Selling Or Merging with the DSO/OSO Can Create Positives and Maybe Some Negatives

Selling Or Merging with the DSO/OSO Can Create Positives and Maybe Some Negatives | Image Credit: © Екатерина Чумаченко - stock.adobe.com / Generated with AI

Having a terrific general dental practice or an orthodontic practice that is the envy of every orthodontist that you know may not be enough to allow these owners and their practices to continue as they are or with continued increases that they are accustomed to seeing.

They see a “pot of gold,” at the end of the next segment of the marketing effort posed to them by the representatives of the DSOs (Dental Service Organizations) or OSOs (Orthodontic Service Organizations) that are now knocking at their doors. Owners of solo dental practices and specialists may see steady growth in terms of gross revenue, net income and value increases in their dental practices but they can’t envision the timing of points when additional monies arrive that the DSO type of practice affords them the opportunity to achieve. The multiples of growth, value and income that are offered by the DSO model are many times considered out of reach for the individual owner because of the lack of their own numbers of employees who can treat the additional patient flow. They may not have the space for expansion of their office or the desire to borrow substantial monies to afford that increased space. Also, they may be afraid of the new marketing expense that will be needed for a while as the general public sees that the practice is ready for the expansion and that there are no 2- to 3-month waits for appointments.

The individual clinicians may see their values increasing by the 100 or more patients that may be added each month to their practices and the 10 to 15 patients they may lose each month. It may be that a DSO type of practice with 3 or 4 acquisitions already within their ownership group may have 3,000 or more patients to add upon the sale to the DSO so that the immediate growth makes up for about 3 years of growth under normal conditions achieved by the solo practice at a 1-at-a-time pace.

Some of the downsides to the above upside with the immediate growth of the solo dental practice:
The loss of tax deductible benefits to the owner become almost immediate because of IRS regulations that force benefits to be of similar proportions between owners and employees of the same dental practice. This means that the payments may still be made on behalf of the owners, but they will be taxable to them. Unlike when the solo owners can massage the payment and use tax benefit strategies for themselves, their family members and key employees, the DSO type of organization has too many people and restrictions to be able to continue to do so as the solo dental practice operated before the DSO merger. A material restriction as an example would be the use of a retirement plan benefit for the owner in a solo practice compared to the type of retirement plan in a DSO. With expert advice the solo practitioner can adopt a defined benefit plan in his or her practice while employing a 401k or lesser employer sponsored qualified retirement plan for certain employees who are not owners. This can cause a deductible contribution on behalf of the owner in an amount exceeding $150,000 annually. The rank and file employees would receive about $25,000 annually with expert individual tax planning.

When the solo owner has his or her dental practice join the DSO, all contributions would be limited to potentially $50,000 in total for all employees, including the owner, his or her family, and key employees. This change has to do with comparability testing, similar benefits for everyone and almost no tax planning for individuals but only for the dental practice itself. There can be no deviations from comparable testing or the dental practice may lose its deductions as well as being assessed penalties and interest. Other benefit changes invariably include medical insurance premiums as the ability to achieve tax deductible payments for the owner and family members will be gone almost immediately as well.

Weighing the upside and downside for the solo dentist and the DSO: Concentrating on the individual practitioner and what the net gain may be for him or her upon the merger of the 2 dental practices: But when accumulated become very material.
When delving into the material items that may change between the 2 types of organization, retirement plan adoptions and medical insurance premiums may be 2 of the largest types of benefits that will be compromised for the solo owner. There are other items that on an individual basis are not material but are being used as a tax deduction for the dental practice and therefore the owner.

Sometimes the individual owner may be able to deduct certain expenses for family members such as when the family member must drive to pick up or deliver dental products or packages to patients. Did the owner of the solo practice employ that individual and have him or her formally added to the payroll? If so, are retirement plan benefits and other acceptable tax deductible payments being paid through the dental practice on behalf of that individual? Are business related personal telephone calls, deliveries, picking up of items needed for the dental practice, etc., being paid through the practice for the owner and those on the payroll?

What is the age of the dentist who is considering joining the DSO? When was the dentist going to put his or her practice up for sale and have the understanding that he or she may have to wait up to a year for a buyer to come along who could satisfy the terms of the selling dentist? These are all questions to consider and discuss with a dental CPA and potentially with the attorney who may be knowledgeable in working with the dental profession.