Report on Dental Support Organizations (DSOs)
Key Trends for Private Equity, Executives and Founders
Tailwinds Quietly Sustain Interest in the Dental Industry
The dental industry has long attracted lenders and investors – with the first wave of public company Dental Support Organizations (DSOs) in the 1990s and a second wave of private equity investment starting in the mid-2000s - and it remains an area ripe for both investment and innovation.
To this day, DSO transactions have steadily, albeit quietly, continued to close in the middle market and lower middle market, with multiple $100 million-plus platform transactions closing over the last 12 months and a significant volume of add-on transactions.
Although the dental sector commands one of the largest, if not the largest, market share of investor-backed healthcare provider companies, DSOs often are omitted from 2025 analyst and media reports on “hot” investment areas. The perceived lack of path to IPO or exit for the very largest DSOs in the current market makes the sector relatively unattractive, at the moment, for large-cap investment bankers and funds, and their perspective is given weight in the media.
This concern is accentuated by the uncomfortable fact that some large DSOs defaulted under their credit agreements in recent years after the post-COVID-19 spike in interest rates. Some other large DSOs, to afford the increased debt service, were forced to cut costs, which in turn stalled their ability to capitalize on the benefits of scale. As a result, there remain fewer large-cap DSOs in the current environment with a demonstrated ability to execute on and realize organic earnings before interest, taxes, depreciation and amortization (EBITDA) growth, which has become a core concern in a more conservative market.
Those temporary issues with large-cap DSOs appear to be idiosyncratic to the small pool of these larger DSOs and not intrinsic to the DSO model itself. The market’s confidence in DSOs as a general proposition is evidenced by the continued pace of transactions at the middle market and lower-middle market, where dental transactions have remained at a more consistent volume, than to other sectors – such as home care, dermatology and ophthalmology, which saw enormous interest spikes in earlier years, followed by sharp reductions in recent deal volume.
Although recent DSO transactions are not pushing the ceiling on multiples above historic norms, there remain strong, persistent tailwinds that appear to be lifting the floor of interest in the dental sector. Among the reasons:
• Long-established demand curves remain strong due to population growth, aging demographics and focus on preventive care.
• New demand for high-value cosmetic dentistry driven by wellness trends, social media and video-conferencing for remote work. The same trends that drive interest in medspas and aesthetic practices are equally in play for dental practices, with high correlations to consumer demand.
• Favorable reimbursement trends, with approximately 40 percent of dental revenue being cash-pay, Medicare Advantage coverage increasing and a number of states supplementing Medicaid rates, particularly for children.
• Dental practices are highly fragmented, with less than 15 percent of U.S. dentists working at DSO - backed practices despite growing interest in DSO affiliation among younger dentists.
• Margin pressure creates a growing need for capital to fund capital expenditures for best-in-class patient care, giving DSO leaders opportunity to use artificial intelligence (AI) and other technology to increase efficiency and revenue cycle management.
• Staffing shortages are expected to improve as the number of dental hygiene graduates has grown in recent years.
• Lenders, especially private credit, have shown growing confidence in DSOs because of increases in availability of mezzanine financing. Also, lenders’ desire for equity “kickers” is a strong indicator that the floor is rising for DSO valuations.
• Specialty DSOs (e.g., in oral surgery, endodontics and orthodontics) continue to drive a significant share of deal volume – but not at the expense of general practice DSOs.
• Representation and warranty insurance (RWI) has provided consistent and broad coverage for DSO transactions over the last 24 months, validating confidence in the scope and predictability of transaction risk.
Recent Shifts in Deal Expectations Are Driving Deal Innovations
The last 24 months have marked significant shifts in deal expectations and innovations for DSOs, significantly in response to mounting pressure on private equity sponsors from their limited partner (LP) investors to exit vintage DSO assets and, simultaneously, deploy “dry powder” (capital committed from LPs but not yet deployed) and the recent surge of regulatory scrutiny of private equity investments in healthcare.
Dual Pressure to Exit and Invest
In the immediate aftermath of COVID-19, pent-up demand, combined with low interest rates, gave rise to an unprecedented surge of deal activity in late 2021 and 2022. Then, as interest rates and inflation rose faster than expected in 2023 and into 2024, some large DSO sale processes stalled. Some DSOs that grew quickly struggled to integrate at scale, as the cost of debt service came at the direct expense of available capital. In other cases, better-positioned DSOs were unwilling to sell into less attractive valuations.
The net result was that earlier fund vintages were unable, or unwilling, to exit delaying distributions to LPs. At the same time, private equity funds hold record-breaking levels of dry powder, which LPs are pushing sponsors to invest. This dual pressure to exit and invest forces sponsors to reconsider the structure of their DSO investments – to both differentiate from others and improve the likelihood of achieving minimum returns even in the face of potential macro risks.
The second pressure source, regulatory scrutiny, has existed for decades, as the corporate practice of dentistry has been litigated extensively since the 1990s. DSO industry groups, particularly the Association of Dental Support Organizations (ADSO), are well established and have a strong track record in defending the DSO structure, especially as compared to other healthcare provider sectors.
Nonetheless, because DSOs command a significant market share, the sector continues to attract attention as new healthcare transaction laws have surged over the last 12 to 18 months. The following image illustrates the rapid proliferation of these laws. For the latest coverage, please visit HK Navigator
Laws Currently in Effect Pending Laws
This map identifies state laws that have been enacted or proposed in connection with increased scrutiny by states of healthcare transactions. This page is current as of Feb. 25, 2025. For the latest information on emerging issues and new developments, please contact our team of Holland & Knight attorneys.
These dual sources of pressure – from LPs to both deploy and return capital and from regulators – are driving the following eight innovations in deal structuring and expectations:
Innovations and Opportunities
1. Rise of Structured Equity
Historically, since the demise of public company DSOs, most DSO equity waterfalls were relatively simple: There would be only one or two classes of equity, primarily distinguished based on the presence or absence of voting rights. Now, to create an economic buffer against perceived regulatory risk and improve returns in the face of the increasing cost of debt, sponsors are increasingly favoring structured equity deals with significant rollover.
As a result, though the headline value of an offer to a seller might look the same as it did two years ago, the economic outcome can be substantially different depending on key terms. For example, participating preferred equity structures with “double-dip,” and sometimes “triple-dip,” features and a 12 percent yield and vesting terms on common can yield an earn-out outcome, even without an earn-out contingency being expressly stated.
On the other hand, investor openness to creative deal structures can afford founders greater upside opportunity, especially for those founders who are relatively young and willing to be on their own but still want access to the resources of a larger platform.
2. Changing “Second Bite” Expectations
To create flexibility and meet both dentist and sponsor demands for liquidity, we are seeing the evolution of traditional “second bite” mechanics. Among other things, there is a rise in the use of put/call options, mandatory dentist rollover and baskets for permitted secondary transactions and co-investments, usually by LPs or corporate venture capital (CVC) funds or through continuation vehicles.
In some cases, these changes can benefit all parties and provide long-term management stability. But to make those benefits mutual, sophistication of counsel and advisors is mandatory, as experience with older “form” operating agreements and healthcare transactions is no longer sufficient to also address the latest private equity-driven innovations.
3. Rise of “Tracker” Equity
Although the “joint venture” or “sub-DSO” model has existed for years, its deployment at a high volume - up until now - would result in the creation of a large number of entities and the negotiation of separate operating agreements and service agreements for every location. Over the last 18 months, more DSOs have deployed “tracker” equity as an alternative. Tracker equity replicates the same outcomes as the sub-DSO model, but with all equity held in a single holding company, thereby achieving significant efficiency gains.
4. Presale Compliance Review
In the current environment, sellers must establish the credibility of their regulatory compliance, not only to avoid regulatory scrutiny and headline risk for investors, but also establish confidence in the integrity of their revenue for valuation. For this reason, founders and DSOs are increasingly engaging counsel prior to a sale process to identify and resolve material compliance issues that could otherwise disrupt a sale process or require last-minute price concessions.
5. Representation and Warranty Insurance (RWI)
RWI, now readily available for dental deals at $30 million-plus valuations, is a game changer. With experienced counsel and well-prepared sellers, most exclusions can be removed, providing sellers with enormous improvements in deal terms, including cash at closing, and speed of closing.
6. Rise of Private Credit
There has been a notable increase in interest from private credit funds to deploy capital to DSOs, in both traditional debt issuances and bespoke solutions, such as mezzanine debt with equity “kickers.” As a result, notwithstanding the current rate environment, DSOs with credible financial and compliance controls are achieving favorable debt terms, reinforcing the (correct) perception that the risk “floor” for DSOs is rising.
7. Integration
In the last 18 to 24 months, an unusual consensus has emerged among founders, regulators and investors that the best DSOs can demonstrate measurable operational improvements in access to and quality of care – as opposed to merely stitching together unintegrated practices through add-ons.
As a result, there has been a noted increase in employee equity programs, sponsorship of companywide events to promote dentist collaboration, growth of in-house private equity expertise in areas such as payer reimbursement and AI, which is then deployed in support of DSO investments, and, most significant, increased effort to promote integration of add-on practices post-transaction.
8. Reduced Reliance on Non-Competes
Although the FTC’s proposed non-compete ban ultimately failed, the effort reminded many DSOs of the importance of developing other tools to attract and retain key employees. In recent months, we have seen continued DSO interest in creative solutions for employee loyalty, from phantom equity plans to meaningful advisory committees and other operating tools. OUR ACCOLADES
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Holland & Knight stands at the top of league tables, currently ranking as the No. 1 Most Active U.S. Law Firm for Healthcare Private Equity Transactions by PitchBook and Americas Private Equity Law Firm of the Year by The M&A Atlas Awards. As the law firm that helped build the DSO industry, Holland & Knight brings decades of experience in closing transactions – and innovating the next generation of DSOs. Since 2022 alone, Holland & Knight has closed more than 250 dental deals totaling over $2.6 billion.
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