We asked our 2022 featured industry leaders: Where is the DSO industry now? Where do you predict the industry is headed in 2023? And, any news or thoughts on emerging technologies in 2023?

AI was the topic of conversation in 2022 and seems like it will continue to be a hot technology not just for dentistry, but most if not all industries. However, there are other technologies and advancements that are important for dental groups to focus on, implement, and leverage. Keep your eyes on communication platforms, such as teledentistry and patient recall. Analytics, procurement, and revenue cycle management tools are being examined and implemented as well.

Frank Balkum 
Managing Director, XPRT DSO Advisory Group

It is a very exciting time in the dental industry. That will continue. The current DSO market mirrors that of nearly every industry worldwide. Consolidation. I expect a shift in the DSO industry will revolve around access to capital for dental groups. Increased interest rates will impact the borrowing ability of the emerging dental groups. This will increase the disadvantage they already have to private equity funded groups through acquisition growth.

I fail to see a legitimate cause for the rapid increase in interest rates other than banks making larger profits. The economic conditions I hear sighted as the reasoning are largely manufactured. It appears to be “fake news” when closely analyzed. The valuation shift from “Capitalization of Excess Earning” in determining a dental office FMV to EBITDA was a big step in placing the non-PE owned groups at a disadvantage.

The bank lending model only allows for so much in funding based on the ability to service debt. At the end of the day, it must cash flow. By inflating values in this way, much of the competition for a practice purchase or group can be eliminated. It creates a scenario where the journey is made easier for the financial elite. This is even more reason to make sure you are running as efficiently as possible and choosing your lending partner very carefully. Exceptional efficiency is required if you expect to keep growing with bank financing and stay competitive in the coming years.

I feel that the current trends in the industry will continue. There will be more aggressive consolidation throughout the industry. Mergers of smaller groups will increase as the competition with the larger groups continues. This will be further enhanced by a desire to scale quickly so not to lose the maximized opportunity to sell at the highest multiple. Mergers of equals will allow for an expeditious scaling in the market.

There will still be those who just do their own thing regardless. They are wise enough to hold on and rely on calculated growth. They reinvest in the process and blend acquisition with de novo. They may buy the real estate in a separate entity as a longer-term investment. If your model works, why sell? If you do not want to manage a large operation, hiring a company to do it for you may prove to be more efficient and the best long-term play financially. Valuations and multiples do shift with the economy, but they always bounce back. If you are making money, forestall the payday. Odds are a much larger one will materialize in the future.

I expect the oral-systemic connection will increase the medical/dental fusion that we see taking place more readily. That should continue for some time in my estimation.

Advances in care and convenience will continue. Not too long ago, dentures were the standard of care. Now All-on-4-6 is available. Milling in the office is refined every year. “Same day” crowns or full-smile makeovers are in full swing.

Increased technological advances will only make it easier to scale more efficiently in the coming years as well.

If one analyzes how long automation and technology has been altering industries across the spectrum, we see that dental is a bit behind. When technological advancements begin, they seem to gain rapid momentum. We are seeing that in the dental space now.

Technology will continue to be more prevalent within dentistry. I see further expansion as technology refines itself to increase productivity in treatment and operations. We see advancements that are reducing office visits, freeing up chair space for increased productivity. Revenue cycle management programs are increasing collections of accounts receivable. Recall programs are filling canceled appointments and reducing no shows. This is a small sample.

Social media will continue to increase in scope as we move forward. Remember Yellow Pages? It is imperative to determine which forums return the best results for your practices. That is where a diligent focus will maximize marketing dollars.

For dentists who are slow to embrace the AI movement, the sooner they buy-in, the more efficient their operation will become. It is a great time for dentistry and the DSO industry. I expect opportunity to increase, as well as profits, for sound operators. 

Brent Barta, DDS 
Founder & CEO, West 10th Dental Group and affiliated practices
President, AADGP

2023 DSO forecast:

• In 2023 consolidation is still the theme for the dental industry. The economic forces that drive consolidation are not ever going away.
• Differences are minor as we move forward. We see and will continue to see structural differences in groups and DSOs around doctor equity, capital structure, and service agreements. The term DPO vs DSO is an example of such differences. I believe in time these differences will become fewer.
• In 2023, macroeconomics will set the course for the year. If we enter a true recession, the stronger organizations will outperform the weak by a larger margin. The profile of practices looking to sell, or affiliate will change with a recession. Older doctors who lose ground in their retirement savings may postpone selling. Younger doctors who are struggling may look to an affiliation as a way out of hard times.
• Emerging technology will continue to impact dentistry like never before. Because most of the gains are occurring in the IT and AI areas, the speed of innovation is exponentially faster than anything that has ever happened in dentistry. This creates two challenges: how to implement the technology and how to determine an appropriate ROI. I see a lot of groups struggling with these issues today!
• My last thought is a prediction for 5 or more years into the future. The demand for dental services is high and will escalate with the changing demographics of the American population. There is a huge shortage of qualified employees. These two issues will draw on emerging technology to create new, innovative delivery systems. And these new delivery systems will come out of the group practice and DSO segment of the industry. Watch for it.

Jeremy R. Dixson, DMD, MBA
CEO, The DSO Project 
CEO, Dental Capital Partners

In January, I personally met with nearly 20 healthcare investors at (and peripheral to) the JP Morgan Healthcare Conference in San Francisco, digging deep with them to understand the key elements driving their decisions in 2023. My takeaways from the event include the following:

• Continued massive demand for differentiated, high-growth potential, sustainable DSOs with world-class management teams.
• DSOs continue to be seen as “recession resistant” with continued runway for years of rapid consolidation and investor returns.
• There is clear, declining interest in “copycat” DSOs with limited or no real differentiation leading one investor to pose the insightful question, “Why do they even exist?” This changing sentiment will surely pave the way for larger multiples, and investor competition for truly differentiated groups with a high-performance history. It may also lead to copycat DSOs being much less attractive as a platform investment, potentially driving consolidation of these assets further into existing large DSOs.
• A high demand for true disruptive innovation in the DSO space.

The raw volume of M&A deals in our industry declined somewhat in 2022 from the record highs in 2021, driven primarily by a lower volume coming to market after the post-COVID deal frenzy and fears of an increasing capital gains tax rate. Despite this trend, investor interest remains extremely strong with continued stable and historically high multiples for high quality DSOs. The disparate market forces of low supply and high demand coupled with PE’s continued record or near record amounts of available capital aka “dry powder,” are offset by the tightest credit markets in years. These credit markets have at least temporarily halted a few of the larger DSO’s aspirations of an IPO and greatly slowed M&A for the largest deals over $1B; however, middle market M&A activity remains extremely strong. Increasing interest rates have made the cost of debt financing more expensive with slightly less favorable terms available, but it does not seem to be inhibiting the middle market and lower middle market deals generally.

I predict that 2023 will be the year of DSO 4.0. The DSO 3.0, which has been characterized for the past 7-8 years by increased financial alignment with clinicians and a variety of JV equity partnership options, is beginning to run its course for new entrants. Plenty of runway remains for the best managed groups to thrive in the coming years; however, this year is shaping up to be a breakout year for highly differentiated, doctor-centric, disruptively innovative, fresh DSO models to emerge onto the scene. In my view, this is a natural and needed evolution of the DSO space that will lead to hyper-growth strategies that have the potential to render entrenched business development strategies obsolete. In addition, I see a realignment and re-thinking of growth strategies for the largest DSOs due to increasing single practice multiples not in alignment with their business plans. I expect this to create a marked shift due to an increased appetite for the purchase of other DSOs with a similar or smaller scale. I also believe single practice multiples will meet or exceed the levels of the past several years due to continued increasing competition for profitable practices, despite tight credit markets.

Linda Harvey, MS, RDH, HRM
Founder, Dental Compliance Institute

Staffing at all levels has been a huge issue in dentistry. Until we see more balance in available clinical and business office talent, proactive planning for onboarding and training team members with little to no dental experience is critical to reduce organizational risk. Inexperienced team members can quickly become a liability. Ideally, your team should increase in value through ongoing training opportunities. Plus, working with a professional executive recruiter is a mainstay for finding the right C-suite talent for your organization.

We also see that many dental professionals have little to no experience in setting up a corporate compliance department. And in the event your organization has in-house counsel, that individual needs assistance operationalizing compliance requirements.

As the DSO industry continues to mature, there will be greater emphasis on advanced compliance requirements and corporate risk management. This begins with extreme diligence, especially since there has already been one private equity firm charged in an anti-kickback and False Claims Act case in healthcare.

As organizations accept more dental plans tied to federal monies, having a corporate compliance program that can withstand an Office of Inspector General (OIG) investigation is a must. This includes but is not limited to having policies-related coding/billing, conducting self-audits, and having an active Corporate Compliance Committee.

Technology will continue to explode in healthcare and dentistry will be no different. Sharing PHI with patients via portals and personal health apps are two examples. Digital compliance programs, artificial intelligence, and teledentistry have not yet been fully utilized and need to be seriously considered.

Consistent implementation of regulatory requirements is critical at the practice level so as to avoid any team or patient injury as well as sanctions from breaches or non-compliance. This relates back to onboarding, ongoing training, and compliance monitoring.

Dentistry successfully navigated throughout the peak of the pandemic and will move forward in even bigger strides as we continue to integrate oral care with total body wellness. The possibilities are limitless.

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