Unlike large DSOs that are financed by
private equity firms, many small and midsized
DSOs are financed by bank loans. Drying up
of potential capital for growth and expansion
of small and midsized DSOs could impact the
industry. Large DSOs—or more specifically,
their large private equity owners—could be
positioned to acquire and consolidate small
DSOs. This could occur with private equity
investment funding, meaning discounted
acquisition costs. The bottom line: large DSOs
could be positioned to out-compete small
DSOs and force them to abandon markets.
If cash flow for small DSOs is insufficient
to fund expansion, their growth could slow.
Because midsized DSOs currently represent
the largest growth segment of the DSO indus-
4, 5 this could result in an overall slowing of
the DSO industry.
Because most DSOs are privately held entities, their financial records are rarely disclosed.
Thus, it is often difficult to gauge the health of
this industry as a whole. One exception is pub-
licly traded Birner Dental Management Services (BDMS, doing business as Perfect Teeth
Dental). BDMS must comply with US Security
and Exchange Commission rules for disclosure
and issuing public records. BDMS’s most recent
annual report, released in the fourth quarter
of 2016, was noteworthy.
6 Production revenues
continued on a downward trend, staffing of
clinics with doctors and auxiliary personnel
was an ongoing problem, and tangible assets
Last year, BDMS was delisted from NAS-DAQ. It is now traded on OTCQX. BDMS is in
default to its lender, Guaranty Bank and Trust
Company (a Colorado-based bank). Per condi-
tions of the default, BDMS is prohibited to pay
shareholder dividends. The bank has imposed
strict terms with forbearance of its loan to
BDMS. Further, BDMS is the current target of
a hostile takeover, which current management
blames for much of the company’s fiscal woes.
One can only speculate if the problems of
BDMS are shared by other entities within the
DSO industry. Again, little is publicly disclosed.
One is often left to rely upon whispers from
insiders of the DSO industry.
Very recently, midsized DSO Jefferson Dental Care was sold off by Black Canyon Capital
to Brentwood Associates, another private equity firm, which has six times the capitalization.
8 Jefferson Dental Care operates 53 clinics,
down from more than 80 clinics a few years
ago. Initial financing for Black Canyon Capital’s
acquisition and operation of Jefferson Dental
Care in 2014 was through bank lending of BMO
The growth phase of the DSO industry may
be starting to plateau, perhaps in a transition
to a mature phase. As evidence, some DSOs
are consolidating operations, such as when
Smile Brands (in portfolio of Gryphon Investors) closed its Monarch Dental clinics in New
Mexico last year. As some banks become
tighter with their lending practices to DSOs,
interest rates continue their steady tick upward. Cheap capital may be harder to access,
especially via traditional bank lending.
It’s also possible that some DSOs are overvalued, and recent developments are reflecting
this. One could even speculate that there is a
market bubble. Regardless, there appear to be
a few notable storm clouds on the horizon.
Industry shakeups are inevitable, and the ride
will be bumpier for some more than others.
Large private equity firms may be best positioned to weather any storm that strikes the
1. Industry life cycle. Inc.com website. https://www.
Accessed April 29, 2017.
2. Allcare Dental Management lists $0 assets, $3.6m
debt. WIFR News website. http://www.wifr.com/
home/headlines/ Allcare__134614693.html. Published
November 29, 2011. Accessed April 29, 2017.
3. OIG excludes pediatric dental management chain
from participation in federal health care programs.
Office of Inspector General, US Department of
Health & Human Services website. https://oig.hhs.
Published April 3, 2014. Accessed April 29, 2017.
4. Cumbus K. East West Bank exits the dental lending
market. LinkedIn website. https://www.linkedin.
com/pulse/east-west-bank-exits-dental-lending-market-kevin-cumbus. Published November 30,
2016. Accessed April 29, 2017.
5. Cumbus K. Another one bites the dust—Opus Bank
exits the dental practice lending market. LinkedIn
another-one-bites-dust-opus-bank-exits-dental-practice-kevin-cumbus. Published December 14,
2016. Accessed April 29, 2017.
6. Birner Dental Management Services, Inc., 2016
annual report. Seeking Alpha website. https://
seekingalpha.com/filing/3483644. Published March
31, 2017. Accessed April 29, 2017.
7. Miller B. Perfect Teeth parent and activist
shareholders are in a donnybrook. Denver Business
Journal website. http://www.bizjournals.com/
and-activist-shareholders-are.html. Published April
5, 2017. Accessed April 29, 2017.
8. Dorbian I. Black Canyon sells Jefferson Dental Care
to Brentwood. PE Hub Network website. https://
April 10, 2017. Accessed April 29, 2017.
9. BMO Harris Bank agents $47MM facility for JDC
Healthcare Management. ABL Advisor website.
healthcare-management. Published July 2, 2014.
Accessed April 29, 2017.
MICHAEL W. DAVIS, DDS,
operates a private general
dental practice in Santa Fe, New
Mexico. He also provides expert
witness work and consultation
for law firms; chairs his district
dental association peer review;
and writes articles on dental
ethics and legal cases affecting
the dental industry. He is an advocate for the public and
fellow doctor colleagues. Dr. Davis can be reached at
Drying up of potential capital for growth and expansion of
small and midsized DSOs could impact the industry.