Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / Rolling Up the Dentist: How PE Remade Dental Care
Transcript
- Lucas: So Luna, you remember the Thoma Bravo SaaS roll-up we talked about last time — buy a platform, then bolt on a dozen smaller companies to consolidate a market. Luna: Right. Classic buy-and-build. Lucas: That same playbook is arguably more advanced in an industry you probably don't think of as 'tech-enabled': dentistry. Luna: Dentistry? Like, cleaning teeth? Lucas: Exactly. Private equity has rolled up roughly 15 percent of all US dental practices under what are called Dental Service Organizations, or DSOs. The biggest is Heartland Dental, backed by KKR, with over 1,700 locations. Luna: That's a lot of drill bits. How does the deal math work compared to a software roll-up? Lucas: Surprisingly similar. The PE firm identifies a strong 'platform' practice — maybe a multi-location operator with good margins. They buy it at 5 to 7 times trailing EBITDA, often with 60 percent debt. Then they add on single-location dentists one at a time, usually at 4 to 5 times EBITDA. Luna: So the multiple expands as they scale. Classic financial engineering. Lucas: Precisely. And the add-on math compounds because they can finance those smaller deals with the platform's credit line. The target internal rate of return is around 20 percent over a five-to-seven-year hold. Luna: But dentists aren't SaaS companies. What's the value proposition for the selling dentist? Lucas: Great question. The PE firm promises to handle all the back office — billing, insurance negotiations, hiring, supplies — so the dentist can focus on clinical work. The selling dentist often gets equity in the larger DSO and can cash out when the platform is sold or goes public. Luna: So they trade some autonomy for upside. But is that upside real? Lucas: Heartland Dental's history suggests yes for early sellers. KKR bought a majority stake in 2020 at a valuation reported around $2.8 billion. Some dentists who sold their practices earlier made 3 to 5 times their initial equity. Luna: But what about the patients? Does corporate dentistry mean worse care? Lucas: That's the tension. Critics say DSOs push production targets — more crowns, more expensive procedures — because those have higher margins. A 2023 study in the Journal of the American Dental Association found that dso affiliated dentists performed more complex procedures per visit than independent ones. Luna: But I've also seen data showing that DSOs can lower costs. Their purchasing power on supplies and lab fees is significant. Lucas: True. A 2022 analysis by the ADA Health Policy Institute showed that DSO practices spent about 12 percent less on supplies per procedure than independents. They also tend to accept more insurance plans, which can actually increase access. Luna: So it's not purely predatory. It's a trade-off. Lucas: It is. But the incentive structure matters. Most DSO dentists are paid a base salary plus a bonus tied to production. If you're a dentist and you see a borderline case, the financial incentive is to do the procedure. Luna: That's the same critique leveled at any fee for service model, not just PE. Lucas: Fair point. But the concentration risk is new. In some metro areas, a single DSO now controls 40 percent of dental offices. That raises anti-trust concerns. Luna: Has the FTC actually done anything? Lucas: In 2023, the FTC signaled it would scrutinize healthcare roll-ups more aggressively. They issued a policy statement targeting 'serial acquisitions' that don't individually trigger merger review but collectively reduce competition. No major dental case yet, but the warning is clear. Luna: So what happens to a dentist who signs with a DSO and then the firm's fund runs out, or they sell to another PE group with different incentives? Lucas: That's the risk. Dentists usually sign long-term contracts that include non-compete clauses. If the DSO is sold to a more aggressive owner, the dentist is stuck. There have been lawsuits — one notable case in 2021 where a group of New Jersey dentists tried to exit a DSO and were blocked. Luna: So the roll-up model works great for the financial sponsor, but the clinical operators end up with less control than they expected. Lucas: That's the tension at the heart of every PE roll-up, whether it's dental or software. The platform owner becomes a financial product. And the exit math only works if you keep adding. Luna: So what's the ceiling? Can 50 percent of US dentists end up under DSOs? Lucas: Some analysts think so. The current penetration is around 15 percent, but in Canada it's over 30 percent. I think the limiting factor is the supply of acquisition targets willing to sell. Younger dentists are more open to the model, but older ones value independence. Luna: And with interest rates higher now than 2020, the debt-funded part of the playbook gets harder. Lucas: Exactly. Higher rates compress returns. Some DSOs have slowed their acquisition pace. Heartland Dental did fewer deals in 2025 than the year before. Luna: So we might see a shakeout. The roll-up gets rolled up itself. Lucas: That's the next phase. The largest DSOs start acquiring mid-sized ones. That's when you see the real concentration. Luna: And that's when the FTC really pays attention. Lucas: Right. The next few years will tell us whether this model delivers better outcomes for patients or just better returns for sponsors.