Being on the front end of transaction activity and with the number of middle market relationships we have, IGS is often asked what industry segments are gaining a lot of attention. One such industry is dental, and one specific area is dental practice management (DPM) companies. Accordingly, we wanted to share some high level thoughts on the space for potential investors.
- Know what type of DPM you want- DPMs have two primary methods for growing their practice base- opening de novo practices and acquisition. DPMs often have the skills to do one of these well, but typically not both. It should also be noted that DPMs focused on de novo growth are well suited for a retail focused investor- funds with experience identifying / matching retail locations with the appropriate customer demographics / psychographics, and not just those focused strictly on healthcare.
- Patients’ loyalty is to the practitioner, not the practice- If a DPM is buying an existing practice (typically because a dentist is looking for an exit opportunity (retirement) or they are tired of dealing with the administrative challenges of running a buinsess), what is really being purchased is that dentist’s existing patient base. In purchasing a patient base, there needs to be a plan in place to transition and maintain those patients (applicable in the case of a retiring dentist). Precautions should be in place such as non-competes and non-solicitations, for an investor to be comfortable with a DPM that is growing via an M&A strategy.
- Keep referrals in house- Bringing specialists (such as orthodontists, periodontists, oral surgeons, etc.) in house is a good way to generate incremental revenue. In order to do this, DPMs require a certain scale to support these specialities- typically 5-6 offices in a region.
- Don’t forget about administrative staff- One of the leading complaints of dentists in DPMs is high turnover (and as a result lack of skills) in their office’s administrative staff. High administrative turnover hinders dentist’s production, as they are forced to spend more time hand holding and training new staff- which is the opposite of why many dentists join a DPM in the first place. In addition, this turnover and lack of skills can result in dissatisfied patients. While administrators can be seen as interchangeable, it is important to maintain strong administrative staff to effectively support the revenue generating activities of the dentists.
- Arbitrage opportunities exist for follow-on acquisitions- Differences in the way that stand alone practices are valued vs. group practices make growing a DPM by acquisitions an attractive proposition. Large, well-run DPMs have ~20% EBITDA margins and have sold for 7x EBITDA multiples, or higher. Dentists often sell individual practices as a percentage of trailing twelve month revenues- typically 75-100%. As an example, a standalone office generating $1MM / year in revenue with 20% EBITDA margins could be purchased for $750K- $1MM, but this same office would be valued at $1.4MM as a part of a DPM.