Six-year holds are a value creation problem, not a timing problem

PE firms are holding DSO assets for an average of 6+ years. And although the value creation plans look good at close, within 12 months the production per location is actually softer than modeled, hygiene schedules have open chairs, and associates are leaving without anyone having flagged the concentration risk. Thing is, every single one of those problems has a specific quantifiable answer that already exists in the practice management system before the deal closes, it's just that the standard diligence process isn't currently built to look at it.

The financial quality of earnings isn't even the problem, it does exactly what it's designed to do. It validates the revenue, it normalizes the EBITDA, and it confirms the tax picture. But it doesn't ask how many patients have lapsed out of recall, or how much diagnosed treatment is sitting accepted but never scheduled, or which providers are carrying disproportionate production and what happens to the revenue line when one of them leaves. Those are operational questions, and right now they live in the PMS where nobody really touches them during a transaction.

As a result, the acquirer builds a value creation plan with a limited picture based on assumptions about what the practice is capable of producing, and 12 months later the operating partner is finding out those assumptions were wrong. And it's not because the financial picture was inaccurate but actually because the operational picture underneath it was never part of the underwriting. So in reality the hold period doesn't extend beyond 6 years because the thesis was wrong but rather because it was built on a financial model that never included the operational reality underneath it.

What does that look like in practice? Production per location softer than modeled is trailing revenue that was underwritten without knowing what was actually driving it. Hygiene schedules have open chairs is lapsed recall that was already deteriorating before close, measurable down to the patient count. Meanwhile, associate departures no one flagged as strategic risks is provider concentration risk, quantifiable by provider, where one departure can take 30 to 40% of production with it.