What You’ll Learn
- Why going from one practice to two is inordinately difficult and often destroys margins
- Where operational bloat hides as dental organizations grow
- What a zombie DSO is and how groups end up trapped there
- Why accrual accounting increases your sale price and cash-basis books get discounted
- How private equity actually evaluates dental investments and what return they expect
Adding Locations Doesn’t Add Value. Here’s Why DSOs Lose Money Scaling.
Growing a dental organization is supposed to make it more profitable. More locations mean more revenue, more leverage with suppliers, and more enterprise value when it’s time to sell.
Ken Kaufman has spent 25 years in dental finance and watched this theory collide with reality over and over again.
“Adding locations does not automatically add value,” Ken told Adrian Lefler on a recent episode of the Byte Sized Podcast. “In fact, the last five years of DSO data suggest the opposite.”
Ken helped scale Community Dental Partners to 75 locations and led finance at Nuvia Dental Implant Centers. He now runs AccruDent, the advisory firm he founded with his son Dallin to help DSOs with five to 25 locations build financial infrastructure that actually survives growth. His new book, Roll the Equity, co-authored with his daughter, comes out September 1.
His message is that most multi-location groups end up breaking even or losing money despite higher revenue.
Why One to Two Is So Hard
The jump from one practice to two is where most dental entrepreneurs underestimate the challenge.
“Going from one to two is inordinately difficult,” Ken said. “You’re not just doubling. You’re creating an entirely new set of problems.”
With one practice, the owner is present. They see everything and catch problems in real time. They make decisions on the fly because they’re standing right there.
With two practices, that’s impossible. Now you need systems with people who can make decisions without you. You need communication structures that didn’t exist before. You need to replicate culture across two buildings with two teams who rarely see each other.
“Most dentists underestimate how much of their first practice’s success came from them personally being there,” Ken said. “When they open a second location, all of that has to be rebuilt through systems instead of presence.”
The ones who succeed build those systems intentionally. The ones who struggle assume what worked at one location will automatically transfer.
Where Bloat Hides
By the time a group reaches problems that compound.
“Redundant practice management software,” Ken listed. “Unmonitored lab and supply pricing. Non-revenue-generating hires. It all quietly eats margins until you’re breaking even despite growing revenue.”
The software problem is particularly insidious. A practice might be running multiple AI tools, each with its own integration fee. Ken has seen groups paying the same PMS integration fee eight separate times across different products.
“That’s five or six hundred dollars a month just in duplicate integration fees,” he said. “Multiply that across 15 locations and you’re talking real money.”
Supply pricing is another leak. When you’re one practice, you negotiate with vendors directly. You know what you’re paying. As you scale, purchasing gets distributed. Different locations use different suppliers. Nobody’s comparing pricing systematically. The savings that should come from scale never materialize.
| Bloat Category | How It Appears | Why It Goes Unnoticed |
| Software redundancy | Multiple tools doing similar things | Each was added to solve a specific problem |
| Integration fees | Same PMS fee paid multiple times | Buried in different vendor invoices |
| Lab pricing | Rates creep up without renegotiation | No centralized purchasing oversight |
| Supply costs | Different vendors across locations | Nobody comparing prices systematically |
| Non-revenue hires | Support staff grows faster than revenue | Each hire seemed justified at the time |
The Rise of the Zombie DSO
There’s a term circulating in dental finance circles that captures what’s happened to many groups over the past few years: zombie DSO.
“A zombie DSO is an overleveraged group generating just enough cash to survive but not enough to grow,” Ken explained. “They’re stuck. They can make payroll. They can keep the lights on. But there’s nothing left.”
Most zombies were created during the low-rate years of 2020 and 2021. Buyers paid premium prices. They financed those acquisitions with variable-rate debt because rates were near zero. Then rates spiked.
“Suddenly that debt that was costing them 4% is costing them 9%,” Ken said. “Their cash flow model breaks. They’re underwater.”
The only way out is aggressive cash generation and working the debt down over time. Some will make it. Others will get absorbed by larger groups at distressed prices. A few will simply fail.
“It’s going to take years to work through,” Ken said. “And some of these groups aren’t going to survive the process.”
Why Accrual Accounting Matters for Sale Price
When it’s time to sell, financial presentation matters more than most owners realize.
“Accrual accounting is the biggest financial lever when it comes time to sell,” Ken said.
Here’s why. Buyers build five-year models. They do discounted cash flow valuations. They need to understand exactly when revenue was earned and when expenses were incurred. Accrual accounting matches expenses to the revenue they create. Cash-basis books don’t.
“If you’re running cash-basis, buyers have to do a conversion during quality of earnings,” Ken explained. “And that conversion earns you almost no credit. They discount it for risk because they don’t know if they’re getting accurate numbers.”
Groups that have run accrual for years get chosen over comparable DSOs because investors trust the numbers. There’s less due diligence risk. There’s more confidence in the projections.
“If you’re planning to sell in three to five years, switch to accrual now,” Ken advised. “Give yourself a track record of clean financials before you go to market.”
How Private Equity Actually Works
Most dentists have a vague sense that private equity buys dental groups. Few understand how the model actually operates.
“Private equity firms raise money from limited partners,” Ken explained. “Pension funds, endowments, wealthy individuals. They promise those investors a return over a defined period, typically three to five years.”
The firm then deploys that capital by acquiring companies. In dentistry, that means buying DSOs or dental groups with growth potential.
“They’re not buying your practice to run it forever,” Ken said. “They’re buying it to grow it and sell it. The whole model is based on that eventual exit.”
The target return is typically two to five times invested capital. If they put in $50 million, they’re expecting to get back $100 to $250 million when they sell.
Understanding this model changes how you think about what makes a practice attractive to buyers.
“They’re asking one question: can I grow this and sell it for more than I paid?” Ken said. “Everything else flows from that.”
What Buyers Actually Pay For
Private equity isn’t paying for your revenue. They’re paying for predictable, repeatable cash flow that someone else can operate.
“The first thing I tell anyone selling in three to five years is systemize the business,” Ken said. “Make it so anyone could run it. Not just you.”
If the practice depends on the owner’s relationships, the owner’s clinical skill, or the owner’s daily presence, buyers discount heavily. They’re buying a job, not a business.
“You want to walk in and say, here’s how we hire, here’s how we train, here’s how we handle every patient scenario,” Ken said. “It’s all documented. It all runs without me.”
The second piece is understanding how private equity operates. What metrics do they care about? How do they build their models? What makes them choose one group over another?
“Read the room,” Ken advised. “Understand what they’re looking for and build that kind of organization. Don’t wait until you’re selling to figure it out.”
The Real Economics of Scale
The promise of scale is real, but it requires discipline that most groups don’t maintain.
“Scale should get you better supply pricing, better lab rates, more leverage in negotiations,” Ken said. “But only if you actually pursue it systematically.”
Most growing groups don’t. They’re so focused on acquiring the next location that they never capture the operational efficiencies that make scale profitable.
“You end up with 15 locations running like 15 independent practices,” Ken said. “You have the overhead of a large organization without the benefits.”
The groups that succeed at scale treat operational efficiency as seriously as growth. They centralize purchasing. They standardize systems. They monitor pricing across vendors. They staff lean and resist the temptation to add non-revenue-generating roles.
“Growth without margin discipline is just a bigger version of breaking even,” Ken said.
The Three-to-Five-Year Playbook
Ken’s advice for anyone considering a sale in the next few years comes down to two priorities.
First, systemize everything. Document your processes. Build a management layer that can operate without founder involvement. Create the kind of organization that a buyer can confidently scale.
Second, understand private equity. Know how they build models. Know what returns they’re targeting. Know what makes them choose one opportunity over another.
“If you wait until you’re in due diligence to figure this out, it’s too late,” Ken said. “You’ve already built whatever you’ve built. The negotiating leverage is gone.”
Starting early creates options. It lets you build the kind of organization that commands premium pricing. It gives you time to fix problems before buyers discover them.
“The best time to prepare for a sale is five years before you want to sell,” Ken said. “The second best time is right now.”
In This Episode:
Ken Kaufman, Co-founder of AccruDent
Ken Kaufman has spent more than two decades in CFO and President/CFO roles at venture and private equity backed dental organizations, including Community Dental Partners, which he helped scale to 75 locations, and Nuvia Dental Implant Centers. He is the co-founder of AccruDent, which helps DSOs with five to 25 locations convert to accrual accounting and build financial systems that survive growth. Ken co-authored Financial Secrets to Grow Dental Organizations and the forthcoming Roll the Equity, releasing September 1.
Adrian Lefler, CEO and Co-founder of My Social Practice
Adrian Lefler, CEO of My Social Practice, is a seasoned expert in the dental marketing industry with 14 years of experience. He is widely recognized for his engaging and informative presentations. Based in Suncrest, Utah, Adrian shares his life with his wife, four children, and a lively mix of pets. My Social Practice is a leading dental marketing company, and Adrian is passionate about helping dental professionals succeed in this dynamic field.
Frequently Asked Questions
Does adding more locations automatically make a dental group more profitable?
No. Scaling often shrinks margins rather than expanding them. Each added location multiplies systems, hiring, and integration challenges. Without strong processes and fiscal discipline, organizations accumulate operational bloat that eats into profitability despite higher revenue.
What is a zombie DSO?
A zombie DSO is an overleveraged group generating just enough cash to keep operating but none to grow. Most were created when buyers overpaid during low-rate years, then variable debt costs spiked. They’re trapped between survival and insolvency.
Where does operational bloat hide in growing dental organizations?
Redundant software and practice management systems, unmonitored lab pricing, overpriced supplies, and non-revenue-generating staff hires. Even AI tools contribute when practices stack multiple products with duplicate integration fees.
Why does accrual accounting matter when selling a dental practice or DSO?
Buyers build five-year models and discounted cash flow valuations. Accrual accounting matches expenses to revenue, so buyers trust the financials. Cash-basis books get discounted for risk because conversions during due diligence earn little credit.
How long does private equity hold a dental investment?
Typically three to five years. They target two to five times return on invested capital. Understanding this model helps founders build the kind of organization buyers actually pay for rather than discovering misalignment during negotiations.
