Selling your practice to a Dental Service Organization, Part I: Why dentists consider a DSO

Are you thinking about selling your dental practice or have you already started the process? Are you wondering what to do next? Part I of this series will guide you on some of your initial steps, even if you’re already in the process.

First, ask yourself: By selling your practice, what are you hoping to achieve? What is your goal? Your answer will determine the steps involved in making this happen. Most dentists have four goals:
1) Money (now and/or later)
2) They are tired of the headaches involved with being the dentist and CEO of their practice
3) They want to focus on practicing dentistry
4) They are looking for more personal time, or ultimately to retire

Here we will assume you want to continue to practice, so the focus will be on Nos. 1, 2, and 3. Dentists often feel all three goals are important in their decision to sell. A good starting exercise is to expand on your goals on a detailed level, such as hours you want to work, money you hope to make, whether you want to mentor, and determining the lab or other vendors used by your practice. This will allow you to prioritize the items into “must haves” and “can live without.” There is one constant for all four goals, and that is to create the highest valuation for the practice.

No matter who you sell your practice to, every deal is different (i.e., ownership structure) and every deal is negotiable (terms will vary). If you decide to hire a broker to find a buyer for your practice, as in any industry it is extremely important that they have experience in the dental industry. Experience in the dental industry may seem fairly straightforward, but many will be surprised to learn that the “dental service organization” (DSO) is a relatively new industry, and there are few specialists that fully understand the inner workings of the DSO business model or group practice model.

Selling to a dental service organization
Selling your practice to a DSO is an option that is gaining traction in the dental industry. The theory behind the DSO business model makes sense for dentists and can be the answer to the goals they’re seeking to reach. As everyone knows, information is power, and no saying holds truer than for a dentist dealing with a DSO. There is really no standard set of terms in this transaction, such as assuming or not assuming a dentist’s liabilities, paying all cash up front or paying out over a given term, or what information will be used to calculate a dentist’s future payroll or commission. The key is to understand each term by clearly defining all the parts and information involved so a dentist can hold the DSO accountable. This includes preacquisition and post acquisition.

There are similarities in the transaction of selling a practice to a DSO compared to a traditional sale, however, there are also differences that dentists should be prepared for. In most cases dentists remain with their practice after the sale is complete. However, they are no longer the owner, a partner, or a partner being bought out by an associate. At this point dentists become an employee (maybe a 1099 employee) of the DSO. This usually entails the execution of an employment agreement between a dentist and the DSO where in the structure or guidelines are set for the future financial interest of the dentist. (This information will be discussed in Part 2 of this series.)

Additionally, dentists give up control of administrative functions and many clinical responsibilities. Although giving up control, they are expected to produce the same dollar amounts or more. Understanding how new restrictions, calculations, or budgets affect a dentist’s practice after the acquisition is critical. (This will be discussed further in Part 3 of this series.) Understanding these and other differences in a DSO sale versus a “traditional” dental practice sale will help dentists understand how to hold the DSO accountable.

The preacquisition period is the time leading up to the closing of the sale of the practice. Ideally as early as possible during this time, an important step for dentists to take is to get their house in order. In other words, clean up their records and report the best possible set of financial statements and reports. The purchase price will be based on these reports. Post acquisition is the period after the closing of the sale of a practice to the DSO.

CONSIDER READING:Power in numbers: The rise of group dental practices
The role of DSOs in improving the oral health of children in America’s underserved communities

Be sure to watch for Part 2 of this DSO series regarding contracts, agreements, and expectations, and Part 3 about what to expect post-acquisition.

Todd Rincon is the former Director of Accounting Operations for a large DSO. He uses his unusual insight and understanding of accounting, operations, acquisitions, and transitions of new dental practices, and dental maintenance organization (DMO) experience to protect dental professionals in both phases of the sale of their practice to a DMO or DSO, pre- and post-acquisition.