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Over the past decade, dentistry has experienced a gradual but inevitable change in the way dentists want to practice. Twenty years ago, the medical profession went through a similar transition. Separation of clinical and management functions has worked well for the medical profession and it was only a matter of time for dentistry to follow suit. “Physicians have simply adjusted, and the data show employed physicians are actually quite happy,” said Dr. Marko Vujicic, PhD, Chief Economist and Vice President, Health Policy Institute, American Dental Association. Building a practice from the ground up or buying an office may have been mainstream 15-20 years ago, but it isn’t necessarily the objective of today’s generation of dentists. Dentists are faced with increased pressures to accept more dental plans, stagnant or declining reimbursement rates, rising supply costs and constant Federal and State regulatory changes. These are just a few of the issues they face today.
Existing private solo and group dental practices struggle to maintain profitability, attract new patients and associates, find qualified buyers for transition and face increasing competition from DSO supported practices. There is no denying DSOs have and will continue to impact the profession of dentistry. Yes, private solo and group owner dentists have largely been resistant to the DSO practice model because they think it is not good for patients and perceive a loss of control. But according to Dr. Vujicic, “there is no research…that compares patient satisfaction and clinical outcomes across different types of dental practice settings. So for now, this is all just anecdote and speculation.”
In today’s market, dentists have several options to sell their practices yet most don’t know where to start or what is involved. That said, dentists do know what they want: legacy preservation, competitive valuation, staff protection and the right dentist to take over the practice. Before selling, dentists need to take into consideration: market opportunities, office valuation and needed improvements, and finding qualified buyers. As dentistry slowly transitions away from solo ownership, the next 1-5 years will be a great time to sell a practice to a DSO. Why? It’s before the boom of baby boomer dentists flood the market. Limited market supply, combined with the increased number of dentists entering the profession and the high cost of starting new practices equals maximum practice valuation. Current market trends indicate a steady increase of practice valuation, reverting to pre-recession prices of 90-95% of revenues.
It’s a New Generation
Dental school enrollments were at a historical peak in 2016-17 with 24,677 students. The last peak was in 1980-81 with 22,842 students. Over the past ten years, first year dental school enrollment annually increased an average of 2.7%. (2) While this bodes well for the profession, there’s been a drastic change how dentists start practicing because of high dental school debt. According to the American Dental Education Association, in 2016 the average dental school debt was approximately $261,149. (3) In comparison, the average medical school debt was around $175,000. And medical doctors fair better than dentists when comparing the ratio of graduate school debt and salary. (4)
Since 1996, dental student debt has increased 96%. (5) Current estimates to start a new dental practice run between $750,000-$1,000,000 dependent upon location. Unless a dental school graduate has little or no school loans, it doesn’t make sense to go further into debt starting a new practice.
A recent ADA study comparing medical and dental practice ownership showed a continued decline of practice ownership among dentists but not as fast paced as doctors. Less than half of today’s physicians are practice owners. While overall solo dental practice ownership has decreased, the biggest drop was with dentists’ aged 35 and under. (6) New dental school graduates do not want to assume additional debt to start a practice. Plus, they prefer to focus clinically. According to Marko Vujicic, PhD, the chief economist and vice president of the ADA Health Policy Institute, “the trend that more and more dentists will be employed is not up for debate. Experts with different views on this issue agree that the trend will continue.”
Finding Qualified Buyers
Every dentist wants to retire knowing his or her practice will be in good hands and will continue to prosper. But it’s important to know upfront – not every potential buyer has the financial ability to buy a practice. This may or may not include associates, dentists right out of school, or a merger with another local practice. On January 1, 2018, the Small Business Association (SBA) changed financing requirements for small business acquisitions. This change makes it more difficult for recent dental school graduates to acquire their first practice because it requires them to put down a minimum 10% equity payment, (50% of equity payment must come from the buyer). For example, if a dentist wants to purchase a $1,000,000 practice, they need to come-up with $50,000 in cash (1/2 the required 10% equity payment) to meet new SBA financing requirements. Previously, dentists could finance 100% of their practice acquisitions. Very few dentists right out of dental school have that kind of cash, especially given the prevalence of education loan debt exceeding $250,000.
Private equity firms or investment banks back most DSOs, which means they have the financial resources necessary for practice transactions. This is just one reason why corporate DSOs have increasingly become a viable option for both practice sellers and young dentists entering the workforce. DSOs also have management expertise to increase profits, grow practices during transitions, make capital improvements and offer young dentists exceptional employment opportunities.
Why the DSO Model Works
Today’s dental students are smart and well prepared to handle the clinical side of dentistry. Understanding the business side is not their focus even though a dental practice is a small business. This might explain why most dental schools do not offer extensive business courses. With ongoing health care changes and requirements, it’s only going to get more complicated to run a successful dental practice. New dentists have several options to start practicing dentistry:
- Private solo or group practice associates are required to develop their own patient base and accept salaries based on production or daily guarantees. Most owner dentists won’t relinquish their existing patients or the higher-margin clinical cases to new associates and there’s no guarantee of future practice ownership.
- Public health service associates provide hands-on experience at relatively low pay. States and U.S. Health Services offer student loan forgiveness (repayment grants) in exchange for practicing dentistry in underserved communities. Student debt forgiveness often requires dentists to relocate to distant rural areas and there’s typically no path to practice ownership.
- Start-up dental practice has become near impossible for young dentists out of dental school because of large loan debt, high start-up costs, limited access to financing plus high-risk factors including market opportunity, population demographics, dental insurance participation and overhead costs.
- DSO associates can focus clinically with an established patient base and clinical staff. They are able to learn from experienced dentists how to treat patients and run a practice. In most cases, associateship will lead to shared ownership of the office. Productivity and high-quality patient care are important and can be tied to compensation.
The growing number of dental school graduates with large student debts explains why DSOs have annually grown 13-14% over the past 5 years, while solo practice ownership has decreased 7% per year over the same time. (7) More and more dental school graduates are choosing to work with DSOs because it gives them time to: payoff school loans; gain clinical experience; and potentially build equity in practices.
It’s Only a Matter of Time
Bottom-line, for a dentist to start a new practice it requires more money upfront; a keen understanding of marketing, office management, insurance plans; and the ability to assume the high-risk of starting a small business. The increase of DSO managed and supported practices across the country will only grow in the next 5-10 years because of these factors combined with the fact that the next generation of dentists’ want to focus clinically. It’s only a matter of time before baby boomer dentists get on board and recognize the benefits of selling or merging their practices with DSOs.
Written by Don Spiert, Director of Acquistions, Benevis Practice Services, dspiert@benevis.com
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