Dental Practice Due Diligence: Don’t Overlook Digital

Dental practice acquisitions are an increasingly common way to achieve sustainable growth, establish regional market superiority, and benefit from centralized billing, scheduling, and marketing.

In today’s increasingly competitive market, dental mergers and acquisitions are part and parcel of a changing industry landscape. Whether you’re looking to grow or seeking acquisition, it benefits both parties to conduct robust digital due diligence early in the process to establish value and identify potential vulnerabilities.

As a prospective buyer or seller, the fast pace of mergers presents challenges. Too often, the standard dental practice acquisition checklist overlooks the digital assets included in the sale.

Read on to learn more about the current state of dental practice M&A and the consideration of digital assets when a deal closes.

The Rapid Pace of Dental Mergers and Acquisitions

Growth through mergers and acquisitions is common across industries, but the dental market has experienced a dramatic uptick in M&A activity. Dental and orthodontics were the most active specialty healthcare subsector in Q4 of 2023, with 44 completed transactions. It was a marked recovery from the almost complete freeze in mergers and acquisitions during the 2021-2022 period of high interest rates. In 2023, dental mergers represented 57% of all specialty healthcare transactions, with major players like Acadia Healthcare, Select Medical Holdings, and a host of other national firms acquiring strategic practices in high-growth regional markets.

Multi-Practice Owners, Private Equity, and Dental Service Organizations

At the regional level, most dental practice mergers and acquisitions are completed by one of two types of buyers.

Multi-practice owners grow by acquiring other dental practices in the area, related businesses like oral surgery clinics or orthodontics practices, or a combination of both. These private ownership groups typically trace their roots to a single practice and are concentrated in fragmented markets where they can gain considerable market share with each additional location.

In most cases, multi-practice owners are local, have a single or small group of owner-operators, and operate in a relatively small area.

Private Equity Drives Dental Merger and Acquisition Trend

Private equity has substantially impacted the pace of dental M&A activity. Between 2015 and 2021, the share of dental practices owned or partially owned by PE increased from 6.6% to 12.8%. PE investment is concentrated in larger practices, particularly those that accept Medicaid, and among specialists like endodontists, oral surgeons, and pediatric dentists.

For multi-practice owners and private equity managers, the dental industry is ripe for investment for several reasons.

Fragmentation

The dental market is highly fragmented, with roughly 135,000 to 140,000 individually owned practices across the US. This presents an opportunity for strategic consolidation in specific locations or high-margin services.

High Entry Costs

Even general dental practices are capital-intensive, which poses a substantial barrier to entry. The number of new dental practices has increased by less than 1% annually since 2018, which means the competitive landscape is relatively fixed.

Recession-Proof

The dental industry is considered relatively recession-proof. With insurance companies offering competitively priced dental plans through employers and an aging population; the number of Americans covered by securing Medicare is expected to nearly double between 2010 and 2030. Increased insurance coverage rates make regular cleanings and elective procedures viable for a larger share of the population.

The Importance of Digital Due Diligence

Buying a dental practice includes acquiring the physical property, patient list, and reams of data associated with doing business. X-ray machines and sterilizer equipment aside, digital assets are some of the most valuable and vulnerable.

Technical debt: Some digital components of the target practice may be outdated and require substantial investment before they can contribute to productive growth. Old websites, outdated patient management software, and unanticipated issues are sometimes referred to as “technical debt” to represent the future investment required to get them up to speed.

Security and privacy: Like all healthcare providers, dental practices must meet federal HIPAA regulations to protect patient privacy. Inheriting an insecure, non-compliant digital environment puts new owners in a tenuous legal position as soon as the contract ink dries. Remember, HIPAA compliance extends to past and current marketing efforts, too.

Valuation: Technical debt and security enhancements have real-world costs; new owners will pay to address these issues or pay potential fines and lawsuits. One way or another, due diligence gives buyers a more accurate valuation and a deeper understanding of the business.

Give Diligence Its Due with Oneupweb

Whether you’re on the buyer or seller side, dental practice mergers and acquisitions are complex processes that, as one owner describes, “happen very quickly over a long period of time.”

Find time to work with an experienced digital due diligence partner.

Oneupweb has nearly 30 years of experience in digital marketing, giving us invaluable expertise to provide a crystal-clear picture of value and potential. Let’s get started; reach out to the team or call (231) 922-9977 today to learn more.