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MailDecember 2021
State of the DSO Industry & Dykema
Amol Nirgudkar, CEO of Patient Prism, and Brian Colao, Director of Dykema’s DSO Industry Group--and also an expert on the corporate practice of dentistry, talk about the intensified consolidation of dental practices and growth of DSOs as we head into 2022.
What is fueling rapid consolidation of dental practices?
“Coming out of the pandemic, the DSO industry is going through a Renaissance,” says Nirgudkar. “It’s one of the important things we’re talking about at this conference.”
“It’s intensified beyond what we were seeing in 2018-2019,” says Colao. “We were at a record pace in 2019, and the first two months of 2020 looked like they would be a record. In March, April, May, June, and July of 2020 it slowed down. Then, it came roaring back in the last half of 2020. It was the busiest third and fourth quarter in 27 years. Now, we’re even busier. The middle market is exploding. The large DSOs are still doing deals like they always have, some of them high-profile, but the middle market is just exploding. For example, an organization that had no practices last year, now has forty.”
What's fueling this rapid consolidation? Colao says there are several factors. One is the fear of the new administration and taxes. That is motivating sellers to go affiliate with DSOs. Another is that the pandemic has scared solo practitioners. “They fear going it alone if something like this ever happens again,” says Colao.
Other factors? There is an insatiable demand from the buyers because the dental industry has been recession proof and now pandemic proof.
“Extreme demand from the buyers and motivated sellers have led to this absolutely insane climate that we're in now from an M&A standpoint,” says Colao.
“This is compounded by the realization that dentistry may have just scratched the surface of the market,” says Nirgudkar. “Most people, 60%, have not seen a dentist.”
On top of the tremendous potential is opportunity for dentists to offer more services. “We’re seeing a lot of medical integration, spa integration, and even optometry,” says Colao. “Those are just examples of consolidation innovation.”
From a legal standpoint, how does it work when a dental support organization decides to incorporate other services like vision?
According to Colao, it becomes a regulatory project only on the clinical side. “Because the DSO can manage a dental practice, it can manage a veterinarian clinic, a med spa, or a vision clinic. There are no regulations preventing a DSO that is providing non-clinical administrative services from managing any medical or dental practice. On the clinical side, with vision as an example, the DSO must collaborate with an optometrist or ophthalmologist. That medical professional would own one clinical entity to do vision care and a dentist would own another clinical entity to do dentistry. And they might do this under one roof,” says Colao. “The patient goes to separate practices managed by the same DSO.”
Dykema advises almost 100 MSOs and hundreds of DSOs.
Dykema is branching out beyond dentistry into veterinary practices, optometry, ophthalmology, radiology, orthopedic surgery, freestanding private emergency rooms, primary care physicians, and more. But “dentistry still remains the most challenging regulatory environment,” says Colao. “Medicine is a different climate. Things that are permissible in medicine are not permissible in dentistry. If you can navigate dentistry, you can do all the medical disciplines.”
Women in DSO has been a highlight of Colao’s career.
The Women in DSO movement asked Colao to serve on its board of directors. “It’s been one of the highlights of my professional career,” says Colao. “I’ve been privileged to do a lot in my career but being asked to be on the board and being the only, at least for now, male member of the board has been tremendous. We started this in 2020, but then the pandemic hit and slowed us down. In 2021, we had a launch party at the July Dykema conference, and there will be an inaugural event March 9-11, 2022, in Las Vegas. Anyone can register online at womenindso.org.”
There are some DSOs that are 85% women says Colao. The majority of professionals in the DSO industry are women – clinical and nonclinical.
“When you think about that, and you think about the historic under-representation of women in leadership, the movement is going to be empowering DSO leaders who are women,” says Colao. “The mission statement of Women in DSO is to access opportunities and mentoring. So, it's really been just a personal and professional highlight for me being a part of that organization.”
In 2022, Dykema will get some clarity on the new tax codes coming out.
“At the beginning of the year, we heard capital gains were going to go from 20% to 43.6%,” said Colao. “I don't think that's going to happen now. Once we get clarity in the tax code, I think that's going to be a big determining factor in what happens in DSO M&A. But right now, I'm seeing a robust volume for the first quarter of '22, and we are at capacity for closing deals by year-end.”
Why do DSOs choose Dykema?
Dykema has structured over 1,500 deals during its 27-year history. “That’s an equal distribution of buy side and sell side,” says Colao. “We know both perspectives, and we have the best track record of closing deals. We’ve done the most structures and regulatory analysis and seen everything that could possibly happen. We’ve never had any client’s business model invalidated. Plus, we’re fun to work with.”
“Dykema looks out for its clients’ best interests,” says Nirgudkar. “They are true consultants, advising from the legal and compliance standpoint, and solving problems. Not all agreements are created equal, not all structures are created equal. And if you are in this business, if you are thinking about becoming a DSO, if you're thinking about acquiring practices, these are the guys that are going to really walk you through the process, including helping you make connections.”
Watch more interviews with Brian Colao:
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