The Strategic Approach to Selling Your Dental Practice to a DSO: Insights from Cecil Staton of Arch Financial Planning

In the ever-evolving dental industry landscape, the decision to sell a dental practice is monumental. With the rise of Dental Service Organizations (DSOs) as a dominant force in the market, dental practice owners are increasingly considering these entities as potential buyers. Cecil Staton from Arch Financial Planning is here to guide you through the nuances of navigating a sale to a DSO and dental practice transitions. Ensuring you make informed decisions that benefit your financial future and the legacy of patient care you’ve built and sold at the right time.

If you’re wondering whether the DSO business model is a good fit or if you’ve received an unsolicited offer, our post can help you determine the best deal for your own practice. After reading this post, contact us to help decide if selling to a DSO is a good option. We advise on dental practice sales and help evaluate DSO buyers. 

Understanding the DSO Landscape

Before diving into the sale process, it’s crucial to understand what DSOs are and how they operate. Dental Service Organizations, or Dental Support Organizations, are business entities that provide non-clinical support to dental practices. This support can include marketing, administrative services, purchasing, and more. The DSO model allows dentists to focus on patient care while leveraging the DSO’s resources for business operations, potentially leading to growth and improved service delivery.

The Appeal of Selling to a DSO

For many dental practice owners, the decision to sell to a DSO is driven by several factors. These can include the desire for financial security, the need to reduce administrative burdens, or the ambition to expand services without direct investment. Additionally, private equity groups often back DSOs, providing a robust financial foundation that can offer attractive purchase prices to selling dentists.

The best way to ensure a successful transition and leave your practice in good hands is to build a team that acts in your best interest. This team includes dental-focused attorneys, accountants, and a financial advisor. 

Potential Buyer Landscape: DSO vs. Private Buyer

When considering selling your practice, weighing the options between a DSO and a private buyer is essential. While private buyers, such as individual dentists or small groups, may offer a more personal touch and potentially more straightforward transactions, DSOs often bring financial backing and resources that can be hard to match. Private equity firms backing many DSOs typically seek investments that can grow significantly, offering potentially higher purchase prices than private buyers.

Navigating DSO Sales: Key Considerations

Due Diligence

The due diligence process is critical when selling to a DSO. Due diligence involves thoroughly reviewing your practice’s financials, operations, and compliance with regulations. It’s not just about the DSO evaluating your practice; it’s also an opportunity for you, the selling dentist, to assess the DSO’s ability to support and grow your practice. Understanding the expectations and resources of the DSO can help ensure a successful partnership post-sale.

Valuation and Negotiation

Understanding the valuation of your dental practice is fundamental. Valuation and negotiation go beyond just the financials; they include the value of your patient care model, staff, and growth potential. Working with a financial advisor who understands the dental market and DSO transactions can be invaluable in negotiating terms that reflect the actual value of your practice.

Getting a practice valuation isn’t straightforward and doesn’t fit into a one-size-fits-all. If you want top dollar, you’ll need several years of clean books, collections above $2,000,000 (if not much more), a desirable location, and staff with young dentists. You can receive offers without all of this, but it will limit the potential of the offers you receive. 

Corporate group buyers want to see you in-network with multiple insurance companies. The patient base translates to a much higher value with sticky patients tied by insurance than fee-for-service patients that will leave after the retiring dentist transitions out. 

Transition and Patient Care

A significant concern for many selling dentists is how the transition to a DSO will affect their patients and staff. Discuss patient care with the DSO’s chief clinical officer and other practice owners who have sold. Also, ask how the DSO will integrate your staff. The goal is to ensure continuity of care and retain the values that made your practice successful.

Clinical autonomy is not a guarantee when selling. To ensure a smooth transition and provide dental care the way you’d prefer, you must talk to other dental offices sold to the DSO and see if they still feel the new owner is the right fit. 

What Does A Letter of Intent Typically Include When a Private Practice Considers a DSO Sale? 

In delving deeper into the intricacies of selling your dental practice to a DSO, it’s essential to understand the typical elements of a DSO offer. These elements can significantly impact the sale’s immediate and long-term outcomes for the selling dentist. By breaking down these components, dental practice owners can better prepare for negotiations and structure a deal that aligns with their objectives and expectations.

Cash Consideration

The foundation of any sale is the cash consideration, the upfront amount the DSO pays to purchase the dental practice. This sum is often the headline number in any negotiation and reflects the practice’s current market value based on its financial performance, patient base, and growth potential. While the allure of a large cash payout is strong, it’s essential to consider how this fits within the broader context of the offer, including the terms of employment and potential for future earnings.

Rollover Equity

Rollover equity is a nuanced aspect of DSO offers that can significantly impact the selling dentist’s financial future. This element involves the dentist taking a portion of the sale proceeds and reinvesting them back into the DSO or its parent company, essentially becoming a shareholder. This arrangement aligns with the interests of the dentist and the DSO, as the selling dentist benefits from the organization’s future growth and success. However, understanding the terms of this equity, including any restrictions on sale or dividends, is crucial.

Employment Agreement and Compensation as an Associate

Another critical component of a DSO offer is the employment agreement and compensation structure for the selling dentist post-sale. Many DSOs wish to retain the expertise and local reputation of the selling dentist by offering them an associate position within the practice. This agreement outlines the terms of employment, including duties, working hours, compensation, and benefits. Negotiating a fair and competitive compensation package ensures that the selling dentist’s expertise and continued contribution to the practice are appropriately valued.

Seller Notes

Seller notes represent a form of financing where the selling dentist agrees to receive a portion of the sale price over time, essentially providing a loan to the buyer. This arrangement can benefit both parties, offering the DSO flexibility in structuring the deal and providing the seller with potential interest income and a staggered tax liability. However, the terms of the seller notes, including the interest rate, repayment schedule, and security, must be carefully negotiated to protect the selling dentist’s interests.

Lease or Purchase of Real Estate

Finally, the terms related to the lease or purchase of the real estate where the dental practice is located can play a significant role in the overall offer. For many dental practices, the physical location is a crucial asset, and the continuity of operations at the current site can be important for maintaining patient loyalty. The DSO may offer to lease the space from the selling dentist, providing a steady income stream, or purchase the real estate outright. Understanding the market value of the property and negotiating favorable terms is crucial for ensuring that this aspect of the deal reflects the selling dentist’s best interests.

Pros of Selling to a DSO

One of the most compelling arguments favoring partnering with a DSO revolves around economies of scale, a stark contrast to the operational framework of a solo practice. DSOs, by their very nature, operate across multiple locations, pooling resources and leveraging bulk purchasing to reduce costs on supplies, equipment, and technology. This scale allows them to negotiate more favorable terms with suppliers and vendors, resulting in cost savings for individual practices within their network. 

Furthermore, DSOs have the infrastructure to invest in advanced technology and marketing strategies that a solo practice might find financially unfeasible without considerable debt or high salaries. This access to state-of-the-art resources and operational efficiencies can significantly enhance a practice’s ability to provide high-quality patient care, expand services, and attract new patients. 

Achieving this level of operational efficiency and technological advancement requires a substantial financial outlay for a solo practice. It can be a challenging endeavor, making the economies of scale offered by DSOs an attractive proposition for many dental practice owners.

DSO offers typically have the highest practice value compared to a private buyer. Further, corporate dentistry can lead to better work-life balance. A DSO may be the best option for dental practice owners looking for an exit strategy that takes chips off the table but works for a few more years as an employee.

Cons of Selling to a DSO

While selling to a Dental Service Organization (DSO) offers numerous benefits, it’s imperative to acknowledge the potential drawbacks that may concern some dental practice owners. One of the primary cons is the possible loss of autonomy over clinical decisions and practice management. 

Once part of a DSO, practices may have to adhere to standardized protocols and practices, which can limit the selling dentist’s ability to make independent choices regarding patient care, staffing, and the services offered. This shift can be particularly challenging for dentists who have spent years building their practice based on personalized care and unique practice cultures. Take your evaluating DSO groups to avoid picking the wrong DSO.

Additionally, DSOs aim to optimize operations and administrative tasks and reduce costs. Some dentists may find the corporate approach to healthcare delivery misaligned with their values or detrimental to the patient-provider relationship they have nurtured. Concerns about quality of care and patient satisfaction may arise if the focus on profitability supersedes the personalized touch that initially defined the practice. Thus, while the financial and operational benefits of joining a DSO are clear, the potential impact on practice autonomy and the essence of patient care warrants careful consideration.

Younger dentists with decades remaining in their careers are typically not a good option for selling to DSOs. You’re better off trying to build a good or even a small group practice and pay off debt along the way.

The Role of Financial Advisors in DSO Sales

Selling your dental practice to a DSO is not just a business transaction; it’s a pivotal moment in your professional life. Engaging with experienced financial advisors, like those at Arch Financial Planning, can provide you with the strategic guidance necessary to navigate this complex process. From valuation to negotiation and through to the final transition, having an expert by your side ensures that your interests are protected and your legacy preserved.

Bottom Line

Selling your dental practice to a DSO can be a strategic move that aligns with your financial and professional goals. However, it requires careful consideration, thorough due diligence, and strategic negotiation. As dental practice owners contemplate this significant decision, they must weigh the benefits of partnering with a DSO against the potential challenges. 

With the proper preparation and support from financial advisors, you can navigate this journey successfully, ensuring a prosperous future for yourself, your employees, and your patients.

Cecil Staton’s expertise in financial planning, specifically within the dental industry, provides a beacon for those considering this pivotal step. By understanding the nuances of DSO sales, conducting comprehensive due diligence, and engaging in strategic negotiations, you can transition your practice into capable hands while securing your financial future and preserving the essence of patient care that has defined your career.

Remember, selling your dental practice is deeply personal and requires a tailored approach. Whether you’re drawn to the operational support of a DSO, the financial backing of private equity groups, or the traditional route of a private buyer, the key is to make an informed decision that aligns with your values and goals. With the proper guidance and a clear understanding of the landscape, selling your dental practice can be a rewarding next step in your professional journey.

Disclaimer:

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