2024 Mid-Year Perspective
The last five years have brought monumental change to the dental industry. It can be persuasively argued that there has been more change in the last five years than in the previous 100 years of the dental industry.
The Great Lockdown
In March of 2020, for the first time in modern history, the government told patients that they could not go to the dentist, and dental offices across the country and throughout the world were shut down for all but emergency cases. It was a tremendous mistake by our elected officials to declare dentistry “non-essential”, and society paid a significant cost for that mistake. Patients were denied essential treatment, dentists were deprived of their livelihood, with little to no benefit to society. It was an unnecessary disaster.
The Great Reopening
Around the summer of 2020 and continuing throughout the year, dental offices were allowed by state governments to reopen on the largest scale in the history of dentistry. Reopening so many offices so quickly presented a number of challenges, including shortages of PPE, staff shortages, staff reluctance to return to work, dentist reluctance to return to work, and patient fear and reluctance to resume treatment.
The Great Recovery
Starting in the summer of 2020, dental offices across the country began recovering their revenue, but it was not an even recovery, and some organizations struggled while others thrived, and still, others experienced everything in between. A divide began to develop where some organizations were able to successfully navigate the post-lockdown challenges, while others were much less successful. Unsurprisingly, the organizations that succeeded in the post-pandemic environment became much more valuable than the organizations that struggled.
The Great Resignation
During the Great Reopening, it quickly became apparent that the post-pandemic labor market was very different from what it was pre-pandemic. The unintended impact of the government aid programs and government lockdown programs led many dental staff members to elect not to return to work, choose other professions, or return to work with costly and often unreasonable demands for their continued employment. This has created one of the most expensive labor markets in the history of dentistry.
The Great Inflation
Beginning in 2022, as a result of government aid programs flooding the economy with largely unnecessary dollars, coupled with numerous geopolitical forces, inflation soared to its highest rate in decades. This caused interest rates to skyrocket in a very short period of time, the cost of goods to increase significantly, and the buying power of money to be greatly reduced.
The Great Uncertainty
The Great Inflation has created a very challenging economic condition.
Historically High Cost of Labor + Historically High Cost of Goods + Historically High Interest Rates = Historically High Pressure on EBITDA and reduced dental organization valuations.
Despite repeated efforts by the Federal government, interest rates remain stubbornly high, and there are now additional global conflicts that threaten to destabilize financial markets. There is also considerable uncertainty as to who will win the upcoming presidential elections. All of this has led to uncertain market conditions and no clear date in sight for when things might improve. This has created Great Uncertainty, with many organizations suspending M&A activity, cutting costs, reducing their workforce, and holding off on capital expenditures.
The State of the Evolution of Dentistry
Pre-pandemic, the dental industry was evolving from dentist-owned solo offices and dentist-owned group practices to DSO affiliations at an unprecedented pace. The market stood at just under 30% consolidation prior to the pandemic. The Great Inflation and Great Uncertainty have considerably slowed down the consolidation market. Many DSO buyers remain “pencils down” or greatly constrained in the number of acquisitions they can complete in 2024. In addition, the large DSO transactions that received great fanfare and attention over the last five years have almost ground to a complete halt.
While the market has slightly improved in the second quarter of 2024 with numerous small to midsize deals occurring, the historically high interest rates will need to come down, or the conventional PE-backed DSO model will need to be restructured for deal activity to reach the 2018-2021 levels.
The outcome of the upcoming presidential election will undoubtedly have a significant impact on the M&A markets as the candidates have very different approaches to the economy. For now, the evolution of dentistry is proceeding at a much slower pace until at least the conclusion of the upcoming presidential election.
The State of Growth in Dentistry
The required formula for growth in the current dental marketplace as shown in the below figure:
Growth MUST equal added value to an organization
- Added value equals increased EBITDA
- Growth without added EBITDA equals negative value
- Growth with added EBITDA equals value
- If you can’t ADD value, you shouldn’t grow your organization
In short, any acquisition or de novo contemplated by a dental organization must increase the organization’s EBITDA, or it should not be undertaken. The current challenges of the M&A markets have caused dental organizations to aggressively focus on same-store growth. There have been incredible innovations over the last five years that can significantly increase same-store growth.
The State of Innovation in Dentistry
There have been more innovations in dentistry in the last five years than in the previous hundred years. This is one of the most exciting times in history to be in the dental industry. The following innovations have been truly game-changing for same-store growth.
The Future Outlook of Dentistry
The Great Evolution and consolidation of dentistry will continue. In the next 10-15 years, the rate of consolidation will increase from 30% to around 80%. The industry will likely consolidate from several thousand organizations to a hundred or so at which time, there will be a second consolidation which will, before it is concluded, test the limits of the anti-trust regulations. The conventional PE-backed DSO model will be the dominant model in dentistry. A few large DSOs may become public companies. Those organizations that adopt technology will have a distinct advantage because technology can overcome labor costs and shortages, as well as the impending shortage of dentists and specialists.
One key to alleviating the shortage of dentists and specialists could be lowering the hurdles for foreign dentists to become licensed in the United States, and this is a trend that should be watched very closely. It is also likely that regulators will continue to impose requirements and hurdles to the consolidation once it reaches a much larger scale. The sky’s the limit as to what AI and other dental technological innovations can accomplish and the next five years will be even more exciting than the previous five from the standpoint of innovation.
The industry leading DSO group at Dykema stands ready to assist dental organizations navigate the challenges and complexities of the existing marketplace.
