Private equity has reshaped the dental landscape over the past decade, drawing significant attention from orthodontists. While the allure of financial gain, shared operational resources, and opportunities to reduce administrative burdens are appealing, understanding what partnering with private equity truly entails is critical for practice owners. This post offers a foundational overview of private equity’s role in orthodontics, explores the differences between traditional Dental Service Organizations (DSOs) and emerging ownership models, and delves into the practical impacts of choosing to partner. Here’s what you need to know before taking the plunge.
What is Private Equity?
Private equity firms invest capital into businesses, typically with the aim of increasing their value and, eventually, selling the business at a profit (largely benefiting the firm, vs. practice owners). In the context of healthcare and dentistry, these firms often focus on scaling practices, improving efficiency, and increasing market share. The premise is straightforward: the firm buys a stake—often a majority interest—in your practice in exchange for capital, resources, and growth expertise.
While private equity involvement can offer substantial financial upside, it may also influence operational decisions and overall practice direction. Knowing how private equity aligns with your personal and professional goals is key before entering any agreement.
Traditional DSOs vs. Other Ownership Models
Traditional DSOs and private equity-driven models have similarities, but they are not identical. Traditional DSOs often focus on centralized management functions, streamlining operations across a network of practices. Private equity models, especially those designed to maintain a degree of doctor autonomy, are evolving. Some structures allow clinicians to retain ownership stakes and active roles in practice governance.
Key Points of Difference to Consider:
- Control and Governance
Traditional DSOs may operate under a centralized model where most strategic decisions flow from the top. Emerging models—like those offered by entities such as Phase 1 Equity—prioritize clinician ownership and input. - Equity Opportunities
Private equity-backed models will acquire your practice, and you’ll typically become a salaried employee, while a platform like Phase 1 Equity utilizes a merger model in which doctors keep all the equity in their practice, and there is no change to the way doctors are paid. - Operational Changes
Understand how day-to-day operations may shift. Certain private equity partners provide enhanced marketing, administrative, and human resources services, potentially improving patient care but also introducing changes in workflows.
Financial and Operational Implications of Partnering with Private Equity
- Financial Upside
Selling a stake to private equity can offer immediate financial liquidity while positioning you for future upside through retained ownership. You can reduce personal risk while benefiting from the growth trajectory your practice experiences under professional management. The risk is that you sell for too low of EBITDA or too low of an EBITDA multiple, and sometimes private equity/DSO term sheets aren’t straightforward. From a practical perspective, DSOs are incented to pay you as little as possible for your practice, while they benefit from operational changes and efficiency put in place. - Strategic Resources
Many firms provide access to advanced technologies, patient management tools, and marketing capabilities that may be beyond the reach of solo or small-group practices. - Cultural and Practice Philosophy Fit
Evaluate how your prospective partner aligns with your core values and patient care philosophy. Incompatible approaches can lead to tension and dissatisfaction. - Exit Strategy
Think long-term. Is your goal to eventually step away or retire? Ensure any deal with private equity aligns with your ideal exit timeline and secures your legacy within the practice.
Making the Right Decision
Before committing to any partnership, make sure you conduct thorough due diligence on potential partners to understand their track record and vision for growth. Ask candid questions about day-to-day changes, organizational culture, and potential exit strategies. Talk to other doctors in the network and understand how their lives have changed post-partnership. Remember, a deal’s immediate benefits should always be weighed against its long-term impact on your practice, your employees, and—most importantly—your patients.
Final thoughts
Private equity’s influence on orthodontics presents both opportunities and challenges. The right partnership can unlock growth potential, reduce administrative headaches, and enhance patient care—but only if it aligns with your goals and values. By understanding the nuances of private equity versus traditional DSO models, you’ll be better equipped to navigate this complex and potentially transformative decision.
For orthodontists interested in learning more about a clinically driven, doctor-owned-and-led approach, consider exploring Phase 1 Equity’s model. Tailored to entrepreneurial doctors, Phase 1 is not a sale to a DSO; it’s an investment in a partnership of like-minded doctors looking to shape the future of patient care and capture the exit multiple usually reserved for private equity. Want support but aren’t ready to sell? Let’s chat.