By Brian A. Colao
Director, DSO Industry Group at Dykema
2024 2nd and 3rd Quarter DSO Industry Update
The DSO industry is facing unprecedented economic challenges, marked by record-high interest rates, rising labor costs, and increased expenses for supplies and materials, compounded by persistent inflation since mid-2022. Although there are signs of improvement in inflation and interest rates, uncertainty persists, particularly concerning U.S. job reports, upcoming economic data, and the presidential election. This update highlights key areas of interest for the DSO sector.
M&A Update
The consolidation of dentistry, which began around 2010, accelerated rapidly until early 2020. The pandemic then caused a temporary slowdown, but consolidation rebounded strongly in late 2020 and throughout 2021, reaching unprecedented levels. By the end of Q2 2022, however, rising interest rates significantly impacted large transactions. Many large DSOs paused their recapitalization efforts. Some DSOs have managed to secure substantial credit facilities, indicating ongoing confidence in the dental market.
In 2022 and early 2023, smaller transactions continued relatively normally until mid-2023, when they also experienced a slowdown. Large DSO transactions have been scarce, and prospects for improvement uncertain, heavily influenced by the upcoming presidential election. A new administration might implement measures to reduce interest rates and inflation, potentially revitalizing large transactions. However, the timing and valuations of such a resurgence remain unclear, especially given the record high valuations before the downturn.
Smaller transactions persist, but at a reduced pace and lower valuations compared to 2021. While some traditional buyers are currently unable to pursue acquisitions, others are limited to fewer transactions. A few buyers are maintaining normal transaction volumes, and new entrants are exploring the DSO market, providing some optimism.
The final quarter of 2024 is expected to be critical, with year-end economic reports and the presidential election likely affecting significant DSO transactions. Despite current challenges, high demand for transactions and many willing sellers suggest a positive outlook for the future.
Valuations for smaller transactions are now highly organization-specific, influenced by:
- Payer mix
- Growth potential
- Specialty integration
- Infrastructure adequacy
- Cost savings and economies of scale
- Organizational culture
- Seller’s business and leadership skills
- Regulatory considerations
DSO Priorities for 2024
Traditionally, DSOs focused on increasing EBITDA through mergers and acquisitions. However, current economic challenges have shifted priorities toward same-store growth, aiming to organically boost EBITDA organically. Strategies for same-store growth include technological innovations such as AI solutions, patient finance tools, RCM tools, discount and membership plans, and specialty integration. Progress in these areas has been slower than anticipated due to subscription fees, capital investment costs, and integration issues with many vendors lacking open architecture.
Fortunately, many of these issues are being addressed, and ongoing case studies on technological innovations for same-store growth are expected to yield valuable insights soon.
Another key priority for DSOs in 2024 is renegotiating credit facilities to ensure adequate capitalization for the coming years. While some DSOs have managed this process smoothly, others face challenges, with some resorting to receivership or bankruptcy. This area requires close monitoring.
Regulatory Update
The challenging economic climate has intensified regulatory scrutiny and enforcement, with various entities seeking to recover funds. In 2024, this has resulted in:
- Increased auditing and enforcement from Medicaid and private insurers, leading to substantial and often unrealistic repayment demands.
- Stricter HIPAA enforcement, accompanied by significant fines and penalties.
- Heightened enforcement of labor and employment laws, leading to a rise in individual and class-action lawsuits.
- Increased actions to recover PPP loans, with the government scrutinizing loan recipients’ compliance amidst conflicting advice and unclear guidance from 2020.
- Growing disputes with affiliated dentists, particularly regarding dissatisfaction with DSOs unable to complete recapitalization events.
These developments reflect a response to economic difficulties, with stakeholders seeking revenue under sometimes questionable circumstances. This heightened regulatory and litigious environment is expected to persist until broader economic conditions improve.
Dykema DSO Conference Recap
A notable highlight of an otherwise challenging year was the 2024 Dykema DSO Conference, which set a new attendance record, becoming the largest event in the DSO industry’s history. With over 2,000 attendees, the conference offered exceptional content, networking opportunities, and overall experience. The 2025 Dykema Conference is scheduled for August 6-8, 2025, at the Gaylord Rocky Mountain Resort in Denver, with the aim of breaking another attendance record. Registration will open in January of 2025 at Dykemadso.com.
