Last week my Partner, Diwakar Sinha, and I spent most of the week in warm and sunny Chicago at the McGuireWoods Healthcare Private Equity Conference where we were honored to be a “Featured Company.” For those who might not be familiar, McGuireWoods is a 180 year-old, international law firm covering numerous sectors of the economy and are recognized as one of the preeminent firms in the DSO space. This conference was very well attended as it was their 14th time putting it on.
The conference covered almost all aspects of the healthcare field over two full days with 29 different panels and breakouts. Topics ranged from operational considerations like changing payer mix and maximizing organic growth to strategic levels dealing with valuation and pricing models. There was a variety of structural discussions based on debt and equity placement as well as sector-specific panels on veterinary, behavioral health, occupational therapy, hospital care, dermatology and…oh yeah – this little space called dentistry.
Diwakar and I drank copious amounts of coffee and made every effort not to get distracted by the frequent discussions of “Repeal or Replacement of the Affordable Care Act.” As you can imagine, however, President Trump featured prominently in many of the discussions even after only 30 days in office. We were fortunate to get a chance to network with many people who were either active in or curious about the dental space in which we operate. I’ll try to summarize some of their comments as well as a few of the panel discussions in my three big takeaways from the trip.
Dental Services and What’s Next for the Sector
The panel was comprised of five executives whose companies ranged from several private equity firms to Guardian Insurance Company to Great Expressions (a DSO). As it has been stated many times before, the attractiveness of the entire dental space is born out of it being highly fragmented. There is a high degree of opportunity due to the many different models that exist among established and emerging DSOs, and from the perspective of Private Equity “market density wins.”
Acquisition strategies continue to be focused on practice quality and geographic density. If you’re focused on one-off dental practices, you know what you’re going to get because you’re buying that particular individual. On the other hand, it can be a lot riskier if you buy a group of 5+ locations due to factors such as: a lack of consistency and continuity; unestablished compliance and few “standard operating procedures”; spotty organizational leadership (no Chief Compliance Officer or Director of HR); and few employment contracts in place for the key clinicians. Additionally, if your targets involve cosmetic services, be aware that a small change in the patient mix can cause the valuation to crater. For this reason, DSOs that are primarily PPO-based tend to see more stability in valuations.
The panelists all agreed that sellers are aware of the “frothiness” of the current market and their expectations of valuations remain high – sometimes irrationally. Sellers frequently get fixated on numbers, but “not every business is worth 15x EBITDA.” A more realistic scale is probably from 8-12X based on geography, payor mix, a scalable platform and growth plans for both top and bottom line. The seller also needs to understand that they and their staff will soon be working for a corporation and the last thing the acquiring company wants are independent contractors in actuality or in mindset.
When considering specialties, the feedback varied according to what the focus was on. In terms of pediatric services, it immediately depends on if there’s a pediatric program in the actual state. If there is, then it’s a volume game if you’re going to make money at it – and it’s hard to grow Pedo if you don’t want to be in Medicaid. Overall you need to focus on areas of market concentration to capitalize on specialty services (which is another reason why “density wins”) in an effort to try to keep the patient “in-house” for every service needed.
In our next post, we’ll dig deeper into the outlook on funding as we summarize two fascinating panel discussions on Macro-Trends in Lending as well as “Alternative” (Non-Bank) Lending Sources. This could impact the business of dentistry significantly due to the departure of EastWest and Opus banks from the fast-growing emerging market DSO space. Stay tuned for more details…
Special thanks to Bart Walker and all of the great people at McGuireWoods for hosting us in Chicago. We look forward to seeing everyone at the conference again next year.
TUSK will be a featured presenter at the Association of Dental Service Organizations 2017 Summit in Orlando, FL on March 7th where we will share “Strategy & Tactics to Meet Opportunity Where it Lives.” We hope to see you there as well!
To continue discussion on these topics or any others related to trends in our industry, please feel free to contact me here.
TUSK is a practice brokerage, strategy and M&A advisory firm specializing in the dental market.