Healthcare M&A Trends – a Reflection + a Forecast

Editor’s note:  With every new year come new trends in the market and patterns in the industry.  I asked Thomas Allen, Practice Transitions Group’s co-founder and managing partner, to reflect on what he saw last year in practice sales M&A deals and what medical practice owners can expect in 2024.  Here’s what he had to say.  

Healthcare M&A Trends - a Reflection on 2023 

 

To reflect on healthcare M&A trends in 2023, we have to take a step back and look at what happened during 2021 and 2022. COVID proved that the dental space was as resilient as investors thought it might be.  During those two years, a lot of DSO groups formed - they aggregated and bought a ton of practices.  Their goal was to raise money, to put, let’s say $20 million of EBITDA together, and then go and flip it to the guys above them. The business plan worked.  But all of a sudden interest rates rose on their debt facilities and they weren’t able to flip out of them the way they thought they would. 

Those DSOs then had to learn how to actually operate dental practices.  I saw a lot of groups hitting pause last year as a result; they were still wanting to buy things because there was good business there, but they were distracted.  They were figuring out: how do we make this business work? I think that took some bandwidth away from certain groups.  They had to focus more on deals they really wanted and couldn’t look at as many as they would have in the past.   

Additionally, after the buying frenzy of ‘21 and ‘22, the groups started learning some lessons that they might have missed in diligence and other little things that added up and made the practices harder to operate. One thing we did in ‘23 was a lot more diligence on the buying side.  Diligence during practice sales M&A deals was a lot harder last year than it was in ‘21 and ‘22.  Deals in ‘21 and ‘22 that might have had 10 bidders swarming might have 5 in ‘23 because groups were looking for more chances to say no. 

What does this mean for someone operating their own practice today?

For owners of what I like to call "diamond" practices that are:

  • Well-located
  • Have clean books
  • Show strong earnings
  • And have a business-minded owner,

we are seeing interest and valuations akin to what we saw in '21 and '22.  Multiple offers every time.

For practices that are:

  • Operating in a tertiary market or
  • Had more doctor risk or
  • Anticipated staying on for a shorter time frame,

the deals moved a little more slowly. Risk reducing terms became more important to the buyers who learned hard lessons.

2021 and 2022 were not unique for dentists. This chart - sourced from Pitchbook and BCG - shows a Healthcare M&A Trend of decreased deal volume across verticals last year.

Healthcare M&A Trends - A Forecast for 2024

 

  • Multisite Healthcare

To start - and something everybody should be thinking about from a macro level - a lot of the PE funds that will back the buyers have some amount of money that they decided to allocate to multisite healthcare.  You might think of your buyer as a DSO, but behind them is a fund looking at practice sales M&A deals more broadly - MedSpa, Dermatology, Urgent Care, and other verticals.  MedSpa is hot right now, and plastics are gaining a lot of momentum.  So while we have historically called buyers DSOs for shorthand, we should be talking about investment in terms of multisite healthcare.  

  • Operators are proving themselves (or not) 

Something else that stands out to me going into 2024 is that good operators are proving themselves. They're still able to buy practices because their businesses are doing well; the bad operators are getting weeded out. 

It’s a positive outcome of the interest rate hikes.  Plus, private equity debt is expensive - it’s not like a fixed-rate mortgage.  It’s risky.  So their interest rates went from eight or nine percent to 12 or 14% - that’s a lot less cash flow.  Money was tight for groups.  They promised their doctors a lot of support after the transitions, but now they don’t have as much money to hire the people they thought they were going to be able to hire to provide all of the support.  The hope is that in 2024, interest rates will start coming down, and operators have had a chance to work out their operational issues and will start buying again.  

For example, we've got two practices in small towns right now that have good traction.  

But ultimately, a lot of our clients are hoping for a “second bite of the apple” on the recap.  And that’s dependent on how well managed and set up their group is compared to the other multisite healthcare groups on the market being sold.  I say it all the time - not all groups are the same - and hopefully it will be easier to tell which ones are well-managed and which ones aren’t based on how well they managed operational hiccups last year.

  • Valuations remain strong.  

In general, the practices we’re selling are getting strong valuations. Are the eight-and-a-half 9x EBITDA multiples that would occasionally happen in ‘21 and early ‘22 on a single practice going to keep happening? Probably not. But they're still really good. 

And I’ll say it again - the good operators are coming to the surface, which will be a real benefit of practical sales M&A deals in ‘24 - the clarity of that.  For example, if I sold 60% of my practice at 9x, you probably went around sharing that with your friends and feeling really good about it for a while.  And you should.  But for the DSOs and MSOs that were paying 9x on debt that had interest at 8 or 9 percent but now has interest at 13 or 14%?  They can’t pay it back.  Add on inflation-hitting suppliers and families feeling tight for cash - they might put off braces for a year.  An orthodontics-focused DSO that we followed last year just fired all the founders and executives. 

  • MedSpa and Plastics Momentum 

2024 is shaping up to be the year for MedSpa and plastics, and dermatology will continue to do well.  There are a lot of practices and a lot of runway.  We’re seeing a ton of buyers circling these verticals, but they all don't quite know where they want to invest yet.  This makes sense because, in the MedSpa and Plastics verticals, the services vary widely.  Ownership varies widely.  Throw in nails and salon services, and it’s unlike anything these PE-backed groups have bid on before.  

In short, positioning your deal and finding the buyer who wants to play in the space you’re in from a procedure mix standpoint will be important. 

Healthcare M&A Trends show dry powder, or money available for investment, increasing year over year.

To summarize Healthcare M&A Trends,

 

We’re still reading and hearing all of these trillions of dollars of cash on the sidelines, and the multisite healthcare space is still being seen as a safe place and a place that can grow. Many of these groups worked on operational kinks in 2023, and their debt costs will likely come down in 2024.  They’re going to keep buying and we're still going to see really good multiples. If you’re a doctor who’s going to partner and invest or roll hundreds of thousands of dollars into private equity, you’re still going to come out on top.  

This year, doctors need to focus on underwriting the experience of the operator in the group in the background and their management team.  I’ve seen these smart, well-educated MBA grads get together to roll up businesses, only to fail later because they know how to operate a practice. 

Candice DePrang Boehm headshot

Candice DePrang Boehm

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