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The Rise of Corporate Dentistry: Why Is Dental So Hot?

By October 8, 2019February 17th, 2021Corporate, Dental Service Organizations

Dental Service Organizations are on the rise.  Not only are the early adopters raising capital and trying to acquire as many practices as possible, but new players are entering the marketplace.  You hear all about the multiples that they’re paying (6-7.5 x EBITDA or a dental practice’s Earnings Before Interest, Taxes, Depreciation or Amortization).  You also hear about how they’re raising money AT EVEN HIGHER multiples than that – to the tune of 12 to 15 x their OWN EBITDA!  Crazy.

Why is dental so hot for non-dentist investors to want to get in on the action?  There are a number of factors at play here including:

  • Dentistry is a SAFE bet.  Dentistry is a stable source of recurring revenues.  It’s recession resistant, not recession proof.  Because it’s heavily insurance-driven, patients don’t need to reach into their own pockets a lot of the time to cover their dental expenses.  Everyone should be going to see a dental hygienist at least 2 x per year.  And everyone has had some type of oral health issue.  Today, a lot of it is cosmetic based: they want to do Invisalign or equivalent to straighten their teeth (using clear aligner technology) or Zoom whitening (to brighten their smile).  They want to save teeth with restorative treatments or root canals.  And, worst case scenario: if they’re going to lose a tooth, they want dentures or implants.  Everyone wants a perfect straight and bright smile.  It shows where you’re at in your life; your social status.
  • There’s Room for Improvement.  A particular practice that has high overheads (e.g. staff, rent, sundries, etc.) and which doesn’t offer a lot of different treatments (e.g. surgeries, implants, Invisalign or equivalent, etc.) can be fixed to enhance the bottom line.  Steps include: (1) putting staff on contracts with industry-average wages (which should comprise 22-25% of overall collections / revenues), (2) being at a location that isn’t necessarily Yorkville (downtown Toronto) where the rent can be $200k / year! (maybe purchase a condo unit instead), (3) getting associates into the practice who can actually do the services that the practice is referring out, and (4) shop around for sundries and don’t necessarily buy the newest and shiniest materials that are pushed on you by dental supply reps (the larger your account, the bigger the discounts you can command).  Plus, let’s face it: most dentists aren’t good at marketing their practice.  They spend too much time and money on the wrong things.  They should develop a brand strategy and tactics to hit their target market (ideal patient) at least 6 times a year.  But most dentists don’t have the knowledge or experience to execute a good marketing plan and are easy to take advantage of by ‘marketing gurus’.
  • Equipment is Replaceable; So Too Are Staff; it’s a little Different for Dentists.  If your cavitron fails, you can buy a new one.  If your chair needs re-upholstering, you can pay for that.  If you need to update your sterilization area… you get the point.   This dental equipment is used thousands and thousands of times over the years and it lasts.  I’m still selling dental practices with 30+ year old Chairman chairs (everyone loves them because they traverse forward and back).  So while a dental practice is capital intensive, you don’t have to keep reinvesting.  And you don’t need a lot of working capital to maintain a dental practice: just be able to pay for staff, rent, sundries, utilities and perhaps some marketing.  What about your staff?  Well, there are schools spitting out assistants and hygienists.  Being a receptionist isn’t rocket science.  For any of the aformentioned position, there are set industry-accepted salaries and benefits; it also depends on geographically WHERE you’re located.  Ontario used to pay assistants $16 to start a few years ago; now it’s closer to $20.  In Alberta, wages are much higher: assistants start in their high $20s now.  Yes, it’s hard to find and invest in ‘good staff’ but the reality is that there are LOT of candidates to choose from; you just have to look or hire a head-hunting agency to do the looking for you.  What about associates and the principal dentist?  OK, here’s where the personal relationship has more of an important element to it.  Dentists should have great chairside manner; great case acceptance skills; be likeable in every way possible.  They should also have a broad range of skill sets – like resto, surgery, endos, ortho, etc.  The dentist is the last means of selling the case (after the practice’s brand, team, office, marketing materials, etc.).  And you can’t just stick any particular dentist in a clinic and hope that the clinic will excel.  You want the very best and when you find the best, you’ll want to lock them in and keep them happy.  But once again, what they get paid is usually fixed by the industry and it ranges from 40-50% for a general practitioner or higher for a specialist.
  • Dentistry is Evolving.  Dental practices used to be located on the 4th floor of a professional / medical building.  They didn’t have storefronts until relatively recently.  Now everyone and their uncle wants to have a store-front dental practice in a mall or a strip plaza.  And dental technology is evolving too.  Instead of using impression materials and trays, practices are using digital scanners (Itero).  There’s also laser dentistry, which allows dentists to cut teeth without anesthetics (and also aids in the recovery of tissue faster than normal).  There’s also the democratization of luxury dentistry: Invisalign and equivalents (particularly through tele-dentistry like Smile Direct Club).  General Practitioners placing Implants.  Using CEREC or equivalent to mill teeth while patients wait in the practice (instead of sending out the case to a lab).  All of these things are making dentistry more mainstream: quicker, better, cheaper.  Plus, there’s the dental schools.  They’re graduating a lot more dentists these days than ever before.  This will put pressure on wages to come down and practice profits up (perhaps associates will start making 28-35% as they do in the U.S. instead of the 40-45% that they’re currently making).
  • The Dental Industry is Early in the Consolidation Process.  Certain estimates have the Canadian dental industry at 3-5% being owned and / or operated by Dental Service Organizations.  In the U.S., it’s probably closer to 25%.  So there’s going to be a lot of consolidation over the next few years as we try to catch up to the Americans (who are in iteration 3.0 of their DSO model; we are likely in iteration 1.0 or 1.5).

 

The Content of this post is provided for informational purposes only. It is not intended to be legal, financial, tax, or other professional advice of any kind. You are advised to contact DMC (or other counsel) to seek specific legal advice concerning your individual situation.