How M&As Impact Dentistry

After a relatively slow start to the year, the dental M&A market in 2022 is expected to be the most active in history. Four main factors are driving the market's growth: the lack of supply on the buy side, concerns about the potential impact of tax increases under the Biden Administration, the rising demand for specialty practices, and COVID fatigue. The demand for dental service organizations backed by private equity (PE) is growing. They need to grow because they have the capital to do so, and they also need to attract more investors expecting a return on their investment. DSOs backed by PE typically have a 60-month growth plan and usually exit once they reach their targets. In 2021, the debt capital markets froze as investors tried to figure out how COVID's impact on the economy would affect the country. This led to a pause in the buying activity in the dental industry. Many deals in the sector were completed with a lender combination of debt and equity.

The lack of debt also caused many deals not to get done. In 2021, many DSOs backed by PE hit their target of acquiring only a fraction of their target. This led to an unprecedented demand for new group and practice acquisitions in 2022. Fears about potential tax increases are also a major factor that caused many deals not to get done. One of the most common reasons why the author's company could negotiate a lower tax rate than its clients was the negotiation around the purchase price. During the last year, President Joe Biden proposed increasing the long-term capital gains tax rate to 37%. This would have caused the asset allocation benefits of the sale to disappear. For instance, if the sale price were $3 million, the net result would be an additional tax bill of around $390,000. Fears about potential tax increases also caused many owners of groups and practices to look for acquisitions in 2022. This prevented them from sitting on the sidelines for a long time.

Despite the positive effects of COVID on the industry, it was still hard for many business owners to get back to work. They had to implement various measures, such as hiring freezes, higher PPE requirements, and wage increases. Managing a dental practice during the COVID shutdown was also very challenging. Many owners of dental practices decided that it was time to retire and focus on other activities. These were not "fire sales." Instead, these were solid businesses run by great leaders who decided to give up their day-to-day responsibilities and let someone else handle the payroll. All four of these aforementioned factors fueled significant activity in the M&A markets in the dental economy in 2021.

According to data from S&P Global, the number of new deals in the market has decreased significantly in the first quarter of 2022. This has caused prices to increase. The lack of supply and the increasing number of buyers has created a sellers' market, which is expected to disappear by the fourth quarter of 2022. This is because the demand for businesses has become so high that it will no longer be able to meet the supply. The M&A markets are expected to remain relatively active until the fourth quarter of 2022. Due to the lack of acquisitions in 2020, many buyers are still willing to pay higher prices for dental businesses. Specialty practices are expected to continue leading the way when it comes to acquiring companies.