Know the Benefits of DSOs If You’re Looking to Sell Your Practice

Know the Benefits of DSOs If You’re Looking to Sell Your Practice | Image Credit: © Andrey Popov - stock.adobe.com

The Dental Service Organization (DSO) offers many attributes to the dental practice owner as a going concern because of its lower costs to operate.

Examples include the purchase of dental supplies, equipment and marketing costs among other items. This is mostly because of the large volume of purchases made by the DSO. Their purchase volume is large because they are buying for many dental practices that they own now or will own shortly in the future.

The question would be that if the dental practitioner wants to be part of a going concern where he or she is a profit center and a payout is based on future earnings, this may be the best place to be.

In the event that the dental practice owner wants a payment that is not based on the future, a solo or multi-partner ownership who offers to buy the practice may be the best for the dentist. In either case, the dental practitioner who is looking to sell his or her practice will want to know how much he or she is receiving now or now plus in the future.

There may be many reasons that the dental practice owner wants to sell his or her practice. Some examples are the dentist’s own health, the stress of working and trying to maintain a strong cash position to meet payroll requirements, and other items too numerous to mention here. Sometimes it is difficult for the dentist and his or her advisor to understand exactly what the DSO is offering because so much of the bid for the practice is based on what will happen in the future.

What does it mean when the DSO offers cash, a note payable to the seller, and a stock ownership in the DSO to the dental practitioner?

When a private offer is on the table for the dentist who is selling, the typical sale includes a closing that is scheduled to take place quickly. The amount of the purchase includes a lump sum payment at the closing with the potential for an earn out to give the seller more if certain conditions have been met. This is somewhat like the offer from the DSO except that the private purchase will be much lower than the DSO will offer to the seller. The reason for this is at the closing, the DSO will pay some cash as a down payment and then based on some agreed upon conditions that the seller and the DSO hope will occur in the future, more cash and the potential for a note payable to the owner who just sold his or her practice to the DSO.

As the years go by and additional goals are achieved by the DSO, the stock of the DSO may be offered to induce the seller to work harder, if employed by the DSO, to obtain an ownership position. It is common for the DSO to employ the seller for a period of time after the closing occurs to keep the owner’s “skin in the game.” If the owner wants to be paid and to be retired, the sale price would probably be lower since there would be no incentive available to the seller. He or she would not be around to work and to offer advice to those who are in the employ of the DSO. One of the attributes of the DSO is that there is no or little administrative work to do and the dentist would have to use his or her clinical skills only at the chair.

When do the advisors to the dentist and the dentist understand what he or she would be receiving from the DSO?

The dental practice has a dental CPA, an attorney with experience in working with clients who are dentists and a hedge fund or venture capital group who are the money people to the DSO. They also may have settled quite a few of these transactions with dental practices so they have experience with what it takes to close a transaction. If each side to the transition really want the transaction to occur, it will and it will be sooner rather than later. The understanding does not guarantee that the goals will be met since that is based on the future. The DSO knows that it must offer quite a bit more than the private practice that may be bidding on the dental practice acquisition as well.

Since the big upside for the dentist is based on reaching certain goals, the DSO knows that it must set these goals realistically or they will get a reputation as not being able to perform. The goals will be set so that the acquisition will have to work hard to reach them, but they will have the opportunity to do so. The DSO profits as well if the new dental practice just acquired can reach its goals. If they do, it will make the DSO more attractive to a third-party buyer that may be a larger DSO or a venture capital firm or hedge fund. Everyone benefits if that occurs.

Final negotiations, analysis and review

After the dental CPA, attorneys for both parties to the transaction and the principals are satisfied with the terms and conditions of the transaction, the transition will probably close. Everyone must compromise a little bit but if the goals are met there will be a pot of gold for the dentist and the DSO at the end of the transaction. Depending on the wishes of the dentist and whether there is a realistic opportunity to reach those goals, a second and maybe a third settlement will take place as the upside of the transition will occur. The dentist should know that the first offer from the DSO will not be the last offer. The DSO has the capital and lines of credit to continue the negotiating while the private buyer has a limit.