DSOs should practice more caution when acquiring dental practices as the field continues to face high interest rates and other economic challenges, according to NextLevel Doctors Group Founder Gary Kadi.
Mr. Kadi recently spoke with Becker's to discuss the biggest challenges facing DSOs and his outlook for the DSO field this year.
Editor's note: Responses were lightly edited for clarity and length.
Question: What are some of the biggest challenges facing DSOs right now?
Gary Kadi: We're about 40% consolidated, we're going to 60%. The next 20 are not going to be the fast track, they're going to be the ones you have to nurture and develop. People were doing market grabs and they were paying too much for practices. They were happy to get the sales just to package it because they thought all of the money was in the recap, and their debt-to-equity ratio suffered. We did a lot of things to mitigate our debt. Our founders did not allow us to transact certain deals because they would affect the recapitalization.
That market grab caused people to get greedy and their debt-to-equity ratio went too high, and they haven't been able to recapitalize. We're in a position to do so because we're a highly profitable business with a machine that's built around the company. It's not just a DSO transacting. It has a vision, purpose and values, and we are attracting doctors. Doctors want to make money, but if you're only selling a transaction, they're shying away from that. They want to buy a lifestyle. They want to buy a place for their team and their patients to land where they're going to be taken care of. [They don't want to] have a regional manager come in and start setting benchmarks and expectations around revenue numbers and telling the practitioner how to practice, and that's why the spigot really shut down.
Q: What is your outlook on the economy right now, and how do you think the economy will affect DSOs later this year?
GK: We believe in creating our own internal economy of scale. You can't control circumstances and we can't predict the future. Money used to be a commodity, and now today, the cost of money is real. You just have to be smarter with your dollars, how you spend them and how you're buying practices. We don't want to be a victim of our circumstances. For sure, in a presidential election year, there are doubts. In November, we're going to know a lot more, but the one thing we do know is that there are always tax positions. There are always different options. As long as you can stay plugged into the changes ahead of time, we can then manage our business. We look to create a highly profitable business that takes care of people along the way, and then we adjust based on any external circumstances. We don't plan given the circumstances, we plan based on what we know we can do and what we have control over.