Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Dental Supply Companies
Transcript
- Lucas: So last week I was looking at a deal that closed back in March — a mid-market private equity firm called Prairie Capital acquired a company called Dental Supply of the Carolinas. It's a regional distributor, about $40 million in revenue, family-owned since 1985. And on its own, that's not a massive headline. But here's the thing: it was the eighth add-on acquisition for a platform they'd started in late 2024 called Main Street Dental Supply. Luna: Eighth add-on in 18 months. That's aggressive, even by roll-up standards. What's the thesis here — that dental supply is still fragmented enough to consolidate? Lucas: Exactly. And I think the thesis is actually stronger than a lot of the other roll-ups we've covered on this show. Because dental supply has this combination of recurring revenue, regulatory barriers, and a genuinely fragmented landscape. The big two — Henry Schein and Patterson Dental — control maybe 40 percent of the market combined. The rest is split among hundreds of regional players, each serving a few hundred dentists in a specific geography. Luna: And what makes dental different from, say, the arborist roll-ups or the pool service roll-ups? Those also had fragmentation and recurring revenue. Lucas: Great question. The difference is in the customer's buying behavior. A dentist orders supplies — gloves, burs, impression material, composites — on a reorder cycle that's incredibly predictable. Most practices order from the same distributor every time because switching would mean reconfiguring their inventory management system. So the retention rate on these accounts is north of 90 percent annually. Compare that to a tree service company where a customer might call three different providers for a quote. Luna: So the roll-up creates a sticky base of recurring revenue. And the PE firm can then consolidate procurement, negotiate better prices from manufacturers, maybe even build a private-label line. Lucas: Right. And the numbers back it up. Dental supply distributors typically run gross margins between 28 and 32 percent. But net margins for a small independent distributor are often only 3 to 5 percent, because they lack purchasing power and have too much overhead spread across too little revenue. When you roll up eight or ten regionals into a $300 million-plus platform, you can centralize warehousing, combine back-office functions, and negotiate with manufacturers like 3M and Dentsply Sirona from a position of strength. Post-consolidation net margins can hit 11 to 12 percent. Luna: That's a dramatic jump. And I imagine the valuation multiple on the exit is higher too, because buyers — whether a larger PE firm or a strategic — will pay up for a scaled platform with that recurring revenue. Lucas: Exactly. The multiples we're seeing on these dental supply platforms are in the 8 to 10 times EBITDA range on exit. That's two to three turns higher than what they pay for the initial add-ons, which typically go for 5 to 7 times. So the math works if you can execute the integration. Luna: But integration is the hard part. You're buying eight family-owned businesses, each with its own culture, its own way of doing things, its own relationships with local dentists. If you screw that up, you lose the very thing you were buying — those sticky customer relationships. Lucas: That's the tension at the heart of every roll-up, and it's especially acute in dental supply. Dentists are small business owners themselves. They value the relationship with their distributor rep. If the rep leaves because the new corporate owner changes the compensation structure or forces new processes, the dentist might switch to a competitor. So the smart platforms — Main Street Dental Supply seems to be one — keep the local brand and the local sales rep in place for at least a couple of years. They centralize only the back end. Luna: That's the 'roll up, don't roll over' approach. Keep the face local, the muscle centralized. It's the same playbook used in the HVAC roll-ups and the commercial door company roll-ups. Lucas: Right. And there's another factor that makes dental supply especially attractive right now — the aging population. More people over 65 means more dental procedures. According to the American Dental Association, spending on dental services in the US was about $180 billion in 2025, and it's projected to grow at 4 to 5 percent annually for the next decade. That's a tailwind for the entire supply chain. Luna: So the PE firms are betting on a rising tide. But they're also creating a more efficient layer that, in theory, should benefit the independent dentist — better pricing, better availability, maybe even better service if the platform invests in technology. Lucas: In theory, yes. The counterargument is that consolidation reduces competition and eventually leads to higher prices for the end patient. But that's a longer-term risk. Right now, the independent dentist is probably getting a better deal because the platform can pass on manufacturer discounts that a small regional couldn't access. Luna: And I'm guessing the larger strategic buyers like Henry Schein are watching this closely. They've been acquisitive themselves, but they're public companies with public company multiples. A pe backed platform that's private and growing fast could be an acquisition target for them down the line. Lucas: Absolutely. Henry Schein's market cap is around $10 billion. A $500 million dental supply platform with strong margins and recurring revenue would be a bolt-on acquisition that moves the needle. And they've done deals like that before — they bought a company called Zahn Dental in 2016, which was a dental lab supply distributor. But the PE firms are betting they can build something even bigger and then sell to a strategic or take it public. Luna: This is exactly the kind of conversation that makes me think about the value of independent analysis in business. We're digging into a specific niche that most people wouldn't even know exists, and we're able to do that because we're not chasing ad revenue or clickbait. Lucas: You're right. And it's something I think about a lot — the fact that this show is ad-free and listener-supported means we can spend 12 minutes on the economics of dental supply distribution without having to sell a single product. If these conversations have moved your work forward in some small way, the best way to keep them going is to support us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that adds up. And it keeps the show exactly what it is — no sponsors, no interruptions, just the two of us talking through a deal or a trend until we understand it. Lucas: So back to the dental supply roll-up. One of the firms we've been tracking is a group called Summit Partners — they made a big move in 2022 when they acquired a platform called Dental Services Group, which is a network of dental labs. But that's a slightly different part of the value chain. Dental labs make crowns, bridges, dentures — custom products, not consumables. The business model is different, and the consolidation story is different. Luna: How so? Because dental labs are also fragmented, also serve local dentists. Seems like a similar thesis. Lucas: It is similar, but the key difference is that lab work is customized and labor-intensive. You can't just stock a crown on a shelf and ship it when ordered. Each restoration is made to order, often using digital scans and cad cam milling. So the economies of scale are less about procurement and more about utilization of expensive equipment — like those five-axis milling machines that cost $200,000 each. If you can centralize production across multiple labs, you can run those machines 24 hours a day and dramatically lower the per-unit cost. Luna: So the roll-up thesis in dental labs is about manufacturing efficiency, while in dental supply it's about distribution efficiency. Both are valid, but they require different operational playbooks. Lucas: Exactly. And the firms that are doing it well are the ones that understand that distinction. I've been looking at one platform in particular — it's called Synergy Dental Partners, backed by a PE firm called Gemspring Capital. They've rolled up about 15 dental labs in the Midwest and Southeast since 2023. Their pitch to sellers is that they'll keep the local lab brand and the relationship with the dentist, but they'll move the production of complex restorations to a central facility with digital workflows. Luna: And that makes sense — the local lab still handles the pickup and delivery, the customer service, the urgent cases. But the high-volume, high-margin work gets centralized. It's the hub and spoke model. Lucas: Precisely. And the margins in dental labs are actually higher than in distribution — gross margins can be 40 to 50 percent because the product is custom and the dentist can't easily comparison-shop. But the industry is also facing a labor shortage. Fewer young people are going into dental technology — that's the field of making crowns and bridges. So the platforms that can invest in automation and digital workflows are going to have a competitive advantage. Luna: So the labor shortage is actually accelerating the consolidation. Independent lab owners are approaching retirement age, they can't find qualified technicians to take over, so selling to a PE platform becomes the exit strategy. Lucas: That's exactly the dynamic we've seen in so many of the verticals we've covered. The seller's motivation is demographic as much as financial. And the buyer's thesis is that by aggregating and modernizing, you can create a business that's worth much more than the sum of its parts. Luna: Let's zoom out a bit. We've talked about dental supply and dental labs. Are there other segments of the dental industry that PE is targeting? I'm thinking of dental practice management — the so-called DSO model, dental service organizations. Lucas: That's a huge area, and we've actually touched on it in a prior episode — pediatric dental practices. But the DSO model is broader. There are firms like Heartland Dental, which is backed by KKR, and Aspen Dental, which is backed by Leonard Green. They acquire individual dental practices and provide centralized administrative support, marketing, billing, and sometimes even clinical oversight. The number of US dentists in DSOs has gone from maybe 5 percent in 2010 to over 15 percent today. Luna: And that creates an interesting dynamic for the supply chain. If more dentists are part of DSOs, then the purchasing decisions become centralized. A DSO with 500 practices can negotiate directly with manufacturers, bypassing distributors altogether. That might actually threaten the distribution roll-up thesis. Lucas: It's a real risk. If DSOs continue to grow and start buying direct, the regional distributor's value proposition diminishes. But I think the distribution platforms are aware of this and are trying to offer value-added services — like inventory management software, practice analytics, even financing — to make themselves indispensable. And the DSOs themselves are often focused on the clinical side, not on supply chain optimization. So there's still a role for a sophisticated distributor. Luna: So it's a bit of an arms race. The DSOs are consolidating on the practice side, and the distributors are consolidating on the supply side. At some point, those two trends may collide. Lucas: They already are. I've heard of cases where a DSO acquired a small distributor to bring the function in-house. But that's still rare. Most DSOs view supply chain as a cost center, not a core competency. They'd rather outsource it to a partner who can do it better and cheaper. So the distribution platforms have a window of opportunity to build scale before the DSOs figure out supply chain on their own. Luna: That feels like the key question for any PE firm building a platform in this space: How fast can you scale before the market structure shifts? If you take five years to roll up 20 distributors, the DSOs may have already consolidated enough to change the purchasing dynamics. Lucas: Exactly. Speed is critical. And that's why we're seeing such aggressive acquisition paces — eight add-ons in 18 months, as we mentioned. The firms that move fastest will capture the most value. The ones that hesitate may find themselves with a platform that's too small to compete. Luna: It's a fascinating space. I know we'll be watching how Main Street Dental Supply and Synergy Dental Partners perform over the next few years. And I'm curious to see if any of these platforms end up going public or getting acquired by a larger player. Lucas: Me too. And on that note — if you're a dentist listening, or someone who works in the dental supply chain, we'd love to hear your perspective. You can reach us at the show's email or on social media. But for now, I think we've covered the key pieces of the dental supply roll-up thesis. Thanks for listening, and we'll see you next time.