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How Private Equity Is Reshaping Dentistry: What Every Dental Professional Needs to Know

Private equity is revolutionizing the dental industry, offering lucrative opportunities but also introducing new challenges for dental practice owners. Learn how to navigate this evolving landscape to maximize your practice’s value and maintain operational control.

The dental industry is undergoing significant changes due to the increasing involvement of private equity (PE) firms. Attracted by the industry’s fragmentation, steady cash flow, and recession resilience, PE firms are investing heavily in dental practices. This trend presents both opportunities and challenges for dental practice owners, necessitating a deep understanding of this evolving landscape.

According to an article from BizEquity, a business valuation platform, PE investments often lead to higher practice valuations than traditional transactions. These valuations are typically based on the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), with multiples ranging from four to eight times EBITDA. PE firms normalize EBITDA to account for owner compensation and other adjustments. Factors influencing these multiples include practice revenue, the number of locations, and specialty areas.

For dental practice owners, PE interest can significantly impact financial and operational strategies. Higher valuations driven by PE investments create lucrative opportunities for those looking to sell their practices. However, increased competition among PE firms can lead to market saturation, making it challenging for smaller practices to compete.

Operationally, PE firms often implement standardized procedures and systems to enhance efficiency and profitability. While this can improve practice performance, it may require significant operational changes and lead to a loss of autonomy for practice owners.

When considering exit strategies, selling to a PE firm can be attractive for those contemplating retirement or a career change. Additionally, PE involvement can complicate traditional succession plans.

Owners should also be aware of potential reductions in annual compensation post-sale, known as the income scrape. Many deals involve the formation of a new entity with a dental support organization (DSO) and a corresponding payment structure. Some transactions may require “rollover equity,” where the seller receives equity in the PE group instead of all cash, hoping this investment will grow in value over time.

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