The Rise of DSOs: Why You Should be Increasing Your EBITDA (and Your Market Value) with Digital Spend Management

March 28, 2023

With the rise of Dental Service Organizations (DSOs), increased investor attention, and a new focus on EBITDA, dental organizations are under more pressure than ever to build scalable infrastructure that ensures efficiencies, controls spend, and decreases overhead costs.

We take a look at the seismic industry shift that should have everyone, from single-office practitioners to large DSOs, paying attention to their EBITDA.

As supply costs escalate and the labor crisis wears on, the need to focus on improving margins through lowering costs and doing more with less has increased. Fueled by the impact of Covid-19, as financial pressures (and student loans) continue to mount, dental practitioners have begun to realize the advantages of the DSO model, with its trending popularity quickly gaining traction.

DSOs offer dental practitioners welcome relief from the pressures of running and maintaining the business side of a dental practice. By having a DSO manage the business and administration side of a practice, rather than spending their own valuable time on business functions that dentists don't necessarily have the knowledge, education, or ability to handle effectively, they can enjoy a stable salary while remaining focused on providing quality patient care.

According to Inside Dentistry, “DSOs continue to increase their market share across the United States. In the race to expand, some are offering to pay amounts that are five to nine times practices' earnings before interest, taxes, depreciation, and amortization (EBITDA), which can be tempting to almost any practice owner.”

As they continue to attract the attention of investors with a healthy rate of return on their investments, DSO growth isn’t about to slow down. The American Dental Association predicts DSOs will more than triple their current market share by 2035.

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Increasing Your EBITDA — and the Value of Your Practice — with Spend Management

DSOs, Chief Financial Officers (CFOs), and dental practitioners have finally realized that a dollar saved is a dollar made. But with the rise of DSOs, that savings could now lead to much, MUCH more.

Lowering overhead costs with improved spend management not only improves your profits but can significantly increase the value of your business.

When it comes to margin-improvement initiatives, dental practitioners have the typical knee-jerk response of obtaining new patients and working longer hours so they can treat more patients and increase revenue.

While the approach can work and may lead to some financial growth, it is far from fail-proof and has a limited impact on driving the bottom line. Unlike savings, where every penny you save is a penny gained on your financial statement, all revenue gets a hefty chunk taken out of it to cover overhead costs, including the costly marketing campaigns it takes to increase revenue, so only part of that revenue actually makes it to your bottom line.

Unfortunately, today, many dental organizations are operating with extremely high overhead costs, impeding profitable growth.

Average practice overhead runs at 66%, so for every dollar of revenue, 66 cents goes towards funding business operations (for dental practices, overhead costs are considered all costs not associated with dentist income, including rent or mortgage, employee compensation equipment, supplies, and equipment.)

To put that into perspective, this means that every $1.00 saved in overhead yields the same profit as increasing production by $2.94. So, even a small reduction in overhead can yield significant increases in profits without having to increase production.

Overhead costs and procurement practices significantly impact your EBITDA, the primary yardstick used by investors in determining the market value of dental practices.

Aegis Dental Network offers an example whereby focusing on EBITDA rather than collections and positioning his practice as a DSO partnership opportunity, one lone practitioner was able to sell his practice for more than $4.5 million, which was over 170% of collections and $2.7 million more than the $1.8 million (70% of collections) he was originally told to expect.

This was able to happen because the dentist ran an efficient, lean practice that generated $2.6 million in revenue and created a huge amount of EBITDA (over $800,000). Although the buyer paid over 170% of collections, from his perspective, he actually paid over 5x EBITDA, which was within the market range. According to Aegis, the buyer is likely to go to market in the coming 24 months and sell for 10x to 12x its collective EBITDA.

Leveraging Automation: The Power of Digital Spend Management

In a seller's market, where interest from investors and DSOs continues to drive up practice valuations, every penny you save counts. The faster and smarter you can buy the supplies you need to run your practice, the healthier your EBITDA, and the more attractive your practice will look to investors. And automation is simply the best way to get there.

But just as critically, Method’s digital spend management delivers essential frameworks designed for easy implementation of best practices that optimize operations and maximize efficiencies. It’s the scalable infrastructure investors look for in a “box.”

Although many dentists are opting to sell to or align with DSOs, those who don’t now find themselves having to compete against capital-heavy DSOs who enjoy economies of scale.

Whether you’re considering buying, selling, relocating, or leasing a dental practice, it’s a massive financial, emotional, and professional decision that’s not to be taken lightly. Luckily, there are organizations that can help. Our partner,  Professional Transition Strategies, can provide you with the expertise needed to make an informed decision by providing the breadth and depth of information necessary to find the best transition strategy for you.

But DSOs still have work to do as well. In order to streamline processes and leverage their buying power to improve their EBITDA, DSOs need to implement standard processes and gain control of spending habits across their organization.

Luckily, no matter the size, maturity, or complexity of your business, a digital dental-specific source-to-pay procurement process offers hidden profits and opportunities for quick improvements.

Method, Your Way to a Healthy EBITDA

In order to streamline processes and leverage their buying power to improve their EBITDA, DSOs need to implement standard processes and gain control of spending habits across their organization.

Luckily, no matter the size, maturity, or complexity of your business, a digital dental-specific source-to-pay procurement process offers hidden profits and opportunities for quick improvements.

Method’s e-procurement tool can provide visibility and control to your purchasing chaos so you can increase formulary acceptance and reduce maverick spend.

Our all-in-one dental procurement platform enables best practices and optimizes the entirety of the source-to-pay process, from identification of requirements to payment of invoice, so you can cut costs and optimize cash flow by ensuring you buy the right item, from the right supplier, at the right time and at the best possible price.

Method’s Amazon-like shopping experience offers an efficient way to buy, making it easy for you to quickly compare prices from multiple vendors, including any contract or specially negotiated pricing, so you can make sure to take full advantage of cost savings opportunities.  Our procurement data analytics help you identify areas for improvement and gather your buy data across locations.

With access to 2000+ suppliers and over 800,000 dental-specific products, Method gives you ultimate flexibility to buy what you wish, from whom you wish. With our automated RFQ process, you can easily request and analyze quotes from multiple vendors and quickly award business.

When it comes to staying within budget, Method’s order approval process and custom buying rules allow you to control spend, so you can govern according to company policies, improve formulary acceptance, and stop overbuying before you overspend.

Ready to start your journey to a healthy, well-run practice with a healthy EBITDA? Contact us now for a personalized demo.

Learn More About Dental Practice Management

Ready to build a better dental practice?

Method Procurement Technologies gives independent dental practices and DSOs the inventory management and procurement capabilities they need to succeed. With our full, end-to-end solution, ordering dental supplies is straightforward and hassle-free.

Learn how Method Procurement's spend management solutions can improve your bottom line. Get in touch with our team today or request a demo to see it for yourself.