COVID-19’s Effect on Private Practice Sales to DSOs

COVID-19’s Effect of Private Practice Sales to DSOs V1

The COVID-19 pandemic has affected nearly every industry, with dentistry being no exception. From the initial concern for dentists’ safety, to the early shuttering of practices, and now the current challenges of providing an essential service as safely as possible, dentists have felt the significant impact of this virus. So, it should come as no surprise that the sales of private practices to larger entities have also been (and continue to be) affected by these unpredictable times.

From a Seller’s Market to…

It’s generally agreed that in 2019, Dental Service Organizations (DSOs) were paying top-of-the-market prices for individual dental practices. Chip Fichtner, the founder of Large Practice sales, reported that his firm helped clients negotiate over $200 million worth of transactions in that year alone.

And then in March of 2020, the COVID-19 pandemic began. And the tables were turned.

This was the moment that stay-at-home orders forced most dental practices to close their doors to all but emergency patients. For a number of them, the shutdown proved to be more than their businesses could withstand. In fact, one source reports that as many as 35% of private practices were overextended, and predicts that up to 20% may never reopen their offices.

For others, on the brink of retirement (15.7%), this seemed like the right time to get what they could for their business and get out. According to Greg Beamer, a broker and transition consultant, "pricing fell around 10%-15%," with some dentists letting their practice be acquired for rock-bottom prices. Fichtner says that the pandemic has caused many potential buyers to go bargain “‘fishing,’ eager to buy practices at a perceived bottom.”

Additionally, some current private practice owners have simply been looking for a little extra security and support. And they are often looking to DSO affiliation to provide it. Two individuals familiar with the market, shared their thoughts on this matter in a recent article. Craig Woods, of the Dykema Dental Service Organizations Group remarked that, “DSOs are seeing renewed attention from potential affiliates who are uncertain of the future and are trying to take some risk out of that future.” George Radigan, vice president of business development for North American Dental Group, added that, “The pandemic has put a spotlight on the benefits of being part of a DSO, where dentists can rely on administrative support to navigate challenges brought on by the pandemic while collaborating with fellow doctors on clinical topics.”

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No One Is Immune

While it’s true that many deep-pocketed corporate dental organizations were able to take advantage of this new buyer’s market, not all have been immune to the challenges of the pandemic.

DSOs, just like private practices, have had to face issues such as reduced staff, the expense of additional PPE and other safety measures, and general uncertainty. And, of course, both private practices and DSOs have had to ride the COVID-19 rollercoaster of production: initially treating only emergency patients, then seeing an onslaught of patients from pent-up demand, to experiencing a general decrease in patient volume — which is currently hovering at only 80% of pre-COVID-19 levels.

What’s more, DSOs have to manage the greater expense and responsibilities that come with operating a larger organization. And some DSOs are actually finding themselves to be in an even more precarious situation than a private practice might. These are the organizations that have overpaid or overborrowed and are now (or are about to become) overleveraged from buying up private practices during the pandemic.

What Makes an Attractive Buyer and Seller?

While the pandemic has been promising plenty of uncertainty for both private practices and DSOs both, one thing does seem to be pretty clear: DSO’s interest in purchasing private practices is at an all-time high.

And during this apparent buying frenzy, the pandemic has offered a unique advantage to private practice buyers and sellers alike. It allows both parties to see each at their most challenged, to highlight their best and worst features.

It’s something sellers are considering as they look for buyers that are able to offer more than just the best price. This is especially true for those who are planning to affiliate. The right partner for these practices must prove that they can help manage cash, provide guidance on staff and patient management, lower overhead, and offer assistance in navigating this pandemic to operate a successful practice.

As for buyers, Radigan echoes many other DSOs as he explains how COVID-19 has been helping him to better evaluate potential purchases. “We continue to look to partner with dentists who are aligned with our patient-focused culture. We can learn a lot by understanding how the practice responded to the pandemic, and how they ensured they were able to protect their team while providing excellent clinical care for patients.”

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