Considering Selling Your Dental Practice To a DSO? Consider These Questions.
A few decades ago, a dentist looking to sell their practice had two broad options: sell to another dentist or dentists in their practice or sell to an outside practice. But the advent of dental services organizations (DSOs) and the flood of private equity money into the dental profession has provided another option, one that can be extremely attractive to practice owners who are looking to move to the next – or last – chapter of their careers.
The choice between selling a practice to a DSO rather than another dentist is a consequential one. The financial benefits, ongoing practice obligations, degree of control, and limitations on future activities for the selling dentist can all differ wildly in deals between these two types of purchasers. There is no “right” or “wrong”, but rather only what is best for each individual practitioner. To make an informed decision, dentists need to understand the often-complex compensation structures of DSO purchases and what will be expected of them in the coming years. But sellers must also look beyond the top-line numbers of a proposed transaction and consider all of their goals – financial and otherwise – before deciding which path to take.
As you prepare to put your practice on the market and before a DSO comes knocking at your door with promises of big returns, ask yourself the following questions.
Do You Want All Of The Purchase Price At Closing?
Individual purchasers of dental practices typically pay the full purchase price at closing, cashing out the seller with no contingencies. Many DSO purchase offers, on the other hand, include “hold-back” or “earn-out” provisions in which the DSO retains a portion of the purchase price, typically around 20% until and unless specific targets are met. Receipt of that remainder of the purchase price is usually contingent on either the seller’s future performance or a pre-determined post-closing collection threshold.
In addition to significant tax considerations regarding earn-outs, selling dentists need to understand that these contingent payments may never materialize or that they may need to put significant time and effort to reach whatever revenue or other thresholds must be met to get their money. For dentists looking to retire in the near future or who want to throttle back the hours they put in, the loss or delay of a significant portion of the sale price and the need to continue working may be a deal-breaker, even when that price is substantially higher (in theory) than what a private buyer would offer.
Do You Want To Keep Practicing?
If imminent retirement is your objective, selling your practice to a DSO is likely not the right path for you. Most DSO purchasers expect and require the selling dentist to continue practicing for a minimum of two to three years after closing.
Not only will you be expected to continue working at your practice, but the DSO will also want to ensure that you don’t practice elsewhere. Non-competition and non-solicitation provisions will be part of your employment contract, which may significantly limit your ability to pursue other opportunities. This is especially true for larger DSOs with multiple locations, as such clauses will typically preclude the selling dentist from practicing in a geographic area around any other practices owned by the DSO.
Are You Ready To Give Up Control?
Many dentists sell to a DSO partly because of the management, financial, operational, marketing, and administrative resources they bring to the table. This is an attractive proposition for dental practice owners who want to be relieved of such burdens so they can focus on their patients or put fewer hours in. But you’re not just ceding control over the less enjoyable parts of running a practice; you are handing over control of the practice itself. After years or decades of building a thriving practice and having the final say on every issue big and small, you will be relegated to the role of an employee. For very hands-on owners, this can be an unexpectedly difficult transition. When crunching the numbers of a DSO offer, do not discount the psychological and emotional price involved in relinquishing control of your practice.
What Are You Investing In?
Many DSOs require that a portion of the purchase price be paid in the form of an equity investment in the DSO. But what exactly are you investing in, and when – if ever – will you see returns on your equity investment? Never is the saying “the devil is in the details” more applicable in dental transitions. A selling dentist with a $1M valuation may be required, for example, to “rollover” 20% of the purchase price into DSO equity. In effect, that dentist is making a $200,000 investment in the DSO. But what the valuation is of the DSO and whether that is a “good” investment is the big question. The reality is that you are making something of a leap with very little control over your investment and many times with very limited information on the DSO you are investing in. The DSO can change hands multiple times, and you could be stuck with the company even if your relationship with the organization otherwise goes south.
Do You Really Understand The Numbers?
In the race to expand, some DSOs offer to pay five to nine times practices' earnings before interest, taxes, depreciation, and amortization (EBITDA). These numbers can be extremely attractive compared to the lesser amounts offered by a private purchaser. But they can also be illusory. No matter how impressive the valuation or offering price appears, there will always be caveats, contingencies, and other provisions that you will need to fully understand before you can make an informed decision. That is why working with an experienced attorney, accountant, broker and financial advisor is so critical if you are considering selling your practice in the near future.
If you are a dental professional considering a sale or merger, please contact us at ddslawyers.com at (630) 833-5533 or contact us online to arrange for your complimentary initial consultation.
We focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices, as well as orthodontists, periodontists, endodontists, pediatric dentists, and oral surgeons. We bring unique insights and deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you.
Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise dentists and other business owners in the Chicago area. Jordan grew up in a dental family, with his father, grandfather, and sister each owning their own dental practices, and this blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.
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