Thinking of Selling Your Dental Practice to a DSO? Read This First
Many dental clients ask me, “Jeff, is selling to a DSO a good idea?”
It depends….
Selling a dental practice to a Dental Service Organization (DSO) is a major decision for any dentist. This choice can offer financial stability and lessen administrative responsibilities, but it also means relinquishing control over daily operations.
Therefore, it is critical for dentists to educate themselves about the current market options and make well-informed, practical decisions. This ensures that their goals are met and that life after the sale is fulfilling and enjoyable.
In this article, we will look at the pros and cons of selling your dental practice to a DSO. This will help you decide if it’s the right choice for you.
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Sign up for my newsletterWhat is a DSO?
Before starting the sale process, it’s important to understand what DSOs are and how they work.
Dental Service Organizations (DSOs) provide non-clinical support to dental practices, enabling dentists to focus more on patient care.
Types of DSO Models
| DSO Model | Description |
|---|---|
| Traditional DSO | Offers administrative and operational services such as billing, marketing, and human resources. Allows dentists to focus on clinical work while benefiting from economies of scale. |
| Dental Partnership Organization (DPO) | Provides a partnership-like arrangement, giving dentists some control in decision-making processes and offering a balance of autonomy and support. |
| Corporate Dentistry | Involves large dental chains that own and operate multiple practices. Offers extensive resources but may limit the dentist’s control over clinical decisions. |
Understanding these models helps dentists choose the best partnership to meet their professional and personal needs.
Pros of Partnering with a DSO
| Pros of Selling to a DSO | Description |
|---|---|
| Financial Benefits | – Upfront Cash Payment: Receive a lump sum immediately, providing financial security and enabling other pursuits like retirement or starting a new business. – Revenue Sharing: Some DSOs offer revenue-sharing deals, providing additional financial stability during the transition. – Lower Overhead Costs: DSOs often supply new equipment, supplies, and marketing, reducing expenses and increasing profitability. |
| Reduced Administrative Work | – Delegation of Non-Clinical Tasks: DSOs handle administrative tasks such as insurance verification, billing, and patient management, allowing your team to focus on patient care. – Access to Technology and Resources: DSOs provide advanced technology and resources that streamline administrative processes and reduce paperwork. – Reduced HR Responsibilities: DSOs take over HR tasks, including hiring, training, and managing benefits, freeing up your time for patient care. |
| Professional Support | – Continuing Education Opportunities: DSOs often offer continuing education to keep your team updated on the latest trends, technologies, and best practices in dentistry. – Clinical Support: Some DSOs provide access to specialist dentists and clinical mentors, helping manage complex cases and improve patient care. – Reduced Stress: With support from DSOs, you have more time and energy to focus on your practice and patients, leading to a better work-life balance. |
Cons of Selling to a DSO
| Cons of Selling to a DSO | Description |
|---|---|
| Loss of Autonomy | – Giving Up Decision-Making Power: Selling to a DSO means losing some control over how your practice is run, which can be challenging if you’ve been the primary decision-maker for years. – Changes in Practice Culture: Selling to a DSO might change your practice’s culture. Some DSOs might alter staff benefits and salaries, potentially upsetting your team. Others might try to keep things the same, varying by DSO. |
| Potential Reduction in Income | – Revenue Sharing: DSOs typically operate on a revenue-sharing model, resulting in you receiving a percentage of the practice’s income rather than all the profits, which can lower your income compared to independent practice. – Pressure to Produce: DSOs often have revenue goals, which can pressure you to generate more revenue, potentially affecting the quality of care provided. Your primary duty remains to provide the best care for your patients. |
| Uncertainty of the Future | – Contractual Obligations: Selling to a DSO involves signing a contract for a specific period, committing to something with future uncertainties. – Dependence on DSO’s Success: Partnering with a DSO means relying on their success. Any problems the DSO faces, such as economic downturns or industry changes, could impact your practice. |
Assessing Your Practice’s Value
To determine if selling to a DSO is the right choice, evaluate your practice’s value.
EBITDA
Key metrics like Revenue and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are important. DSOs typically offer higher multiples based on these figures.
Patient Demographics
Also, consider the patient demographics. A diverse and loyal patient base can boost your practice’s value. Practices with high patient retention, recurring revenue, and a strong community reputation appeal to DSOs.
Operational Efficiency
Examine operational efficiency. Streamlined procedures, up-to-date equipment, and an experienced staff can make your practice more attractive. Additionally, meeting regulatory compliance and having a clean financial record are essential.
Evaluating Potential DSO Buyers
Identifying the right DSO buyer involves assessing their track record and alignment with your goals.
#1. Start by researching their reputation. Gather feedback from other practice owners who have sold to them. This helps gauge their reliability and management style.
#2. Next, analyze their affiliation and support offers. Some DSOs provide extensive administrative support, marketing, and training, which can reduce your workload. Determine if they offer the services and benefits that match your needs.
#3. Lastly, consider the terms of the deal. DSOs often require sellers to stay on board for a period, typically three to five years. Ensure that the terms align with your future plans. Look for clear policies on roles, compensation, and profit-sharing.
Join the Passive Investors CirclePreparing for the Sale to a DSO
BEFORE selling, key considerations include conducting thorough due diligence and understanding the deal structure.
The Importance of Due Diligence
Due diligence is critical when selling a practice to a DSO. It helps assess the true value and potential risks of the deal.
Always start by reviewing the letter of intent (LOI). This document outlines the basic terms and acts as a foundation for further negotiation. Ensure it covers all significant points such as proposed purchase price, deal structure, and employment terms post-sale.
It’s also important to evaluate the DSO’s practice model, including its approach to patient care and clinical autonomy. Understanding the specific model can help determine if it aligns with your values.
Another key step is to vet the financials thoroughly. This involves checking the DSO’s financial stability and projections. Knowing the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiples used in the valuation is essential.
Additionally, be aware of any post-sale commitments. Often, selling doctors are required to stay on and work under new employment agreements. This affects future plans and should be considered carefully.
I can’t stress this enough: Consult with advisors and legal experts throughout the process to ensure a clear and favorable deal.
Ensuring a Smooth Transition Post-Sale
After selling to a DSO, it’s important to set clear expectations for both the seller and the buyer.
The selling dentist must understand their role during the transition period, which often lasts 3-5 years. This includes making the necessary work-life balance adjustments to meet both parties’ expectations.
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Next, signing a detailed employment agreement is essential. This document should outline the following:
- seller’s responsibilities
- compensation
- conditions under the new management
By having a clear and fair employment agreement, the transition can be more successful. This helps prevent misunderstandings and ensures that both the seller and the DSO are on the same page.
Both parties should regularly communicate to address any issues that arise, which aids in a smoother integration. Clear communication helps maintain a positive atmosphere and work environment, contributing to a more successful transition during this crucial period.
Frequently Asked Questions
How do I know if selling to a DSO is the best option for my practice?
When considering selling your dental practice, it’s essential to evaluate whether a DSO sale is a good fit. Comparing this with other potential buyers, such as private equity groups or a private buyer, can help you determine the best option for your specific situation. Consulting with financial advisors can also ensure you make an informed decision that aligns with your best interests.
What should be considered before selling a practice to a Dental Support Organization (DSO)?
Dentists need to evaluate the practice’s current market value and calculate metrics like EBITDA. Comparing various DSO deal structures is crucial. It’s important to consider if selling to a DSO aligns with their long-term goals.
What should dental practice owners consider when receiving an unsolicited offer from a corporate group?
Receiving an unsolicited offer from a corporate group can be flattering, but it’s crucial to assess whether it’s the right fit for your practice. Evaluating the offer’s terms, the corporate group’s reputation and the potential impact on your practice’s culture and patient care will help you decide if it’s the right time to sell.
How will the sale to a DSO affect the existing staff and day-to-day operations?
Post-sale, the selling dentist may need to continue working at the practice under a new employment agreement. Other staff might also have to sign new contracts. Day-to-day operations can change, depending on the DSO’s policies and management style.
Can you explain the typical financial arrangements when partnering with a DSO?
Financial arrangements often include a purchase price and a requirement for the selling dentist to invest a portion of the sale proceeds into DSO equity. This rollover investment could be a significant part of the deal, and its value depends on the DSO’s financial health.
What are some potential drawbacks of merging with a Dental Support Organization?
Potential drawbacks include less autonomy over practice management and potential changes in staff policies. The complexity of DSO deal structures might also pose challenges, and post-sale, the dentist could face ongoing obligations to the DSO.
How do Dental Support Organizations create revenue and what does that mean for my practice?
DSOs generate revenue through a combination of patient fees, operational efficiency, and economies of scale. For the practice, this can mean streamlined processes but also adherence to the DSO’s management and financial protocols.
What long-term impacts should a dentist expect after selling to a Dental Support Organization?
Long-term impacts include potential changes in practice culture and management style.
Dentists might benefit from support services and financial stability. However, they may also face limitations on independent decision-making.