Is The Dso Bubble About To Burst?

As we speak, at least a dozen DSOs are struggling to cover debt and are either at the brink of shutting down or have already shut down. I know because as the CEO of Blackford Dental Management, I’ve dedicated my professional career to the development of large group practices and I’m heavily involved in the current DSO market. During the last thirty years, I’ve led several successful DSO consolidation processes and worked with a variety of private equity firms, operating continuously within the changing DSO environment.

I’ve seen the shift in paradigms and how a concept that was heavily resisted has become the best and most viable business model for the future of dentistry. I’ve witnessed the evolution of dentistry from a cottage industry to a cutting-edge DSO model that maximizes resources, takes advantage of economies of scale, and makes use of management systems and operational policies and procedures to ensure profitability, clinical quality and the highest standards of patient care.

The industry gets it. DSOs are here to stay. This realization has led to a dental DSO “rush.” One of the elements that put the industry in bubble territory are the emergence of “get rich schemes” by sellers looking to make a quick buck and the consolidation of group dental practices into entities that look like DSOs but do not have the necessary elements for long term success.

You may recall, prior to the Great Recession of the mid 2000’s, we saw a proliferation of non-professionals acting like real estate moguls, buying and flipping real estate, houses, condos, land. The local barber was telling customers how to flip apartment complexes. Today we see a similar pattern with dentists. Less than six years ago, most dentists did not know the meaning of terms like PE—Private equity—and EBITDA—Earnings Before Interest, Taxes, Depreciation and Amortization. Today, we have many folks without the business education and/or experience, attempting to bundle together often incompatible groups of dental practices in the hope of marketing and selling them to DSOs or PE firms for inflated prices that do not reflect income or profitability potential.

The problem with this approach is that established DSOs and competent PE firms do an extraordinary amount of research prior to entering into a new industry or committing to a new deal. They rely on experts like me to study what works and what doesn’t. They apply evaluation standards to potential purchases and perform extensive due diligence before signing on the dotted line. Make no mistake about it. DSOs and PE firms are looking for profit. If the practices in the pipeline don’t meet their profitability standards, the deal will not happen.

Occasionally, a floundering DSO or a PE firm with insufficient dental management expertise will be sloppy in their due diligence. A bad deal or more may ensue, where unscrupulous sellers will misrepresent their earnings and get a higher dollar for their transaction. This is bad for the industry as it decreases the DSO’s odds for success and creates huge financial liabilities. DSOs who fall prey to these schemes are at greater risk for financial failure. Several of the DSOs currently on the bubble have made bad acquisition decisions.

The three main reasons we are starting to see many DSOs fail is because there has been a major influx of adventuresome entrepreneurs who knowingly or unknowingly are attempting to come up with get rich quick schemes by cutting corners and looking for a quick flip. This development, combined with lapses in the acquisition process and a rush to buy practices without vetting fit and suitability, have created the current bubble prone environment. DSOs in a hurry to grow have fallen prey to those schemes. Thirdly, and more importantly, those same DSOs have also neglected to put in place the fundamental elements of a stable DSO platform and the relationships required to grow and build a successful DSO. In my next article, I will be talking about the basic platform for a successful long term DSO and how you can spot the DSOs that have the best chances for long term success in the market.

A DSO failure is bad for dentistry, bad for other DSOs and bad for investors. One way to avoid the DSO bubble is to standardize the acquisition process and ensure the fit and valuation of each group being considered for purchase. The successful DSO is not looking to fund someone’s comfortable retirement. We are looking for fair value and future profitability.

For those who are interested in creating a successful DSO platform, there are many organizations, groups and resources that are helpful, including the AADGP and theADSO.