August 3, 2020
5 Types of DSOs
There is much more to dental service organizations than a signature on a dotted line. Before deciding to partner with one, it’s important to explore other options beyond selling 100% of the practice to a traditional DSO. We help you scratch the surface on this group of investors and unpack everything you need to know about DSOs.
Joint venture model
In the joint venture model, the dentist and DSO both invest capital in the form of money, equipment, and other assets into the joint venture, sharing proportionally in the growth of the practice. The dentist retains day-to-day clinical control of the practice.
When transitioning as a sub-DSO, the practice owner will exit the transaction debt-free with a large upfront payment and typically hold 40% ownership and profit share in the sub-DSO portfolio. Returns are made on various levels, including equity, profit sharing and exit upon a parent DSO recapitalization.
With a group affiliation versus a partnership with a group, the practice owner will sell 100% of their practice. They will then trade in their equity into the DSO as a whole.
Direct investment with private equity
A direct investment is when an investor purchases ownership within an operating company. The amount of ownership in the operating company varies per deal. This direct investment can be a buyout with controlling interest transferring to the investor or it can be a minority growth investment.
Specific practices can “go to auction” with their practices. This competition allows for more possibilities and a greater reward for the selling owner.
EBITDA versus SDE
As an aside, Earnings, Before Interest, Taxes on Income, Depreciation, and Amortization (EBITDA) and Seller’s Discretionary Earnings (SDE) are two different ways of measuring the earnings or income-generating ability of a business. The EBITDA reflects a value based on the investment, while SDE represents the true take-home value. SDE is EBITDA plus the deduction of all the owner’s income and benefits. Typically, the SDE is considered when looking at a practice’s fair market value for an individual practice, while EBITDA is considered when looking for a DSO.
Contact the experts at Professional Transition Strategies to see which DSO option works best for you and your practice.