Private Equity Firms Target DSOs Through Leveraged Buying

Michael W. Davis, DDS


The private equity industry facilitates purchases in companies for interested investors. These potential investors may be private individuals, corporate entities, or nonprofits. The investment company pools money from one or more investors and purchases companies, which are generally not traded on public market exchanges like the New York Stock Exchange or NASDAQ. (Exceptions exist such as Palm Investors’ control over Birner Dental Management, doing business as Perfect Teeth Dental, which is traded on the over-the-counter exchange.)

Direct ownership of the company by a private equity group is generally undesirable. Ownership is usually established through a shell company to mitigate possible regulatory or tort law liabilities. There are also tax advantages in the utilization of a façade shell company, which is employed as a fiscal pass-through vehicle. 

The private investment firm generally will position itself as the primary creditor, via collateralized loan obligations. This might take the form of a first-lien creditor, mezzanine financier, and sometimes holder of very senior debt bonds. In the event of a bankruptcy, those holding senior debt get paid first. Thus, those holding the debt usually have greater company control than “owners,” who may hold junk-grade stock certificates or second-tier bonds.

Private equity companies purchase (technically they may not “own,” but do beneficially own) dental service organizations (DSOs) through leveraged debt. That debt is a multiple of DSO earnings or earnings before interest, taxes, depreciation, and amortization (EBITDA). As a general rule of thumb, the higher the multiple of debt above a DSO’s earnings, the greater the risk for investors.

The private equity firm establishes a leveraged buyout of a DSO by strapping the formerly independent DSO with substantial debt, which must be repaid to the private equity firm. (Click here for an additional explanation of leveraged finance.) Company profits are redesigned for accounting to pay out beneficial ownership in interest and principle sums, not as earned income or “profits.” 

KKR Purchase of Heartland Dental

Heartland Dental is the largest DSO in the United States, currently operating more than 800 dental clinics in 36 states. In April 2018, Kohlberg, Kravis, Roberts and Co (KKR) purchased 58% of Heartland Dental through leveraged debt vehicles.1,2 Currently, Heartland’s debt to EBIDTA ratio is 7.9. Moody’s Investor Service rates this junk-grade company’s leverage levels as “very high.”3,4 

Recent articles in Bloomberg Business News by Sally Bakewell and Lisa Lee and another by Will Mathis and Tom Metcalf focused on the leveraged acquisition of Heartland Dental by KKR and its potential implications.2,3

“When KKR & Co tried to sell money managers pieces of a $1 billion loan to fund its buyout of Heartland Dental, it included a bold ask: it wanted credit now for earnings the company expected to get in the future from offices it had just opened,” Bakewell and Lee reported.   

“Heartland Dental got what it wanted in the end and sold its loans late last month (April 2018). Its success underscores how money managers can’t get enough loans to junk-rated companies now, and how strong demand is allowing borrowers in the $1 trillion market for leveraged loans to push the envelope and make debt riskier,” they continued. 

“At some point, companies and the broader economy will face strain. More companies might feel the pain as the Federal Reserve readies to increase rates at two or three more times this year,” Bakewell and Lee concluded.

Mathis and Metcalf highlighted more on the DSO industry generally and the history of Heartland Dental and its founder and CEO, Dr. Rick Workman, specifically.

“Investors were so hungry that they accepted lenient terms in providing $1 billion of the leveraged loans that back the deal, making investing in the debt even riskier,” they said of the Heartland buyout.  

Mathis and Metcalif also addressed the DSO industry’s abuses of the public interest. The business journalists highlighted a push for unnecessary patient services and unlawful billings by elements in the DSO industry to elevate revenue generated. 


The DSO industry isn’t monolithic. Some companies focus on public sector programs like Medicaid, while others target the private sector of dental consumers. Some frequently engage in disturbing alleged regulatory violations with government, while others far less so.

Numbers are commonly in friction with doctor employees (often nominal owners), which may result in civil legal actions, while other DSOs less so. Some DSOs actually uphold a hands-off policy of non-interference in the doctor/patient relationship. Others are fully unlawfully engaged in the doctor/patient relationship, as an additional pursuit to boost profits. 

Some DSOs (like Heartland Dental) utilize “stealth branding,” such that consumers have no idea a dental clinic is part of a national chain. Others like Aspen Dental and Comfort Dental openly market their brand and trademarked logos at their clinical facilities and in external marketing.5

Business models, target demographics, and management styles and strategies vary throughout the DSO industry.  Likewise, investment risk is not uniform within this industry. Both the leveraged loan markets and junk bond markets are swelling in volume.

Yes, leveraged loans offer a greater degree of safety over junk-grade bonds. However, once there’s a significant downturn in the bond cycle, as interest rates reach a range of concern (or fear) for investors, the bubble could well burst (and very rapidly) for all such investors. Investors would be wise to perform their thorough due diligence on the specifics of any DSO that may be offered as an investment opportunity.


  1. Davis MW. KKR to Acquire Majority Interest in Heartland Dental. Dentistry Today Mar 12, 2018;
  2. Mathis W, Metcalf T. Private Equity is Pouring Money into a Dental Empire. Bloomberg Business News Jun 28, 2018.
  1. Bakewell S, Lee L. Leveraged Loan Safety Net May Prove Frayed for Investors. Bloomberg Business News May 11, 2018.
  2. Moody’s Investor Service. Moody’s places Heartland Dental’s ratings under review for downgrade. Mar 12, 2018.–PR_380602
  3. Davis MW. Corporate Dental Branding- What Consumers Need to Know. Dentist the Menace Dec 14, 2016.

Dr. Davis practices general dentistry in Santa Fe, NM. He assists as an expert witness in dental fraud and malpractice legal cases. He currently chairs the Santa Fe District Dental Society Peer-Review Committee and serves as a state dental association member to its house of delegates. He extensively writes and lectures on related matters. He may be reached at or

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