What Are You Really Getting When You Sell Your Practice to a DSO?

What Are You Really Getting When You Sell Your Practice to a DSO? | Image Credit: andrey popov - stock.adobe.com

The art of negotiating a contract and what you will earn from it should make you feel terrific based on what the lead people from the dental service organization (DSO) are telling you about your dental practice.

The promises they offer you may keep getting more and more exciting from a practical standpoint. One of the most important things while discussing what you are going to get is what has been written down and promised. This matter can become confusing because there have been so many promises made by those leading the discussions that it is hard to remember what all was said.

There are many opportunities for each type of dental practice. The importance of dental practice advisors is probably the key to making a decision that will be life-changing whether it be for the good or for the bad. The dental practice advisors’ list should begin with the dental CPA. This person should not be a CPA who has an expertise in general business accounting such as someone who has experience with businesses that have a large inventory of a product.

Related reading: Consider Pros and Cons Before Executing a Dental Practice Partnership Dissolution

The main difference that will affect the dentist is that a general business with a high valuation for inventory typically does not have a good understanding of goodwill. This item is probably the most valuable with the highest value assigned in a dental practice valuation. Goodwill can account for as much as 75% to 80% of the value in a dental practice valuation. Compared to the general business model, the inventory may have 75% to 80% valuation of the business. When selling the general business compared to selling the dental practice, because of the allocation to goodwill, the dental practice transition will typically allow a capital gain tax approach while the inventory valuation will not.

That alone may be the difference in receiving or not getting a 25% tax compared to a 50% tax for the seller of the dental practice when comparing it to the sale of the general business.

The dental practice advisors. Who are they?

When advising a dental practice and the dentist, the most important advisor is almost always the dental CPA. This is a person with experience in evaluating dental practices and in assisting the dentist in acquiring the loan for the dental practice acquisition or start up. The dental CPA will have knowledge of other dental practices that he or she has advised in the past. This person knows what a lender is looking for with financial projections and can make sure that the expense ratio to projection gross revenue is within the guidelines established by national and local experts who compile averages and publish in various well-known professional dental publications. After all the work done by the dental practice advisor to assist in establishing a value for the dental practice, the dentist will surely be happy that he or she chose the dental CPA for this assignment and not the general business CPA.

A good dental practice attorney will know that he or she should rely on the dental CPA for additional help when drafting contracts and assisting the dentist with other legal matters. There are attorneys who have assisted in helping the dentist interested in joining a DSO and knowing the laws in the states where the DSO has successfully opened their doors and gotten their employees to understand the big picture. It is important for the dentist to retain an attorney who has had experience with DSOs.That attorney as well as the dental CPA probably have contacts with the lenders as well who understand how to lend to a DSO or an individual dentist who may be joining the DSO.

The clinical side and the administrative side of the DSO

Of course, the entire concept of the DSO is the size of the practice, its clinical side as well as its administrative side and making sure the employees are expert at what they are hired to be doing. The DSO does not want a dentist to be working on the administrative side of the practice. The dentist should be at the chair doing clinical work and bringing in the money. The CPA, attorney, and other administrative people should be working on the administrative side of the practice and trying to keep the money that is being earned to remain in the practice. Other administrators will be looking to acquire additional dental practices and will have input into who shall be hired, their compensation and benefits and potentially their rights to buy into the DSO and to become shareholders. Sometimes the founders of the DSO are skilled in administrative details and may join in the nonclinical workings of it for a time in the beginning of the organization until top-notch administrators are hired.

The goal of the DSO is to have the top-producing dentists produce as much as they possibly can. As the DSO becomes stronger financially and its employee base is stable, it will then start to look at other DSOs as well as additional dental practices to increase their cash flow and to make them more attractive to others who may be interested in merging with them or acquiring them. This is the point where the dental CPAs and the attorneys with experience in working with DSOs and their lenders will have an opportunity to shine. The process can start again but with a much higher base of positive cash flow, employees in strategic positions, and without the need to hire more highly-priced personnel.

Blueprint for success

If the clinicians and administrators stick to their field of expertise and don’t interfere with the overall operation by thinking like they were still involved in a small way rather than the large DSO organization that they have become all the above writings will almost guarantee a blueprint for success, especially for those who were among the original members of the DSO.