You have probably received mailers, phone calls, or other solicitations from “corporate groups” or Dental Service Organizations (DSOs) seeking to buy your practice, or practices in your area. They usually include a promise to pay top dollar for your practice, and they have probably caused you to wonder if selling to a DSO is the right decision for you. Let’s explore that question.

There are pros and cons to the DSO buy-out structure. A DSO buy-out could be perfect for you and your practice. In some instances, you may be able to get more money for your practice in the short term than you could sell to a private buyer, but not all DSOs are created equal and not all DSO offers are what they may seem to be on the surface.

To begin, let’s consider what most DSOs are looking for in a practice opportunity to determine if your practice may even be of interest to them.

The Requirements

While almost every dentist gets offer letters in the mail, DSOs have very specific requirements as to what they are looking for. To keep this article short and to the point, we’ll list the basic requirements here.

1. FFS or PPO-based practices (limited or no HMO or Medicaid)
2. Practices producing $700K or more in gross, annual collections
3. Minimum of 5 operatories, preferably with room to grow 
4. Retail location or superior exposure/signage 
5. Seller willing to stay on working as an associate dentist/employee for a period of 2 to 3 years or longer. 

The Positive

Dental practices are appraised and evaluated very differently than other businesses. Most businesses are valued based on a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which may also be thought of as the profits remaining after all operating overhead, including any professional employee compensation, is paid. EBITDA is not what you, the doctor, take home. EBITDA is what a business owner would take home after paying you–or any other associate–a going rate of compensation to do the dentistry. Most businesses in America sell for 3 to 5x EBITDA. The quickly developing corporate dentistry industry is applying this same model to how they evaluate and buy dental practices. Using this model, your typical solo practitioner practice may sell for roughly 4 to 5x EBITDA. Sellers who have a practice that appeals to a DSO, such as high gross, high EBITDA, and/or more than one location, can see up to 7x EBITDA, or more, depending on the number of locations and the size of their EBITDA.

EBITDA may be a new concept for many dentists who are used to the old “percentage-of-gross” rule of thumb. That rule of thumb has become ubiquitous over the years, due to its simplicity; however, what is gained in simplicity is lost in accuracy, so a word of caution to the wise when using this rule of thumb. It can either dramatically overvalue or undervalue any practice since it ignores so many other factors that contribute to or detract from practice values. A multiple of EBITDA is somewhat more accurate, but determining the correct multiple must rely on careful analysis of what influences practice value. Things 

like an active patient base, insurance makeup, new patient flow, location, facility & equipment, procedure mix, staff tenure, and so forth, all impact value.

 While on average dental practices in this market are selling for 65% to 80% of last year’s gross collections, some DSOs are paying anywhere from 100% to 120% of last year’s collections. DSOs are increasing sale prices nationally and changing current valuation models. That is the largest positive to be noted when it comes to DSO sales; however, many times if something is too good to be true, it probably is. Often these “premium” prices come with strings attached. Read on. 

The Negative

While you may get paid more for your practice, rarely will you get all of that money upfront, and when you factor in giving up the profits (or EBITDA) of the practice to the new DSO owner, you may actually come out with the short end of the stick financially. To pay a premium price, DSO buyers require the seller to continue working in the practice for a minimum number of years, usually two to five. To ensure that you fulfill that work-back period, usually, a portion (around 20% or so) of the purchase price is held in reserve, and its payment to you is made contingent upon you fulfilling the terms of the work-back period AND meeting certain benchmarks relative to practice production and/or profitability. 

As an associate working for the new owner, your compensation will be much less than it was as an owner. Typically the seller, working as an associate for a DSO will be paid anywhere from 25% to 30% of his/her collected production. Depending on hygiene production and/or production from other dentists in the practice, this usually equates to about 20 to 25% of total practice revenues. As an owner, you were probably taking home 35% to 40% of total practice revenues, depending on your operating overhead.  The difference, now, goes to the new DSO owner.  As such, when you run the math, you may not actually come out ahead financially, and that “great price” you were offered upfront, is not actually all that great.  Most DSOs are hoping you don’t do this math. Consequently, oftentimes a simple sale to a private party two to five years later will 

result in the same (or even better) yield for the practice, but with fewer headaches and less complication.

Besides the numbers, there are the issues of relinquishing control, autonomy, and decision-making. These losses can be particularly poignant when it comes to hiring and firing staff, deciding how the practice will be marketed and what image will be portrayed, selecting which lab or supplies to use, determining your own work schedule and time off, and so forth.

In our experience, many dentists have later regretted selling to a DSO. They admit they were “wowed” by a big number upfront and did not take the time to do what they are doing right now: to do their homework and educate themselves about the pros and cons. 

Brokers

Of course, one may accuse dental practice brokers, like us, of being biased against DSOs since they may be perceived as “cutting in on” our business. There is truth to that, but a broker is also retained primarily to look out for the client’s best interests–your best interests. As we have seen time and again throughout history, a corporation established to procure profits does not always have the best interests 

of its customers, vendors, employees, or even owners in mind.  A DSO will have professionals looking out for their interests. Who is looking out for yours?

There is also an erroneous, general assumption that A) brokers are too expensive, and B) their primary job is to find a buyer. Well, if that is true, then in a market where buyers are easy to come by and DSOs are knocking on your door, why would you need a broker? In truth, finding a buyer is a relatively small part of a broker’s job. Finding a buyer is like getting the player (seller) onto first base. Getting a buyer to home plate (closing) involves much, much more. It includes getting the seller a fair price, providing proper guidance and appropriate resources, and making the process seamless, from start to finish. You don’t know what you don’t know.  And, if a broker does their job correctly, he/she will provide value in the form of a higher price, lower taxes, and/or other benefits from the sale that will more than pay for their fee.  

Conclusion

Selling to a DSO has its pros and cons, but it really comes down to your specific situation. Selling to a DSO can be a great transition plan for some and terrible for others. If you are unsure if it is right for you, contact us for additional guidance. 

Regardless of whether you are selling to a DSO or to a private party individual, consider involving a dental practice broker to help you get the most from your practice and ensure the terms negotiated are in your best interest.