Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Dental Support Organizations
Transcript
- Lucas: You know, there's something strangely intimate about roll-ups in healthcare. You wouldn't think a root canal could be a private equity thesis. Luna: But here we are. And it's not just root canals — it's cleanings, implants, orthodontics. Dental support organizations, or DSOs, are one of the fastest-growing roll-up categories in the US. Lucas: Yeah. So a DSO is basically a management company that buys the non-clinical side of a dental practice. They handle billing, supply procurement, HR, marketing — the dentist just shows up and does the dentistry. In exchange, the DSO takes somewhere between 25 and 40 percent of the revenue. Luna: And how many practices are we talking? I've seen numbers all over the place. Lucas: By mid-2026, there are roughly 15,000 dental practices affiliated with DSOs in the US, up from about 5,000 a decade ago. That's about 12 percent of all dental offices. And the largest player, Heartland Dental, now has over 1,700 locations across 40 states. Luna: Heartland is backed by KKR — they took a majority stake in 2019 at around a $2.5 billion valuation. They've been on an absolute shopping spree. Lucas: And the pitch is compelling. The average independent dentist spends a huge chunk of their day on non-clinical work — scheduling, payroll, dealing with insurance. A DSO can centralize all that and cut overhead by 30 percent or more. The dentist gets to focus on patients, and in theory, produces more revenue per chair. Luna: But the catch is that once the DSO buys the practice, the dentist is an employee. They lose autonomy. And the DSO has an incentive to maximize volume — get more patients through faster. Lucas: Right. And that tension is the whole story. On one hand, DSOs bring efficiency and scale. On the other, there's a real risk of assembly-line dentistry. The question is: does consolidation actually improve outcomes or just profits? Luna: Let's talk about the numbers. What does a typical DSO acquisition look like? Lucas: A single-dentist practice generating about $800,000 a year in revenue might sell for 70 to 80 percent of that — so around $600,000. The dentist gets a lump sum upfront, plus a earn-out based on future earnings. But here's the key: the DSO then layers on corporate overhead of maybe 15 percent, and aims to push the practice to $1 million in revenue within three years. That's a 25 percent growth target. Luna: Which means more patients, longer hours, more procedures per visit. It's basically a leverage play on the dentist's chair time. Lucas: Exactly. And it works — until it doesn't. There's a cautionary tale in SmileDirectClub, which was not a DSO but a direct to consumer orthodontics company. They went public in 2019 at a valuation of $8.9 billion, and by 2023 they were bankrupt. The lesson was that scaling a dental model without proper clinical oversight can destroy trust and value. Luna: But DSOs are different — they're buying existing practices with established patient bases. The risk is more about execution: can they integrate hundreds of small businesses without crushing morale? Lucas: And that's where the data gets interesting. A 2024 study in the Journal of the American Dental Association found that dso affiliated dentists actually report higher job satisfaction on average than independent dentists. They said they appreciated not having to deal with insurance companies and HR headaches. Luna: So the dentists are happier. But what about the patients? Same study showed no significant difference in clinical outcomes — but also no improvement. So the DSO didn't make dentistry better, it just made it more efficient. Lucas: Which is fine if you're a private equity firm looking for steady cash flows. A dental practice has incredibly predictable revenue — people get cavities regardless of the economy. And DSOs have been able to consolidate really fragmented markets, especially in midsized cities. Luna: I want to zoom in on one deal. In 2022, a firm called TPG Capital acquired a majority stake in a DSO called Western Dental. Western had about 300 offices and was losing money. TPG brought in a new CEO, cut unprofitable locations, and focused on higher-margin procedures like implants. By 2025, they had EBITDA margins above 20 percent. Lucas: That's a classic PE play — buy a distressed platform, fix the operations, then either sell to a larger DSO or take it public. And there's been a lot of talk about a Heartland Dental IPO. They filed confidentially in 2021 but never launched, partly because of market conditions and partly because of the regulatory scrutiny around consolidation. Luna: What's the regulatory angle? The FTC has been looking at healthcare roll-ups more carefully, especially after the anesthesia and ER consolidation cases. Lucas: Right. The worry is that a DSO that controls 30 percent of the dental market in a given city could set prices for cleanings and crowns. Dental insurance is already complicated — if a DSO becomes the dominant provider, they can negotiate higher reimbursement rates. That cost gets passed to employers and patients. Luna: But so far, no major antitrust challenges to DSO roll-ups. The market is still very fragmented — the top 10 DSOs control maybe 15 percent of all practices. It's not like the veterinary space where a few firms own a huge share. Lucas: That's a fair point. And it's worth noting that many DSOs are small — 10 or 20 offices. The roll-up story is really about the top 20 firms that are gobbling up hundreds of practices and creating regional monopolies. Luna: One interesting trend I've seen is that DSOs are now targeting specialty practices — orthodontists, oral surgeons, periodontists. Those procedures have higher margins and less insurance interference. Lucas: Yeah, the general dentistry DSO is becoming a platform to then add ortho and surgical wings. It's the same logic as a dermatology roll-up: get the volume, then layer on high-margin services. Luna: Let me ask the obvious question: is this good for the consumer? I think most people just want a dentist they trust, not a corporate brand. Lucas: And that's the tension. The DSO model works best when it's invisible — when the patient still feels like they're going to 'Dr. Smith's office' even though Dr. Smith sold the practice three years ago. But if the brand becomes too corporate, if patients feel like they're being upsold on unnecessary procedures, trust erodes. That's the big risk. Luna: So where does this go? Do we see a slowdown in DSO acquisitions, or is this just the beginning? Lucas: I think we'll see continued consolidation, but at a slower pace. Interest rates are still relatively high in 2026, which makes debt-financed acquisitions more expensive. Plus, the easy pickings — the high-quality independent practices — have already been bought. What's left are either very small or underperforming practices that need more operational work. Luna: And that's where the skill of the PE firm really matters. It's not just about writing checks; it's about actually improving the practice. Lucas: Speaking of which — I want to mention something. A handful of listeners support this show through buy me a coffee dot com slash fexingo, and that's what makes it possible for us to do deep dives like this without any ads. It's genuinely just a small group of people who find these conversations useful and want to keep them going. So if you've gotten value from any of these episodes, that's the simplest way to help. Luna: Yeah, and it means we don't have to worry about pleasing advertisers or chasing clicks. We can spend ten minutes on dental roll-ups because it's interesting, not because it's trending. Lucas: Exactly. So back to the future of DSOs — I think the next phase is international. There's huge opportunity in the UK and Australia, where dental markets are even more fragmented. Some us backed DSOs are already testing the waters. Luna: And that brings its own challenges — different regulations, different insurance systems. But the model is fundamentally scalable. Lucas: It is. And I suspect we'll see a mega-merger within the next two years — two of the top five DSOs combining to create a national behemoth. That would be the real test of whether antitrust authorities start paying attention. Luna: So the bottom line: DSOs are here to stay, they bring real efficiencies, but the devil is in the execution. Patients and regulators will determine how far this goes. Lucas: Agreed. And for now, if you're a dentist considering selling, the offers are still on the table — just make sure you read the fine print on clinical autonomy.