Doing deals with DSO

Based on the book “Buy Sell Merge: How to Navigate Successful Dental Practice Transitions for the Entrepreneurial Dentist”

The trend in dentistry—and throughout medicine and business in general—is consolidation, often through private equity investment. While it is still possible for an individual dentist to successfully run an office independent of a greater corporate structure, today, private equity is recognizing the value of combining dental practices to create economies of scale, generate greater wealth for all concerned, and provide a solid return on their investment.

The primary benefit of selling your practice to a dental service organization (DSO) is that they often pay a higher purchase price than a traditional buyer. DSOs, flush with cash, ignore prior valuation models, and offer higher prices for successful dental practices. This is good news for the dentist whose practice would be attractive to a DSO. DSOs prefer high-volume general-dentistry practices that accept a range of quality insurances, as well as high-end, cash-based practices, and specialty practices. DSOs are generally not interested in Medicaid practices unless those practices are unusually profitable. (To be clear, some DSOs are interested in Medicaid practices, but many are not.)

Once your dental enterprise reaches a certain size, DSOs often become the only plausible buyer. This is regularly the case where a single dentist owns several offices with gross revenue in excess of $5 million per year. Such practices are almost always out of the reach of a young dentist looking to buy a practice for themselves. They are likely unable to secure bank financing for a practice of that magnitude and may not have the managerial experience to successfully lead such an enterprise. So, if you’ve built up a sizeable entrepreneurial empire, selling to a DSO may well be the way to go.

The tremendous explosion of DSOs in the marketplace began when private equity investors saw that they could get a great return on investment in dentistry but ran into legal restrictions due to regulations limiting the corporate practice of dentistry in many states. These restrictions stipulate that non-dentists cannot own an interest in a dental practice. Thus, the dental service organization became the vehicle, allowing non-licensed investors to get into the business of dentistry. A DSO is a general business entity with a fairly complex structure, the details of which are beyond the scope of this article. Suffice it to say that the DSO model is the means by which private equity and other non-licensed investor groups are able to buy up multiple dental practices while still acting within the scope of the law.

What to expect when you transition to a DSO

When you sell to a DSO, the transition can take a few years. Many DSOs will require a selling doctor to take 20–30 percent of the sale price in what we call rollover equity, which is essentially an equity interest in the acquiring company (the DSO itself). This way, the selling dentist is incentivized to participate in the post-closing success and growth of that practice.

Why is this? The DSO wants to ensure, to the extent possible, that the practice will be successful after the closing. A smooth transfer of patient and staff relationships often requires a long transition period. Most DSOs expect relatively long-term employment agreements with the sellers and their key employees. If you’re planning to sell to a DSO, you should expect that the DSO will be looking for a three- to five-year employment contract after closing. These deals are profitable but often require a long-term commitment.

The primary scenario in which a DSO would not expect the selling dentist to sign a long-term employment contract is one in which the seller can prove, to the absolute satisfaction of the DSO, that all they have been doing for the last few years is managing the practice. If you can demonstrate conclusively that your role is more CEO-like in nature, and that you haven’t been treating patients, the DSO may not require a long-term employment contract.

Is it possible to stay on for fewer than three years when a DSO buys your practice? In some cases, yes. We recently represented an older dentist who sold his practice to a DSO and will only remain in the office for eighteen months. That’s the shortest post-closing DSO employment contract I’ve ever seen for any dentist who still works chairside. However, this case is unusual. If you’re going to sell to a DSO, they will almost certainly expect you to be there longer.

The DSO is focused on the continuation of cash flow and return on investment. Keep in mind that the bigger DSOs own dozens, if not hundreds, of dental practices. The simple truth is that they don’t want to be forced to staff every office that they acquire. The DSO model requires that the dentists and the staff members remain in place post-closing.

Can you create your own DSO?

If you are an entrepreneurial dentist and you are wondering if you have what it takes to create your own DSO, the answer is a resounding “Yes!” Plenty of dentists are indeed creating their own DSOs or equivalent affiliation groups. These savvy dentist entrepreneurs are able to operate in multiple locations, enjoy economies of scale, and ultimately build something that, if they wish, could be sold for a high price to a larger DSO down the road.

We’ve helped many dentists establish DSOs of their own, which allowed them to take advantage of outside investors; provide equity to non-dentist “partners”; and develop benefits, including centralized billing, a centralized call center, consolidated payroll, better insurance reimbursement rates, less expensive dental equipment and supplies, savings on employee benefit plans, and many other economies of scale. Similarly, DSOs can also offer sophisticated real estate management services, equipment leasing, marketing, advertising, and even training. These economies of scale are hard to beat, and therefore why you see consolidation.

I want to emphasize that not every dentist who wants to acquire other practices needs to establish a DSO to do so. There are many ways that an experienced and creative law firm can help the entrepreneurial dentist succeed, whether with a DSO-like model or not. Different clients have different needs and styles. Whether we create an actual DSO for our client or create some other type of entity that allows for the affiliation of multiple practices, any dentist can benefit from DSO-type management and can grow the value of multiple practices, making for an even more lucrative exit down the road.

Life after a DSO sale

For the most part, DSOs want business as usual; they want you to keep coming to work every day, continue managing your staff exactly as you did, and keep taking care of patients in the same manner you always have. Little by little, they will incorporate systems that will endeavor to make your practice more successful and more profitable. They will also provide training and other services to aid your growth. But in the beginning, they typically don’t want much to change. They want their investment to be profitable, and that means they want you and your staff to perform as before, without disruption, and without any bumps in the road. For the most part, selling dentists want to preserve their autonomy, and DSOs want them to keep it.

Summing it up

If you run a high-revenue practice, and you are willing to invest a few more years as the face of that practice, a deal with a DSO can be a fantastic opportunity. In nearly every DSO transaction we’ve handled, the sellers have been happy with their choice to sell to a DSO. You just want to make sure that you’re choosing the right DSO, and that you’re choosing the right firm to represent you. If you do things correctly, a DSO can provide a sizeable profit and an excellent exit strategy.

I understand that many individual practitioners see DSOs as the enemy. The truth, however, is that DSOs (and affiliations that offer some of the benefits of DSOs) create exciting new opportunities for dentists. Rather than thinking of them as a threat to the profession, it makes sense to consider how they can benefit your practice, or better yet, how you can learn from them and perhaps beat them at their own game.

Buy Sell Merge: How to Navigate Successful Dental Practice Transitions for the Entrepreneurial Dentist navigates the process of closing a dental practice transaction in the most effective, ethical, and successful manner possible. Though written by attorneys, it is not a legal book. There are legal issues baked into the conversation but it’s really a book about the marketplace and how dentists can take advantage of it, how to have successful deals while avoiding all too common pitfalls, and how to use one’s entrepreneurial spirit to achieve their goals.

WILLIAM S. BARRETT, ESQ. provides more than twenty years of law experience. As the CEO of Mandelbaum Salsburg P.C., he has represented a wide range of businesses with a unique specialty in mergers and acquisitions. He also created the firm's National Dental Law Center, with the objective of setting the standard for the legal representation of dentists and dental specialists in practice transitions. Bill is known throughout the country as a deal maker, who gets things done.

CASEY GOCEL, ESQ. is a seasoned transactional lawyer and equity partner of Mandelbaum Salsburg P.C. Casey specializes in corporate transactions as well as tax and estate planning.