Predictions and Analysis on Economic Conditions, Technology and M&A Trends
Director, DSO Industry Group at Dykema
The last two-plus years have been the toughest economic environment in the history of the DSO industry. The challenges began in early 2021, near the end of the COVID-19 pandemic, with a new presidential administration that flooded the economy with a surplus of aid programs, many of which proved unnecessary. Around a year later, Russia invaded Ukraine, destabilizing global markets, followed by several crises in the Middle East. The result was the highest interest rates and inflation in the history of the DSO industry, coupled with record costs for goods and labor. These difficult economic conditions significantly lowered EBITDA, leaving many organizations struggling to maintain positive cash flow and comply with the terms of their credit facilities. These conditions also caused a massive slowdown in the once-booming DSO M&A markets, creating great uncertainty heading into the November 2024 presidential election.
In November 2024, one of the most closely watched elections in U.S. history took place, resulting in the election of a new presidential
administration. Interest rates have since been lowered by the Federal Reserve. This raises the question: what can we expect for the DSO industry in 2025?
Economic Conditions are Trending in a Positive Direction
Going into 2025, there are a number of favorable economic conditions, including the following:
1. The Federal Reserve cut interest rates three times in the latter half of 2024, during meetings in September, November, and December, totaling a full percentage point reduction. This has led to more favorable lending conditions, with expectations that rates will continue to decline throughout 2025.
2. Investor confidence has improved significantly after the outcome of the 2024 presidential election, with the stock market rising more than 1,500 points and 3.6% the day after the election and continuing to rise over the next few weeks.
3. An enormous amount of investor capital remains on the sidelines, waiting for the right opportunities.
4. There is also a large inventory of dental organizations of all sizes that are seeking recapitalization events.
5. Many technological innovations have either come online or are expected to come online soon, which can dramatically improve the same-store growth of dental organizations.
The New Presidential Administration is Expected to Pursue a Much Less Stringent Regulatory Environment
Going into 2025, the regulatory environment appears much more favorable, including the following factors:
• The FTC’s proposed non-compete rule was enjoined by a federal court on August 20, 2024. The new administration is not expected to pursue the enforcement of this proposed rule, which will create much more favorable conditions for the labor market.
• The Corporate Transparency Act was enjoined by a federal court on December 3, 2024. If this injunction is upheld, it will create a less burdensome environment for corporate entities.
• The current FTC director will be resigning, and a new director appointed by President Trump will be taking over with a much more business-friendly philosophy.
• President Trump has pledged to overhaul the Justice Department, which is expected to lead to less aggressive healthcare-related investigations and enforcement actions.
• Governor Gavin Newsom recently vetoed SB 842 (in September of 2024), which, if signed into law, would have allowed the California Attorney General broad powers to block healthcare M&A transactions.
Amazing Innovations Exist to Boost Same-Store Growth for DSOs
This is truly one of the most exciting times in the history of the dental industry. There have been more innovations in the last five years than in the previous 100 years. Some of the most incredible innovations that either exist or are coming soon include:
• Diagnostic AI allows for the diagnosis and treatment of many more dental conditions than ever before.
• AI is automating payment of invoices, adjudication of insurance claims, approvals, collection of receivables, and improving revenue cycle management. AI is also reviewing phone calls to maximize patient retention.
• A revolutionary product exists that has the potential to regenerate enamel and monetize the treatment of minor cavities without resorting to the traditionally invasive “drilling and filling” procedures.
• Membership plans are increasing the ability of dental organizations to attract and retain patients who lack insurance.
• Technological advancements and innovations in clear aligners, implants, anchored dentures, sleep medicine devices, and traveling specialists have made the integration of specialties into general dentistry offices easier than before.
• Innovative patient finance solutions have made access to treatment easier than before.
• Other technology advancements include real-time tracking of capital tables and earn-outs, lease management, management of merchant fees, the use of big data to determine market presence, and lab consolidation—all of which have the potential to reduce overhead.
These technologies can increase same-store growth, lower overhead, and compensate for shortages in clinical and non-clinical employees. However, challenges remain in the adoption of these technologies, including resistance to change, lack of effective implementation plans, and the integration with existing technologies already in use at dental organizations.
Questions and Predictions for the First Half of 2025
There are several key questions as we enter the first half
of 2025:
1. Will interest rates go low enough to truly jump-start M&A markets?
In December of 2024, the Federal Reserve Chairman delivered disappointing news, by projecting just 2 rate cuts, down from its original anticipated rate cut of 4. This caused stocks to tumble. The Chairman cited persistent inflation as the main reason for the smaller-than expected reduction, warning that it could take until the third or fourth quarter of 2025 for inflation to improve.
2. Is investor confidence high enough to truly jump-start M&A markets?
Investor confidence is at its highest point in the last three years, and there is significant capital waiting to be deployed but inflation still remains higher than it should be and interest rates will not be reduced as quickly as the market had hoped.
3. What will 2025 valuations for dental organizations look like?
I believe valuations will be fair but not as high as they were at the end of 2020 and 2021, when market highs were reached.
4. What will 2025 deal structures look like?
The market will continue to utilize rollovers, earn-outs, and joint ventures as a means of mitigating risk for transactions into 2025. EBITDA will also be scrutinized much more strictly than it was during the market highs in 2021.
5. What will same-store growth look like?
Organizations that adopt new technologies, properly implement them, and integrate them with existing systems will experience substantial same-store growth.
6. What challenges could derail a market rebound in 2025?
• New wars or global unrest.
• The implementation of draconian policies,
such as onerous tariffs.
• Failure to achieve low enough interest rates.
• Stubbornly high inflation.
Prediction for 2025
I predict a gradual recovery during the first two quarters of 2025, with smaller to mid-sized deals closing in this period. I expect to see improved deal activity in the third and fourth quarters of this year, assuming there are no major global or domestic setbacks. Additionally, I anticipate a dramatic increase in the adoption and successful implementation of new technologies in 2025, which will lead to significant same-store growth for dental organizations.
