Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Pediatric Dental Practices
Transcript
- Lucas: There's a scene in the movie 'The Pursuit of Happyness' where Will Smith's character looks at a guy getting out of a Ferrari and asks him two questions: 'What do you do?' and 'How do you do it?' The guy says he's a stockbroker. The line that stuck with me was: 'You have to be good with numbers and good with people.' That's basically the pitch private equity firms are making today about pediatric dentistry. Luna: I've seen the numbers. There are now at least 50 pediatric dental platforms backed by private equity in the US. That's up from maybe 10 a decade ago. Lucas: Exactly. And the economics of a single pediatric dental practice are remarkably consistent. A typical standalone office does about $1.2 million in annual revenue, with EBITDA margins between 25 and 30 percent. So you're looking at an EBITDA of $300,000 to $360,000 per location. Luna: And PE firms are buying these at what multiples? Lucas: Current market is around 5 to 7 times EBITDA for a single practice. So a decent practice might sell for $1.5 to $2.5 million. But here's the key — they're not buying one. They're buying a platform, which is a collection of say 10 to 20 practices in a region, and then they bolt on more. The platform itself can command 8 to 10 times EBITDA on exit. Luna: So the play is: buy small at 6x, add scale, then sell the whole thing at 9x. That's a classic roll-up. Lucas: Exactly. And the operational improvements are pretty standard. Centralize the billing, negotiate supply contracts across 50 offices instead of one, implement a common software system. They can typically lift margins by 200 to 300 basis points within two years. Luna: But what about the patients? I came across a JAMA study from 2023 — it tracked antibiotic prescriptions before and after private equity acquisition. In pe owned pediatric dental practices, antibiotic prescriptions went up by about 12 percent compared to independent ones. That's a red flag. Lucas: That's the tension. The PE firms will say they're just standardizing best practices and ensuring kids don't miss follow-ups. Critics say the financial incentive to do more procedures — even unnecessary ones — is baked into the model. The American Academy of Pediatric Dentistry has been vocal about this. Luna: And there's also the non-compete issue. When PE buys a practice, the selling dentist typically signs a 3- to 5-year non-compete. If they leave, they can't open a new office within 10 miles. That effectively locks patients into the pe owned chain. Lucas: Right. The FTC has actually been looking at this. They're considering a rule that would restrict non-competes in healthcare, including dentistry. But the trade group for DSOs — the Dental Service Organization Association — argues that non-competes protect the investment and ensure continuity of care. Luna: Let's talk about the exit. Who buys these platforms? Is it other PE firms or is there a bigger buyer? Lucas: It's a mix. Larger PE funds, like those with $5 billion plus, will buy regional platforms and combine them into super-regionals. There have also been strategic buyers — dental insurance companies or even hospital systems. Heartland Dental, one of the biggest DSOs, is backed by PE but also has a large corporate component. For pediatric specifically, the exit might be to a larger DSO that wants to add a pediatrics vertical. Luna: And the valuation on exit? What are we talking about? Lucas: For a well-run platform with 30-plus locations, you're looking at 8 to 10 times EBITDA. If the platform does $10 million in EBITDA, that's an $80 to $100 million exit. The original PE investors might put in $20 million of equity and get back $60 million. That's a 3x return over 5 years — a solid deal. Luna: But not all roll-ups work. We've seen some blow up. Remember the dental DSO that filed for Chapter 11 in 2022? I think it was called 'DentalOne Partners' or something similar. They expanded too fast, couldn't integrate the back offices, and lost control of collections. Lucas: That's a good cautionary tale. The integration risk is real. You have to get the IT systems talking to each other. You have to keep the dentists happy — they're independent business owners who just got bought, and they're used to running things their way. If a quarter of them leave in the first year, your EBITDA assumptions fall apart. Luna: Which brings us back to the people side. You have to be good with numbers AND good with people. That stockbroker line from the movie actually applies. Lucas: Speaking of that, I want to give a quick honest moment here. This show — all 111 episodes — is entirely listener supported. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. If these conversations have moved your work forward in some small way, that's where you can help keep it ad-free. Luna: Yeah, I think a lot of people don't realize there's no ad revenue behind this. It's just a few folks kicking in a few bucks each month. That's it. Keeps us independent. Lucas: Exactly. And back to pediatric dentistry — I think the next frontier is actually the insurance angle. Pediatric dental is less complex than adult because most kids are covered by Medicaid or CHIP. That means standardized fee schedules, less negotiation. PE firms love predictability. Luna: But Medicaid reimbursement rates are low. How do they make that work? Lucas: Volume. A single dentist can see 20 to 30 kids a day. A DSO can schedule them in 10-minute slots for cleanings, then upsell fluoride treatments, sealants, or orthodontic evaluations. The margins on those add-ons are much higher. The FTC is actually looking at whether these upsells are being recommended clinically or financially. Luna: That's the 'add-on services' rule they proposed last year. Requires DSOs to disclose if a recommendation is based on a financial incentive. Lucas: Right. If that rule goes through, it could change the economics. But for now, the growth story is intact. Pediatric dentistry is about a $15 billion market in the US, and pe backed DSOs probably control around 15 to 20 percent. There's room to consolidate further. Luna: So for someone listening who might be a pediatric dentist considering a sale — what's your advice? Lucas: First, understand that you're selling not just your practice but your autonomy. Make sure the culture fit is real. Second, negotiate the non-compete — try to shrink the radius or duration. Third, look at the earnout structure. Many deals tie part of the purchase price to you staying for 3 years and hitting revenue targets. That can be a good incentive or a trap, depending on the targets. Luna: And for investors who want to play this space without buying a practice — what's the play? Lucas: There are a few publicly traded DSOs. Envista Holdings, though they're more equipment. But the real action is in the pe to pe sale. You'd need to be an accredited investor to get into a fund. Alternatively, some platforms are raising capital through private credit or even royalty-based financing. But it's not a retail-friendly sector yet. Luna: I wonder if we'll see a pediatric dental REIT emerge — own the real estate, lease it back to the DSOs. Lucas: That's already happening. Some PE deals include a sale-leaseback of the office properties. The practice sells the building to a real estate fund and then rents it. That frees up capital for more acquisitions. It's a double dip — you get the operating multiple AND the real estate multiple. Luna: So the bottom line: pediatric dentistry is a high-volume, low-complexity, insurance-stable market that's ripe for consolidation. But the clinical quality concerns and regulatory scrutiny are real risks. Lucas: Exactly. It's a textbook PE roll-up, with all the opportunities and pitfalls that come with it. The numbers work, but the people — dentists, patients, regulators — can make or break the deal. And that's the story of private equity in healthcare.