Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Rolling Up Dental Support Organizations
Transcript
- Lucas: So next time you sit down in the dentist's chair and they ask you to bite down on that little sensor for the x-ray, take a look at the name on the practice's paperwork. There's a decent chance the actual owner isn't Dr. So-and-So anymore. It's a private equity firm. Luna: We've talked about roll-ups in veterinary, in pet funeral services, in HVAC. But dentistry feels different. It's a profession that's been fiercely independent for a century. Lucas: Right. And it's still less consolidated than a lot of those industries. But the pace has picked up dramatically. According to the ADA, in 2018, about 5 percent of U.S. dentists were affiliated with a DSO — a Dental Support Organization. By the end of 2025, that number was north of 17 percent. And the biggest DSOs are backed by some of the largest private equity names out there. Luna: Seventeen percent doesn't sound massive until you realize there are roughly 200,000 practicing dentists in the U.S. So that's over 34,000 dentists now tied to a corporate entity. Lucas: Exactly. And the DSO model is elegant in its structure. The DSO doesn't own the clinical practice — that would run into state laws prohibiting the corporate practice of dentistry. Instead, it owns a separate management company that provides all the non-clinical services: billing, scheduling, HR, procurement, marketing, real estate. The dentist retains the professional corporation and clinical decision-making. But the economics tilt toward the DSO. Luna: So the dentist gets to focus on drilling and filling, and the DSO takes care of everything else. And takes a cut. Lucas: Typically a percentage of revenue, sometimes 15 to 25 percent. But the real juice for the DSO comes from the supply chain arbitrage. A solo practice might pay $80 for a box of composite filling material. A DSO buying for two hundred practices pays maybe $50. Same for gloves, same for equipment, same for lab fees. And then there's the insurance negotiation leverage. A DSO can credential all its dentists with a single contract and negotiate fee schedules that a solo practitioner could never get. Luna: Which is one of the arguments the DSOs make — they say they're actually helping patients by lowering costs and improving access. But the critics say the pressure to hit production targets leads to overtreatment. Lucas: And that's the explosive tension in this roll-up. The DSO model works best when the dentist is producing a lot of high-margin procedures: crowns, implants, Invisalign, periodontal work. The DSO's revenue is tied to the dentist's production. So there's a built-in incentive to push more expensive treatment. Some former DSO dentists have come forward saying they felt pressured to recommend crowns when a filling would have been fine, or to sell cosmetic procedures the patient didn't need. Luna: And that's gotten the attention of state dental boards. I think Texas and Ohio have both introduced bills in the last two years to tighten restrictions on the dso dentist relationship. Lucas: Correct. The Texas Dental Board actually proposed a rule requiring that a dentist own at least 51 percent of any practice they work in — which would gut the DSO model entirely. It hasn't passed yet, but it signals the regulatory risk. Meanwhile, the FTC has started looking at whether DSO consolidation is reducing competition in local markets. If one DSO owns five of the twelve dental practices in a midsize city, they can effectively set prices. Luna: Let's talk about a specific DSO. Heartland Dental is probably the biggest name in the space. How did they get so big? Lucas: Heartland Dental was founded in 1997 by a dentist, Dr. Rick Workman, and it grew organically for about a decade. Then in 2012, they took a minority investment from a PE firm — Ontario Teachers' Pension Plan. In 2018, they got acquired by KKR for a reported $2.1 billion. That was the inflection point. KKR had the capital to go on an acquisition spree. Today, Heartland supports over 1,700 affiliated dentists across 38 states. They're the dominant player, but they're not alone. Luna: There's also Aspen Dental, which is backed by private equity — I think they were bought by AstraZeneca's private equity arm or something? Lucas: Aspen Dental is actually owned by a PE firm called American Securities. They bought it in 2021. And Pacific Dental Services is another massive one, backed by a different PE firm. The point is, the DSO space is being carved up by several large platforms, each with a geographic stronghold. And they're all buying up independent practices at a furious pace. Luna: What does a typical acquisition look like? I mean, what's the multiple? Lucas: For a well-run practice with a recurring patient base, you're looking at 6 to 8 times EBITDA. A solo general dentist might produce $800,000 to $1.2 million in revenue, with an EBITDA margin of 20 to 30 percent. So the practice might be worth maybe $1.5 million. The DSO will pay part in cash upfront and part in equity in the DSO itself. That equity is supposed to be the wealth-creation piece if the DSO later goes public or gets sold. Luna: But that equity can be tricky. If the DSO takes on too much debt, or if the roll-up stalls, that equity might be worth zero. Lucas: And we've seen that happen. In 2024, a DSO called Mortenson Dental Partners filed for bankruptcy. They had grown too fast, took on too much debt, and the interest rates shot up in 2022 and 2023. Their EBITDA couldn't cover the debt service. That's the classic roll-up risk — you need the underlying practices to keep growing, and if the economy slows or if patients delay elective procedures, the whole thing unravels. Luna: So what's the endgame for the big DSOs? Is it an IPO? A sale to a larger PE firm? Lucas: Historically, the dream has been an IPO. Heartland Dental filed for an IPO in 2020 but withdrew it — the market wasn't receptive. Since then, interest rates have made IPOs less attractive. So the near-term exit might be a sale to another PE firm — a secondary buyout — or a dividend recapitalization, where the DSO takes on more debt to pay a dividend to its PE owners. That's not great for the long-term health of the business, but it's a way to get liquidity. Luna: And the dentists themselves — how do they feel about it? I've talked to some who sold and they say they love not having to deal with payroll and insurance. But others say they miss being their own boss. Lucas: It's a trade-off. A dentist who sells to a DSO gets a lump sum, maybe $1 to $3 million, plus a salary and benefits. They don't have to worry about hiring hygienists or negotiating with Delta Dental. But they give up autonomy. The DSO may dictate how many patients they see per day, what procedures to push, what materials to use. Some dentists thrive in that environment. Others feel like they've become an employee in a factory. Luna: And then there's the patient perspective. Do patients notice a difference? I've heard that dso run practices often have more extended hours, better online booking, more modern equipment. But also that they feel like a conveyor belt. Lucas: The data is mixed. A study from the Journal of the American Dental Association found that dso affiliated practices had slightly higher patient satisfaction scores on convenience measures — like wait times and appointment availability — but slightly lower scores on the quality of the dentist-patient relationship. That makes sense. The DSO is optimized for operational efficiency. The solo practitioner is optimized for personal connection. Luna: So where does this go next? I mean, can the DSO model keep growing at this pace? Lucas: There's a ceiling. Right now, about 17 percent of dentists are in DSOs. The most optimistic projections say it could hit 30 percent by 2030. But after that, it gets harder. The best practices — the ones with the best locations, the best patient bases, the most efficient operations — they get bought first. The remaining independents are often smaller, less profitable, or in less desirable areas. The economics of acquiring them get worse. Luna: And the regulatory backdrop is shifting. If more states pass laws restricting corporate ownership of dental practices, the whole model could hit a wall. Lucas: That's the big unknown. The DSO industry has spent heavily on lobbying — the DSO trade group, the Association of Dental Support Organizations, has increased its lobbying budget by 40 percent since 2020. They argue that the model improves access and quality. But the state dental boards, which are often dominated by independent dentists, are skeptical. It's a classic battle between a well-funded industry and a profession that values its independence. Luna: It feels like the dental roll-up is still in its middle innings. The PE firms are in it for the long haul, but the exit might not look like the traditional playbook. Lucas: And that's exactly what makes this story worth watching. It's not just about finance — it's about the future of a profession that touches almost every American. I know for me, the conversations we have on this show have actually shaped how I think about my own healthcare choices. I mean, when you understand the business incentives behind a recommendation, you ask better questions. Luna: Yeah, that's true. And I think a lot of our listeners feel the same way. We get messages all the time saying these episodes have made them more thoughtful about their own spending, their own careers, their own investments. Lucas: That's the whole point. And we try to keep this show ad-free because we want the information to stand on its own, without someone trying to sell you something. If these episodes have added value to your work or your life, and you'd like to support that, you can find us at buy me a coffee dot com slash fexingo. It's a simple way to help us keep doing this. No pressure, just an option. Luna: Absolutely. And now back to the future of the DSO model — what do you think happens when the PE funds' holding periods start to expire? We're talking about funds raised in 2018-2020 that are hitting their end dates. Lucas: That's the next big stress test. If a fund can't exit through an IPO or a sale, they might be forced to sell to another PE firm at a lower multiple, or do a dividend recap that loads the DSO with debt. Either way, the dentists who hold equity in the DSO could get diluted or wiped out. That's when the lawsuits start. Luna: And it could also trigger a wave of dentist buybacks — where a group of dentists in a DSO decide to pool their money and buy back their practices. Lucas: That's already happening in smaller roll-ups. There's a model called the 'cooperative DSO' where the dentists own the management company collectively. It's like a return to the independent model, but with shared services. I think we'll see more of that if the big DSOs stumble. Luna: So the dental roll-up isn't a done deal yet. It's still being written. Lucas: Exactly. And that's what makes it such a fascinating case study in how private equity intersects with a regulated profession. The next few years will tell us whether the DSO model is genuinely additive or whether it's just a financial engineering play that extracts value at the expense of patients and dentists. Luna: Something to chew on next time you're in the chair. Lucas: Just try not to say 'that's a filling, not a crown' while they've got instruments in your mouth.