By: Erick Cutler
Dentists wishing to sell a practice in today’s marketplace have a new buyer entity to consider – the dental services organization or DSO. These corporate groups are well-managed, well-resourced and typically require no financing contingencies when they acquire a new practice.
But what goes into the process of selling to a DSO? Here’s what you need to know to ensure a seamless transition.
Why Sell to a DSO?
DSOs typically own dozens and sometimes hundreds of dental practices under a single corporate umbrella, the majority of which are branded under one trade name. Through a centralized administrative function, the corporation takes care of day-to-day operational management such as supplier contracts, accounts receivable, payroll and practice strategy. In theory, the DSO model makes sense to dentists as it frees them to focus on clinical work.
For dentists looking to sell their practices, transitioning to corporate dentistry offers some intriguing possibilities:
- The opportunity to work fewer hours before eventually exiting the practice, while potentially earning a high income as a salaried employee
- Removing yourself from the hassle of hiring, firing and staff management
- First-class administrative support and practice development services – no more marketing and practice strategy headaches
- Clearly defined continuing education programs based on patient need
- Options to move between practices within the DSO
It’s the sheer size of DSOs that delivers these benefits. Corporations succeed because they have the resources to reduce overhead, bargain with insurance companies and recruit investors to fund the development of practices. For patients, these economies of scale translate to flexible financing, convenient hours and the promise of lower fees.
Vetting For “Fit”
Every DSO has its unique style and approach to dentistry; you’re not comparing apples to apples. Affiliating with the wrong DSO could have an adverse impact on your reputation and future financial interests and may result in a poorer quality of patient care.
Dentists sell their practices for all sorts of reasons, but fundamentally, the majority wish to pass their practice to a dedicated buyer to create a legacy of their life’s work and ensure that patients continue to receive excellent service. Corporate dentists, by contrast, have a duty of generating profits for their shareholders. This results in an apparent conflict of interest.
While there’s no magic formula for figuring out whether a DSO shares your philosophy, your transaction stands a better chance of success if you vet corporate buyers for “fit.” Ask yourself, what’s the DSO’s reputation in the market? Does it emphasize price over quality? Is it transparent about who owns the organization, or are private interests hidden behind tiers of dummy shell companies and stealth branding? Does it have a history of employing arm-twisting sales techniques? Is there a risk that patients will be upsold unnecessary and expensive services without your knowledge? Will the practice you’ve built with blood, sweat, and tears lose its identity when it aligns with the corporate brand?
Make phone calls, check websites and talk with dentists who’ve sold their practices to get an idea of the perks and the pitfalls associated with DSO sales. It’s essential to do the necessary research and decide which corporate can offer a solution aligned with your goals.
Due Diligence is Key
Knowledge is power, as they say, and that’s certainly true for the solo dentist who is negotiating with a mighty DSO. While it is beyond the scope of this article to discuss all the due diligence you should carry out before the sale – and really, you should hire a practice broker and/or an attorney to handle your due diligence – there are three main areas to consider before sealing the deal.
1. Payment terms
Every DSO has its own set of payment terms, such as paying the sale price upfront or paying it out after you’ve finished your post-sale employment, assuming or not assuming your current liabilities, or what data and accounting protocol is used to calculate your future revenues or commission. Make sure you understand the detail so you can hold the DSO accountable.
2. Employment status
When a DSO acquires your practice, it’s usually a condition that you remain with the practice for a minimum two-year period after the sale (some dentists stay for considerably longer as a permanent employee). The employment contract should be comprehensive and define how you will be paid. Is commission based on practice profit or personal production? Is the calculation based on gross or net revenue? What’s the exit strategy? Can you help select your replacement to make sure the person fits the practice you’ve worked so hard to build?
Most DSOs will not deviate from their practice model – this is what drives their economies of scale. Be clear how these new operating conditions might impact your numbers and the quality of patient care. Are the required vendors of sufficient quality? Will DSO-imposed budget restrictions hinder the provision of services? How much latitude do you have on day-to-day clinical decisions? Will you have the freedom to discuss all reasonable treatment options with your patients?
Be diligent when reviewing the legal papers to ensure that you understand all of the stipulations. The best DSO’s will be flexible in their demands and attuned to your goals as the selling owner.
For the dentist who wishes to phase out of clinical practice slowly while maximizing the value he receives from his practice, selling to a DSO might be a good solution. Informing yourself about the process, researching the options and asking the right questions will help ensure a positive, quick and seamless experience for you, your team and your practice.
Contact the Dental CPAs at Goldin Peiser & Peiser to help you through this process or for any of your business or personal financial needs.