Private Equity Isn't Wrecking Dentistry. It's Pricing It.

I’m about to record a debate on the question “Is private equity wrecking dentistry?” I’m taking the side almost nobody in dentistry will take out loud. No.

Before the pitchforks: I’m not a convert to private equity’s cause, and I’m not a convert to the dentists’ cause either. I spent a decade inside the machine. I helped scale one DSO from 80 locations to more than 200, ran turnarounds against production targets at another, and left when I understood what the instrument was doing to the clinical floor. I’ve read the ledgers of more than five hundred practices since, from both sides of the table. I’m on the side of the number being true. From that seat, the “greedy and inhumane” argument isn’t just wrong. It points the whole industry at the wrong fix.

What Private Equity Actually Buys

Start with the thing nobody on either side says plainly. There is no future cash flow in a single dental practice for a fund to buy. Private equity knows this. It buys three things.

It buys arbitrage. A platform trades at twelve to fifteen times its consolidated earnings and pays five to eight times for the practices it rolls into it. The spread funds the model, and it exists whether or not anything about the practice improves.

It buys the doctor’s labor. The employment agreement, the earnout tied to production the doctor no longer controls, the holdback. The headline price is for the practice; the terms are for the dentist.

And it buys an option to re-price. The letter of intent opens sixty to one hundred and twenty days of exclusivity in which the buyer’s team reads everything the seller has, and 85% of lower-middle-market deals see the price adjusted after the LOI. That isn’t malice. It’s diligence doing what it was paid to do.

None of that is wrecking anything. It’s pricing. The question is what gets priced, and with what instrument.

What the Pricing Exposes

A practice I’ve written about all year reported about $720,000 of EBITDA on $10 million of collections, with clean books and a CPA who did his job. Financial diligence normalized it to about $595,000: the owner paying himself below what it would cost to replace him, contractors doing employee work, rent to his own building below market. Roughly $875,000 off the price at seven times, before anyone opened a chart.

Then someone opened the practice software. The owner performed 4.4% of the exams and originated 24.6% of everything diagnosed. The ledger carried $390,000 of patient and insurance refunds against $150,000 on the P&L. The practice collected 107% of its insurance estimates with under $500 of rejected claims in its history, which sounds like excellence until you read the coding patterns underneath it and find $680,000 of exposure a payer can claw back after close. Read all the way down, defensible EBITDA was below zero.

Private equity didn’t do that to the practice. It was that practice the day before the buyer called and would have been that practice the day after. What private equity did was become the first party with a financial incentive to find out.

The Deals That Went Wrong Were Priced Correctly

Last week I published what dentists who sold to DSOs said surprised them between the LOI and the wire. Read those stories again as prices.

The owner offered twice what his practice was worth, with half of it deferred over years of working for the buyer: that wasn’t generosity followed by betrayal. The buyer priced its own doubt into the structure, and the structure paid out exactly what the practice turned out to be worth. The earnout that never arrived was priced correctly on day one; it was a bet on production the seller no longer controlled, and the seller took the bet. The rollover equity that turned out to be worth less than the paper was priced as what it was: a minority position in someone else’s exit.

The sellers who came out whole took 75% in cash, put the terms in writing, and had someone independent check the numbers before the buyer did. Same buyers. Same market. The difference was what the seller brought to be priced.

The Warmth Was Subsidized

Here is the part of the “humane industry” argument that doesn’t survive arithmetic.

The independent practice people are mourning was often running on the owner’s unpaid labor. He paid himself less than a replacement dentist would cost. The team held together because he was in the building. Patients were carried on goodwill that never touched the P&L. That slack is where the warmth lived, and it is Phantom EBITDA in its original form: earnings that existed only because someone was quietly not being paid.

The lean model everyone hates is what the same practice looks like when every role is paid market and every hour has to be accounted for. Private equity didn’t invent that. It priced the slack and then removed it, because it had paid for earnings that only existed while the slack was there. The warmth was real. It was also subsidized, and the subsidy ended at close.

Where the Harm Actually Comes From

I’m not going to pretend there is no harm. Medicaid pediatric chains have paid federal settlements for unnecessary procedures on children. Platforms have pushed treatment patients didn’t need. I’ve stood on clinical floors where the only instrument was a production target, and I can tell you where the pressure goes: downhill, until it ends at the chair.

But look at what every one of those cases has in common. They were managed to production. Production is dentistry’s vanity metric; it tells you what was done, not whether it was right, whether it was completed, whether the patient came back, or whether a payer will defend it in eighteen months. A platform managed to production will overtreat, and overtreatment destroys completion, retention, and payer-defensibility, which are the exact things the platform was priced on. That isn’t capital being greedy. That’s capital measuring the wrong thing and paying for it later. I know, because I used to be the one holding the instrument.

Both Sides of the Table Are Blind

The anti-private-equity argument assumes the alternative sees better. It doesn’t.

A bank funds a doctor-to-doctor sale at close to 100% of the price off the same tax return the fund reads, with less diligence. On October 1 the SBA conceded the point: on any acquisition loan of $3 million or more, the lender now has to order an independent quality of earnings, because the seller’s paper can’t be trusted on its own. The buyer with the fund and the buyer with the loan price the practice from the same ledger, and neither of them reads the software, which is where transferability, dependency, and defensibility actually live.

That makes private equity the largest user of the wrong instrument and its largest victim. A platform that pays seven times for earnings that aren’t there is the platform whose margins compress after close. When that happens, the seller’s earnout and the fund’s second bite die together. The owner in last week’s piece who watched his platform’s margins fall from a distance, most of his money already in the bank, wasn’t watching greed. He was watching a bad measurement come due.

What Dentistry Should Actually Be Angry About

Not that practices get priced. That they get priced with an instrument that can’t see them, by buyers who can’t tell a transferable practice from a personality with a lease, and sold by owners who never checked which one they had.

Private equity made the eight-figure dental exit possible. Before the platforms, the exit was an associate and a bank loan at a fraction of collections. The multiple exists because the arbitrage exists. Dentists who want that exit, and most of the ones complaining about private equity still want it, have one job that nobody else on their team is paid to do: get priced before you get priced.

Pay yourself market for a year so there is nothing to normalize. Document every add-back. Refund the credits. Measure who the diagnosis depends on and distribute it. Read your own ledger before the buyer’s team does. The owner who can prove the number gets to choose the buyer. Including none.

Independence isn’t a business model. Defensible earnings are.

The process, from the first conversation to the wire, is laid out in How to Sell a Dental Practice. Reading your own ledger the way the buyer’s team will is the Sell-Side Baseline.

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About the author — James DeLuca is the founder of Precision Dental Analytics and works in clinical data forensics and M&A defense: the independent Clinical Quality of Earnings for sellers, buyers, and lenders, run before the buyer’s team runs theirs. He is the author of Phantom EBITDA, The Dental Data Playbook, Hidden Levers, and Spartan Leadership. Meet the team →