Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / Why Private Equity Is Buying Up Dental Support Organizations
Transcript
- Lucas: So last week I was at a conference and I kept hearing the term DSO — Dental Support Organization. And I realised I actually didn't have a clear picture of how private equity has been rolling up dental practices. Turns out it's a massive, quiet wave. Luna: I've seen the numbers — roughly 15 percent of US dentists are now affiliated with some kind of DSO. But the model itself is pretty opaque to most patients. Lucas: Right. The patient walks in, they see the same dentist, maybe a new sign on the door. But behind the scenes, a PE firm has bought the practice's non-clinical assets — the building, the equipment, the billing system — and they lease it back to the dentist. The dentist keeps clinical control, but the DSO takes a cut of revenue, usually somewhere between 5 and 12 percent. Luna: And that cut pays for centralised services — HR, payroll, marketing, supply chain. The dentist gets to focus on drilling and filling, not on hiring a receptionist. Lucas: Exactly. The economics are compelling. A typical independent dentist might net 30 percent margin after overhead. With a DSO, the overhead drops because it's shared across dozens or hundreds of practices. The trade-off is they lose some autonomy. The DSO might push them to see six patients per hour instead of four, and that's where the tension lives. Luna: Let's talk about the poster child. Heartland Dental — backed by KKR and others — they support over 1,700 practices across the US. That's a lot of buying power on supplies alone. Lucas: Heartland is the biggest, but there are dozens. The model really took off after the 2008 recession. Dentists were retiring or struggling with debt, and PE firms saw a fragmented market ripe for consolidation. There are roughly 200,000 dentists in the US, and most practices are still single-location. So the roll-up thesis is: buy the small guys, centralise the back office, and grow earnings before interest, taxes, depreciation, and amortisation — EBITDA — through scale. Luna: And the revenue is sticky. People need dental care — cleanings, fillings, root canals — it's not discretionary like cosmetic surgery. So the recurring patient base is a big draw for PE. Lucas: Right. A DSO can also upsell — things like whitening, Invisalign, implants. So same patient, higher average ticket. Some DSOs have reported 20 percent revenue growth just from adding services. Luna: But there's pushback. The American Dental Association has raised concerns about corporate influence on clinical decisions. And a few states have considered laws requiring that a licensed dentist own a majority stake in any practice. Lucas: That's the big regulatory risk. If states start capping non-dentist ownership, the PE model gets complicated. So far, only a handful of states have moved in that direction, but it's worth watching. Luna: What about the numbers on patient outcomes? I've seen some studies suggesting dso affiliated dentists perform fewer complex procedures and refer more out to specialists. Is that a quality concern? Lucas: It's mixed. On one hand, DSOs standardise care — you get consistent infection control, digital X-rays, that sort of thing. On the other hand, the pressure to hit volume targets can lead to over-treatment or rushed work. There was a whistleblower case a few years back where a DSO allegedly pushed dentists to perform unnecessary crowns. So the jury is out. Luna: But the market clearly sees value. Private equity deals in dental have totalled well over $10 billion in the past five years. And the penetration — 15 percent — suggests there's room to grow. What's the ceiling? Lucas: I've seen analysts project 30 to 40 percent penetration in the next decade. But I think it'll slow once the easy targets — retiring solo practitioners — are bought up. The harder sell is convincing younger, successful dentists to give up control. Luna: Yeah, the younger generation actually seems more open to it. They don't want to run a business; they want to practice dentistry without the headache of payroll and insurance billing. So maybe the ceiling is higher than we think. Lucas: Good point. And there's a demographic tailwind: the average dentist is over 50, so a lot of practices will change hands in the next decade. PE firms are essentially betting that the DSO model becomes the default structure for American dentistry, like how hospital systems swallowed up independent physician practices. Luna: Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making deep-dive episodes like this. No ads, no sponsors — just the audience. Lucas: Yeah, if these conversations have moved your work forward in some small way, that's where it comes from. Appreciate everyone who's part of that. Luna: So back to dentistry — what's the one concrete number listeners should remember from this episode? Lucas: I'd say 15 percent. That's the slice of the US dental market currently under DSO management. If you're in PE, that's the arrow on the chart that says 'room to run.' And if you're a patient, next time you're in the chair, you might ask: is this practice dso affiliated? The answer might tell you something about the business behind the drill. Luna: That's a good closing thought. And we'll keep watching how the regulatory landscape evolves — especially those state ownership laws. Lucas: Exactly. Thanks for listening.