Group Function: DSO...Friend or Foe? with Dr. Mark Costes and Dr. Paul Etchison

Jul 21, 2023

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Dentistry is a business. No matter how much I want to separate myself from that, it just is. Two people whose business acumen I respect a LOT also happen to be dental podcasters. Today I'm joined by Dr. Mark Costes of the Dental Success Institute and the Dentalpreneur Podcast and Dr. Paul Etchison, author of "Dental Practice Hero" and creator of the Dental Practice Heroes Podcast.

These guys understand business in a way that most do not. But what I like about them is how freely they give away their knowledge. I brought them together to talk about the state of DSOs in dentistry. Even in the short time that DSOs have been a common topic (which I figure is less than 10 years) the concept has continued to evolve as well as consolidate the dental practice market. Mark and Paul have thoughts...and you get to hear them all in a wide ranging conversation:

What is a DSO?
How are DSOs evolving?
Why are DSOs continuing to consolidate in the dental space?
Dentistry is a stable industry for private equity to invest in and is used as a hedge against more risky investments.
What kind of dental practices are DSOs interested in?
What kind of practices and practitioners are DSOs starting to become less interested in?
What's the difference between "multiple practices" and a DSO (Dental Service Organization?)
How have current levels of student debt affected DSOs and the consolidation of the dental market?
Can clinical excellence really be "baked in" to a DSO model?
Are DSOs more attracted to specialty groups? What types of specialties are more attractive? Less attractive?
Will DSOs move to rural areas?

Mark and Paul use quite a few terms that you might not be 100% familiar with. I had heard them kicked around, but before the conversation starts, I list a couple definitions that you might find helpful:

DSO: Simply put, DSO stands for Dental Service Organization. A DSO is a company that helps administer the business aspects (management, marketing and business administration) of the dental practice.
EBITA: EBITA stands for "Earnings Before Interest, Taxes and Amoritization." It is a measure of profitability that a potential investor can use to evaluate a potential company or practice. It's used help make "apples to apples" comparisons between potential investments. EBITA is calculated from financial data reported by a company. Many DSOs valuate dental practices as a multiple of their EBITA.
same store growth (or same store sales): a measure of growth used by a DSO to know how well an individual practice within the DSO is doing. A DSO will want to know how well the individual practice is doing vs. the entire DSOs growth. The idea is to invest in a practice that has potential to grow in it's own location separate from its relationship to the whole DSO.
Private equity (or PE): a type of investment where investors buy shares of privately-held businesses. Private equity is the money supply that has driven the DSO revolution in dentistry (and many other industries). Private equity money expects a return on their investment much like any investor would.
Recapitalization (aka: recapitalization event): "the second bite at the apple" according to Mark and Paul. Recapitalization is the restructuring of a company's debt and equity mixture, and/or financing. This is usually done to stabilize a company's capital structure. In the context of a DSO, recapitalization might be the sale of a smaller DSO/group to a larger one and/or the buying out of dental owners.

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