December 4, 2023
3 Possible Outcomes of Affiliating With a DSO
There are more than 375 dental service organizations (DSOs) nationwide, and each operates differently. That means there’s no one-size-fits-all approach to finding and affiliating with the one that matches your philosophy and vision. Here, as an example, we use a dental practice with a $2 million valuation and analyze the range of different directions it can go depending on the transaction type when transitioning ownership to a DSO.
When transitioning 100% of the dental practice to a DSO, the dental entrepreneur of a $2 million practice can expect to receive between $1.8 million and $2.1 million in total value. This option works well for a doctor who is ready to retire and move on to the next chapter in their life, perhaps staying on to practice to ease the transition for both staff and patients.
If the same dental practice owner goes with a joint venture deal, they will sell 60% to 70% upfront. In return, they’ll get a higher multiple for the equity stake, and the practice will provide better returns. The doctor could get $2.4 million to $2.5 million upfront, take $1 million and roll as an equity stake in the practice. The equity can then grow anywhere from two to three times in the next five years. That means the owner can see profits of $4 million to $4.5 million over time. A sub-DSO concept also works similarly.
When exploring an equity roll, the doctor can expect to see the same type of multiple as a joint venture but can choose how much to roll forward. The more they put in, the more they get out, though the risk does increase. If the doctor chooses to roll $1 million, it’ll grow four to five times because it’s a less-risky investment and, therefore, will grow faster. It’s important to note the doctor won’t get distributions anymore, and it’s harder to see the one-on-one relationship between the doctor and the practice. Think of it more like owning stock or a mutual fund rather than a DSO.