Canada went through a government-led oral health education process, as just over 50% of the population was visiting a dentist annually at that time,” he says. “Fast-forward to today, and more than 75% of Canadian adults now see a dentist annually.³ A similar increase in dental visits in the U.S. would be a massive uplift for the DSO sector as a whole.”

Additionally, while some U.S. geographies maintain a higher percentage of DSO affiliations or more dentists per population, there remains a strong opportunity for continued consolidation and/or de novo growth in nearly every geography. James Clark highlights that while dental was one of the first physician practice management subsectors to employ a roll-up strategy, “The industry is still only 15% to 20% consolidated at this point, with less than 10% consolidated by private equity,” he says. “There's significant opportunity for further consolidation and creation of scale.”

Dentist interest in affiliating with a DSO also continues to accelerate. The DSO model allows dentists to focus on providing high-quality patient care with a significantly reduced administrative burden. It also enables them to realize the benefits of scale in purchasing power and payor contracts, overcome educational debt burdens more quickly, and create a path to equity. “With an average school debt of $300,000+, dentists coming out of dental school are increasingly choosing to go the DSO route,” Nathan Robertson says. “It gives them an opportunity to de-risk their decision to pursue dentistry and creates a path to wealth creation via equity in a scaling platform.”

Four Key Growth Levers

Despite the number of existing PE-backed platforms in the market, significant opportunities for value creation remain for investors. Those that are differentiating their platforms have developed unique and specialized business models that coalesce around four essential growth levers.

Dentist Retention

Perhaps the most crucial and differentiating factor for a DSO to drive value is to maintain an exceptional dentist culture, which drives dentist satisfaction, retention, and ultimately produces stable top-line growth. Strong DSO platforms are clinically driven and enable dentists to focus on what they do best: provide high-quality dental care and enhance the patient’s oral health. Dentists want to work with trustworthy, value-added partners that give them the appropriate autonomy to practice effectively and support their continuing education efforts. DSOs that employ these dentist-forward cultures often see above-market retention rates.

Attractive incentive models also produce upper quartile retention rates, typically by incorporating some form of equity model into the incentive program. While there is no one-size-fits-all approach in the market, two popular equity models include a joint venture (JV) model and a holding company or “TopCo” model.

In the JV model, the dentist owns a percentage of his or her practice and receives a commensurate share of the practice-level profits on a quarterly or annual basis. In a healthy practice, this model can often result in greater voluntary retention rates, simply because the dentist is “bought in”, given his or her tangible vested interest in every decision that is made at the practice. In this model, the dentist personally benefits from every incremental dollar of profit. However, under this construct, dentists can also feel the pressure of making operational decisions that directly impact their own compensation.

In a TopCo model, the holding company aggregates the interests of anywhere from a few practices to hundreds, allowing each dentist to own a share of the combined entity, and benefit from the growth and profitability of the entire business. Everyone works toward the collective profitability of the holding company, creating a broader sense of collegiality, while placing slightly less emphasis on the profitability of the specific office in which the dentist practices. The downside to this model, especially in larger platforms, is the potential for some to take advantage of the model’s upside while underperforming themselves.

“While there is still a bit of an education gap, dentists have become more versed in the dynamics between JV and TopCo equity models, and in many cases now, work to find the model that most aligns with their personal objectives,” says Clark. “In addition to these two structures, there are many other ways that DSOs are being creative to align incentives and make sure that they have the best, most profitable dentists, for the longest time, on the platform.”

Embracing Consumerization

"Consumers realize they have a choice. They're reading reviews and looking at pictures. They want more modern offices with more amenities and online access or patient portals. They want a better, more transparent experience,” says Corey Benjamin. “DSOs that are on the leading edge of this trend effectively stand to win."

Some platforms are adding consumer-facing technology, such as apps, that the patient can use to seamlessly engage with the provider. The apps allow patients to share necessary information in advance of their dental visit, receive automatic appointment reminders, enable two-way communication pre- or post-appointment, and integrate directly with the provider’s practice management system. Other platforms are appealing to the senses by creating calming environments, complete with massage chairs and aromatherapy towels, to more closely resemble a med spa facility. Still others are making care more convenient by adding weekend and evening hours or adding incremental cosmetic services to their mix. All are working to place the patient at the center of their care model and make it as easy, convenient, and pleasant of an experience as possible.

An Opportunity With Teeth

The large, growing, and fragmented dental market is rich with opportunities for continued consolidation, professionalization, and consumerization. DSOs eliminate many of the day-to-day burdens for dentists and enable them to provide quality care for the patient. Despite the current macro-economic conditions, DSOs with differentiated approaches to dentist retention, specialization, consumerization, and efficiency are best positioned to win share.

To discuss the dental market and DSO investment opportunity in more detail, contact our senior bankers.

1. Stax

2. CDC National Center for Health Statistics

3. https://www.cda-adc.ca/stateoforalhealth/snap/#:~:text=The%20results%20showed%20that%2075,dentist%20on%20an%20annual%20basis