Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Dental Labs
Transcript
- Lucas: So there's a quiet corner of healthcare that private equity has been circling for a while now, and I don't think most people realize how much it's already changed. I'm talking about dental labs — the places that actually make the crowns, bridges, and dentures your dentist fits. Luna: Right, the behind the scenes workshops. I had no idea those were getting rolled up until I started looking into it. Lucas: And they are. I was looking at a recent deal — a mid-size regional lab in the Midwest that sold for a multiple that would have been unthinkable ten years ago. And it's part of a much bigger pattern. Luna: Before we dive in, I have to say — if these conversations have helped you think about your own business or career in a new way, that's exactly what we hope for. And if you've gotten something out of it, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Small things like that keep this show ad-free and independent. Lucas: Yeah, and we really do appreciate that. Okay, back to the labs — so the key here is that this is a classic fragmented market. There are thousands of small, owner-operated labs across the U.S., most of them with fewer than ten employees. Luna: And those owners are getting older, right? A lot of them are looking to retire, and they don't have a successor lined up. Lucas: Exactly. The average age of a dental lab owner is pushing sixty, and the craft isn't exactly attracting a flood of young people. So you've got a bunch of businesses that have been stable and profitable for decades, but with no obvious exit plan. Enter private equity. Luna: So what makes a dental lab attractive to a PE firm? I mean, it's not exactly tech. Lucas: It's the recurring revenue. Dentists send work to a lab on a regular basis — they're sticky customers. Once a lab has a relationship with a dental practice, it's not easy to switch. And the margins are decent, especially if the lab has embraced digital workflows. Luna: Digital workflows — so we're talking about CAD/CAM, intraoral scanners, that kind of thing? Lucas: Exactly. Traditionally, a dental lab was a manual craft — you'd take an impression, pour a plaster model, build a crown by hand. But today, a lot of labs are using digital scanners to capture the tooth geometry, then milling or 3D-printing the restoration from a block of ceramic or zirconia. Luna: So it becomes more scalable. You don't need the same level of artisan skill for every step. Lucas: That's the whole thesis. You can centralize the digital design work, put a milling machine in a central facility, and deliver a consistent product. That's what makes a roll-up work — you can buy a bunch of small labs, standardize the technology, and cut costs. Luna: And I've seen numbers that the dental lab market is around five billion dollars in the U.S. alone. Is that right? Lucas: You're in the right ballpark. It's a multi billion dollar market, and it's growing slowly, but it's not a high-growth industry. What PE firms see is a steady, predictable cash flow stream. Luna: So who are the big players doing these roll-ups? I've heard of a few names, but I don't want to get them wrong. Lucas: Well, there are a few well-funded platforms that have been on a buying spree. One of the larger ones is based in Texas, I think, and they've acquired dozens of labs across the country. They're not household names, but in the dental world, they're becoming dominant. Luna: And what do these firms actually do with the labs they buy? Do they keep the local brand or rebrand everything? Lucas: It varies. Some keep the local name because dentists value that relationship. But behind the scenes, they're integrating back-office functions, centralizing purchasing, and often moving the lab to a centralized production facility. Luna: That sounds like it could be a tough transition for the original owners and staff. Lucas: It can be. A lot of the original owners stay on for a few years, but the culture can shift. And there's a bigger question — what happens to quality when you're churning out crowns in a centralized plant? Luna: That's my worry, honestly. I had a crown done last year and the fit was perfect, but I've heard horror stories from friends. Lucas: And that's a real risk. Some dentists have complained that the big lab groups are less responsive, more error-prone, and harder to get on the phone. But the counterargument is that digital workflows actually improve consistency and reduce human error. Luna: So it's not all doom and gloom. But what about pricing? Are they squeezing the dentists, or does consolidation actually lower costs? Lucas: It's still early to tell. You'd think economies of scale could lower prices, but in practice, we've seen some lab groups raise prices because they have more negotiating power with dental plans. Luna: So the dentists might end up paying more, and then they pass that on to us, the patients. Lucas: Right. If you're getting a crown, you might not see the lab bill directly, but it's baked into what your dentist charges. And if the lab costs go up, either your dentist absorbs it or you do. Luna: Now, there's also a consolidation trend on the other side — dental service organizations, the DSOs that buy up dental practices. Are they getting involved with labs too? Lucas: They are, and that's the next layer. Some DSOs are starting to acquire or partner with labs to capture more of the value chain. If you own the dental practice and the lab, you control the whole patient journey for a crown or a bridge. Luna: Vertical integration, basically. Lucas: Exactly. And that's a trend to watch, because it could change the competitive landscape. If the largest DSOs have their own in-house labs, then the independent labs have to fight for the remaining dentists. Luna: So what does this mean for the small independent lab owner who's thinking about selling? Is it a good time to sell, or should they hold out? Lucas: It's a seller's market, frankly. There's a lot of capital chasing these deals, and valuations have been rising. If you're a lab with a solid client list and modern equipment, you can get a good multiple. Luna: But what if you're a younger tech who's thinking about starting a lab? Is there still room for independence? Lucas: It's harder, but not impossible. Some labs are thriving by specializing in high-end, complex cases that don't fit the standardized mold. They're the boutique shops of the industry. Luna: Like a custom jewelry store versus a chain. Lucas: Exactly. And there's also a trend of some dentists going back to in-house milling machines, especially for same-day crowns. That's a threat to the traditional lab model, but it's also an opportunity for labs that can partner with dentists to handle the more complex cases. Luna: So the industry is kind of splitting into two camps — the big consolidated players and the niche boutiques. Lucas: That's a fair way to put it. And the middle is getting squeezed. If you're a mid-size lab that's not big enough to have the scale of the roll-ups, but not specialized enough to compete on quality, you're going to have a tough time. Luna: So what's the one thing you want listeners to take away from this episode? Lucas: I think it's that the next time you're in the dentist's chair getting a crown, the person who made that crown might not be the local craftsman anymore. It could be a centralized production facility owned by a private equity firm. And that's not necessarily a bad thing, but it's a big change from the way things used to be. Luna: It's definitely worth thinking about. And with the aging owner demographic, we're probably going to see more of these deals in the next few years. Lucas: Absolutely. I'd expect to see at least a few more big roll-ups announced before the end of the year. And if you're a dentist listening, maybe think about who's making your crowns. Luna: On that note, thanks for listening, and we'll catch you next time.