Mar 13, 2024

Building a DSO—What You Need to Know

Our State of the Market Report for 2024 showed the dental sales market to be healthy and thriving following a relatively quiet period sparked by a perfect storm of socio-economic factors.

However, the market rallied in the last quarter of 2023, with over 90% of our clients achieving their asking price and continuing to do so.

Stats like these could lead you to believe the market belongs to sellers right now—but this isn’t necessarily so.

There is also increased activity from large dental service organisations (DSOs) looking to acquire practices and reap the benefits of empire-building.

These include improved economies of scale and negotiating powers, as well as the personal and professional satisfaction gained from being at the helm of a profitable group.

If the idea of building a dental empire sounds like it’s for you, read on to learn what’s involved and discover why now could be a better time than ever to start.

Why Build a Group? 

For the most ambitious owners, running a single practice simply isn’t in the DNA. But there are plenty of reasons beyond the ego to consolidate and build.

Financial Stability & Cash Flow

Diversification across multiple revenue streams insulates your business against underperformance—in the worst case, closure—of any single location. 

Improved Economies of Scale 

By consolidating functions like procurement, accounting, HR, marketing, IT and administration into centralised services centres, groups can spread fixed costs across a larger revenue base to boost profit margins.

Better Bargaining Power

Groups leverage their size and buying power to command discounted rates on everything from dental supplies, equipment and lab fees to insurance, financing, and new premises.

Operational Efficiencies

Standardising clinical and business processes across locations allows groups to create efficiencies with scheduling, staffing levels, treatment workflows and other key drivers of productivity.

Access to Technology & Expertise

Groups have more capital to invest in cutting-edge technology like CBCT imaging, CAD/CAM systems and advanced procedures. They can also hire dedicated trainers, clinical experts and specialists.

Equity Value Creation

Larger, scaled groups can command higher valuations and better multiples when seeking an exit or taking on investment partners.

Control Over Patient Flow

With multiple clinics, you can strategically route overflow demand and balance chair utilisation across the group. Through strategic acquisitions and de novos, groups can also continually expand their patient base and revenue.

Talent Management

Groups have more career path options to attract, retain and compensate top clinical and administrative talent.

Location Selection

Groups enjoy more flexibility and capital to handpick prime locations for new build-outs or acquisitions.

Retirement Planning

For older dentists and new owners with an eye on the future, the group structure provides a clear path to succession and value realisation at exit.

Convinced? Define Your Goals!

Building a thriving dental group requires meticulous planning upfront. Far too often, consolidation efforts stumble due to a lack of a cohesive, well-thought-out roadmap.

The first step is clearly defining your motivation for pursuing group practice. Are you primarily interested in maximising the potential for near-term earnings via operational improvements? Focusing more on rapidly scaling the top line through an aggressive buy-and-build strategy? Or ultimately positioning the group for a lucrative exit down the road?

It’s critical to have an anticipated internal rate of return (IRR) or multiple on investment in mind to benchmark and align every subsequent decision.

Defining Your Strategy: M&A Vs De Novo

With your goals established, you can start formulating the core organic growth strategy through M&As, de novo squat practices or a combination of the two. 

Both present pros and cons:

M&As move the needle quicker by absorbing entire turnkey clinics and their patient bases. However, acquisitions require more upfront capital and entail integration risks around assimilating the new practices and personnel.

Launching squat practices accelerates profitable growth over a longer timeline and avoids many of the M&A pitfalls. However, squat practices require more time and startup capital while building the new clinic from scratch.

For most groups, the ideal strategy involves a balanced approach, supplementing steady acquisition activity with periodic new clinic openings to maintain momentum.

For a more detailed exploration of the pros and cons of squat Vs M&A models, see our guide here. 

Focusing on EBITDA

Defining EBITDA or earnings before interest, taxes, depreciation and amortisation—and why it matters—is a whole article in itself. 

In the context of group building, EBITDA is the most important metric for gauging potential profitability and financial performance.

For prospective buyers, robust EBITDA demonstrates the cash flow available to service any new debt incurred for the acquisition while funding future growth initiatives. 

A healthy and growing EBITDA indicates financial viability and helps support higher potential valuation multiples.

There are several key areas acquirers look at when performing due diligence on a target practice:

Historical EBITDA Trends

Review at least three years of historical EBITDA performance and growth rates. Ensure there are no red flags like declining or volatile earnings patterns that could signal mismanagement or external risks. Analyse EBITDA margins against industry benchmarks.

EBITDA Quality

Assess the quality of reported earnings by analysing any non-recurring income sources or one-time expense adjustments that artificially inflate EBITDA. Pay particular attention to adjustments related to owner compensation, related-party transactions, and capital expenditures.

EBITDA Forecasting Assumptions

Rigorously vet the target’s financial forecasting model and growth assumptions driving projected future EBITDA. Factors like provider productivity ramps, new treatment offerings, price increases, cost-saving initiatives and capital needs should be scrutinised bottom-up.

Earnings Durability

Evaluate the durability and makeup of the clinic’s earnings stream. Is EBITDA concentrated in a single provider or service line? How diversified are the payer sources and mix? Assess potential risks from key employee departures or other disruptions.

EBITDA Profit Drivers

Dig into the clinical, operational and financial drivers underpinning the EBITDA profit engine. Metrics like per-chair production, overhead ratios, scheduling efficiencies, supply costs and staffing models should be analysed.

EBITDA Expansion Opportunities

Finally, identify key opportunities and initiatives for an acquirer to expand the acquired clinic’s EBITDA post-integration further. Options include treatment mix optimisation, new service rollouts, staffing realignment, centralisation of support functions and technology implementations.

Financing the Dream

Executing your dental group growth strategy will require careful planning and access to significant capital resources. There are several potential financing avenues to consider:

Bank Loans

For many DSOs, securing debt financing from banks will comprise the core of their capital. Typical loans include commercial mortgages to purchase premises and practice acquisition loans to fund the upfront buyout of target clinics.

Banks will extensively evaluate the dental group’s historical earnings, credit profile, assets, and future cash flow projections. Groups must be prepared to provide detailed financials, tax returns, AR/AP reports, payroll data, and comprehensive financial models. Lenders generally require a minimum EBITDA threshold and cash flow coverage ratios.

Maintaining an impeccable personal credit record is also critical for securing bank loans, especially for smaller groups who need more business credit history. Be prepared for lenders to examine personal tax returns, existing debts/liabilities, and even personal family budgets with a fine-tooth comb!

Mezzanine Debt

As groups reach a certain scale and their appetite for M&A heats up, they often layer on a complementary mezzanine (mezz) debt facility. Mezzanine funds provide an additional £5 million to £50 million in capital.

While more expensive than bank debt—often with double-digit interest rates—the additional mezzanine tranche enhances liquidity and borrowing power for highly acquisitive groups. 

Since mezz debt is subordinated to senior bank loans, it presents an elevated risk but can be raised without pledging significant hard assets as collateral.

Private Equity

As groups approach £20 million or more in revenue and EBITDA, they may partner with an institutional private equity partner to inject significant growth equity capital. Quality private equity firms can provide £20 million to £200 million or more to turbocharge M&A activity.

In return for their investment, PE firms take a majority ownership stake and require a board seat with certain governance rights. The upside is their deep sector expertise, M&A support resources, and ability to finance a buy-and-build strategy to scale rapidly. The tradeoff is relatively high return hurdles and eventual exit requirements for the PE backer.

Alternative Capital Sources

Other financing routes can include asset-based and cash-flow loans, tapping personal equity through home loans or retirement accounts, raising capital from high-net-worth individuals and tapping government small business support programs. Groups should evaluate all potential capital providers based on their cost of capital, use of funds, and future liquidity needs.

Savvy groups adequately capitalise upfront while preserving financial flexibility to pivot strategies, withstand economic cyclicality, and fund future growth phases as opportunities arise.

Assembling Your Team

No dentrepreneur can go it alone when it comes to orchestrating M&A and developing a DSO. Having the right complementary team in place is crucial.

At the very minimum, groups require a savvy Chief Executive to oversee operations, a Chief Financial Officer to manage accounting and finances, and a Chief Operating Officer to standardise processes and scaling.  

Much-needed outside support should come from experienced M&A advisors, CPAs, corporate solicitors, lenders, PR/marketing resources and dental consultants.

Executing Your Plan

With the right team assembled and finances lined up, it’s time to start executing the finalised M&A and growth roadmap.

Building the Group Structure

With robust financial/HR/marketing systems and central admin infrastructure for seamless integration of new locations.

Rigorous Due Diligence on All Targets

Conduct exhaustive operational, financial, legal, regulatory, HR, and compliance audits to spot potential red flags before deals go ahead.

Structuring and Negotiating Deals

Determine optimal investment structures, such as asset Vs equity purchases, rolling equity, earnouts, etc. While pushing to get deals done, it is critical to avoid overpaying for acquisitions by anchoring on reasonable forward EBITDA multiples.

Rapid and Effective Integration of New Clinics

Ensure minimal disruption and practice culture clashes by having solid onboarding and change management protocols and retaining key staff.

Empire Building—Is it For You?

While building a thriving multi-practice dental group is no simple undertaking, the potential rewards for growth, profitability, and equity value creation are immense. 

Dentrepreneurs who take a meticulous, strategic approach to planning and execution will be well-positioned to conquer an increased share of the UK’s healthy dental sector under a group structure.

Get Support from Pluto Partners

For dentists interested in pursuing a dental group growth strategy, having the right experienced partners can make all the difference. 

Pluto Partners specialises in advising dentists on mergers, acquisitions, financing and operations to successfully build and scale dental groups. 

Reach out to our team of experts to realise your ambitions.

Christina Diamanti
Abbey Road Dental Owner

A huge thank you to Max for all his help! I would not have been able to buy my practice without his professionalism, expertise and enthusiasm. He was always there to give support and advice and checked in with everyone involved at all times to make sure everything was running smoothly!





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