Many dentists today are approached by different dental service organizations (herein referred to as “DSO”) about selling and/or merging their practice with their organization.  That’s because these DSOs (corporations, private investors, private equity groups) have developed a strong appetite for dental practices and want to create substantial equity gain and strong dividends in their company.

As a general rule, a DSO uses income-based valuation methods to evaluate investment opportunities. For example, a general dental practice will typically sell at a price in the range of 4 to 6 times its adjusted net income. Unfortunately, most practices do not fit the DSO “footprint”, i.e., they do not fall within the parameters most DSOs have set for practices they would be interested in acquiring. 

So, what are some of those parameters? 

1) The practice should be grossing no less than $1 million per year. It requires essentially the same amount of time to manage a practice grossing $600,000.00 per year as it does to manage one grossing over $1 million per year, from the DSO’s standpoint. 

2) A facility that can accommodate two or more doctors. Profit margins are higher when utilization of the physical facility can be maximized. 

3) A highly visible location with easy access (such as retail centers, strip malls, and other locations in high-traffic areas). 

4) A market/area that has the potential and capacity to provide a significant pool of prospective employee dentists. (Generally, this means cities with a population of no less than 25,000 inhabitants.) 

5) A local economy that is stable and growing.

If a practice falls within these basic parameters, it may be appealing enough to a DSO to garner an offer for a purchase, and in some cases, those offers can be quite lucrative (more than what a typical private buyer would pay).

However, sometimes there are some serious strings attached to the deal, including but not limited to, a holdback provisions on paying out part of the purchase price and how and when the seller will work back after the closing. In many instances, the seller is “paying back” the DSO’s investment by working back and creating those profit margins between what the doctor is paid and what’s left after all the overhead expenses have been paid.

There are four points to consider before transitioning your practice over to a DSO:

Point #1: Evaluate the financial compensation and structure. 

Be sure to carefully review how much after-tax net you will receive from the transaction and how much income and benefits you will receive working back after the transaction is completed. Most doctors are paid a percentage of their respective gross production. In most markets and most situations, this percentage is around thirty percent (30%).  (Note: Specialty practices/specialist associates are often paid a higher percentage.)  It is not uncommon, however, to see a flat salary paid as well, or variations of the two, such as a base salary applied against future percentage compensation.  In other words, the doctor is paid a monthly salary and/or a percentage, whichever is higher.  Then, as the doctor’s production increases, any salary that was taken is paid back by the percentage of production.

Point #2: Evaluate your own values, practice philosophy, leadership style, and personality type.  Then compare these characteristics to those of a prospective DSO.  

Matching your values with a DSO possessing similar values is very important and there are certain values they should possess if a successful relationship is to develop between you and them. These values are as follows:

• Honesty. Are they honest in all of their dealings? 
• Integrity. Do they keep their promises? Do they do what they say they will?  
• Consistency. Do they vacillate on issues or do they make a decision and stick to it? Are their actions congruent with your words?  Are they effective in communicating their thoughts and expectations?
• Compassion.  Do they have a genuine concern for those they work with?  
• Skills & Knowledge. Are you confident in their level of knowledge and skill to lead and guide you and the staff? 
• Conscious. Do they exercise good judgment and make decisions based on what is best for all concerned?
• Motivation. Do they inspire others to be and do the best they can? 

Moreover, what if you have evaluated your personality and determined that you still like to be the captain? In many cases, if the parties have a strong need to be in control, regardless if the transition is structured fairly, the arrangement will likely not last over the long term.  For this reason, some doctors are just not meant to work for or be partners with a DSO. Frankly stated, some doctors are meant to be the “captains of their own ship.” They have a certain way of doing things and prefer not to be encumbered by what a DSO says and does.  If you think you might be this type of doctor, don’t talk yourself into thinking that the sale or merger will be right for you.  Everyone has a different approach to business and a different way of doing dentistry.  

Point #3: Define your expectations and motivations in advance and seek to understand theirs in return. 

Each party is pursuing a practice transition arrangement but for very different reasons.  It is important they have complementary needs and similar values. Failed arrangements usually fail because the parties have incongruent expectations. In other words, one of the parties is expecting something to happen or for things to happen a certain way, yet somehow those expectations were not met. It’s best to check with other doctors who have sold or merged their practices with the prospective DSO and get their input. An ounce of prevention is worth a pound of cure.  Similarly, it is more difficult to turn back time in an attempt to correct a problem than it is to address those issues in advance.  

Rule #4: Seek professional help and define the arrangement in writing.

Contracts help define promises between two parties with their mutual and respective rights and obligations, along with consequences in the form of rewards and penalties. Ideally, these promises create a win-win outcome in which both parties are pleased. However, problems often occur when one or both of the parties seek only their own interests with little or no consideration for the others or without considering the longer-term impact of their actions. Sometimes negotiations result in one party getting their ideal result, but at the expense of the other party. Many issues could have avoided undesirable results by asking the following questions before entering into any agreement:

Does the agreement further your personal short and long-range goals? Does the outcome of the agreement fit into your objectives? 

Do both parties feel good about and comfortable with the terms of the agreement? Has any possibility of resentment as a result of uncomfortable compromises been removed?

Based on all the information, can both sides perform the agreement to their expectations?

It’s best to check your “gut feeling” on any issue.  If it does not “feel” right, then they should seek greater understanding and obtain additional information until it does feel right. And if you still feel uncertain about it, you should either ask for revisions to the agreement or no longer pursue the transaction. Just because other doctors have signed off on similar agreements, doesn’t mean it’s right for you.

If handled correctly, transitioning a practice to a DSO could be rewarding–personally and professionally–to both parties. Success is the goal of virtually every business venture.  Although doing business with a DSO can be inherently risky, it’s possible to structure and benefit from a successful arrangement with a DSO by following some of the information we have outlined above. In summary, crunch the numbers, define expectations, do your homework, and seek advice.  Attention to these things will increase your likelihood of a successful outcome.