January 29, 2024
Dentists & Succession Planning: Beyond the Family Legacy
Dentistry is undeniably a familial industry, with stories abound of children following in their parents’ footsteps and taking over established practices. Selling your practice to your children may seem like the perfect way to secure their financial future while maintaining a family legacy in the field. However, the reality is far more complex, and there are compelling reasons for dentists to consider alternative paths.
Dentistry is in the middle of a consolidation wave, and dentists currently stand to benefit from exceptionally favorable deals for their practices. However, industry experts predict that this opportune window may only last for the next 5-7 years. After this period, the market is anticipated to stabilize, potentially diminishing the value dentists can obtain for selling their practices. For those banking on family succession, delaying the transition could inadvertently limit the financial gains for both themselves and their children.
Instead of relying solely on a family succession plan, forward-thinking dentists are exploring alternative options to secure their financial future while providing for their children in the long run. One alternative gaining traction in the dental community is selling the practice to a dental service organization (DSO).
A DSO supports multiple dental practices, providing administrative and operational services. This allows individual dentists to benefit from economies of scale, operational efficiencies and strategic partnerships while, in some cases, maintaining clinical autonomy in their practices.
However, while many DSOs claim to be clinically autonomous, this is not always guaranteed. That’s why engaging with a seasoned broker is essential for navigating the negotiation process and securing the most favorable deal that safeguards clinical independence. With the right guidance, DSOs offer a compelling solution for dentists looking to transition out of their practice while ensuring a stable financial future for their children.
Success Story in Chicago
One of our clients who owned a large practice in Chicago faced the challenge of involving his daughter and her husband (also a dentist) in the future of the practice. Uncertain about their willingness to buy the practice, he decided to explore alternative options. With the assistance of a seasoned broker, they found an excellent joint venture (JV) style DSO. The outcome was remarkable – the practitioner not only made four times more than he would have selling to an individual, but also provided his daughter with an option to vest into ownership or purchase the remaining amount from him. By opting for a DSO, he effectively removed risk, optimized rewards, and ensured his daughter’s favorable decision-making position.
Strategic Moves Despite Financial Constraints
Another client had his son working at his practice, but the son was not financially able to become a partner. In a strategic move, the practitioner and his partner sold 70% of the practice while each partner retained 10%. The owner gave his son the 10%, as he had already gained significantly more from the sale than he would have otherwise. This structure allowed his son to be part of the practice, demonstrating how DSOs can facilitate family involvement despite financial constraints.
These examples illustrate that selling to a DSO opens avenues for dentists to structure deals that not only maximize financial gains but also enable family members to participate in the practice’s future.
Which DSO deal structure is best for you?
Joint ventures and equity rolls are two attractive types of deal structures for dentists contemplating a sale. With these options, dentists can receive a substantial sum of money upfront, allowing them to invest in their children’s education or other financial endeavors immediately.
In a joint venture (JV), the dentist retains a stake in the practice, benefiting from its ongoing success while also receiving a lump sum at the time of the sale. Equity rolls involve the dentist exchanging a portion of their practice equity for a financial stake in the DSO, thereby participating in the growth and success of the broader organization.
These options can also go hand and hand, allowing for a flexible strategy where joint ventures and equity rolls can complement each other seamlessly. Dentists have the option to go the JV route, maintaining a stake in their practice, and subsequently, roll some of their remaining equity into the holding company of the DSO. By combining joint ventures and equity rolls, dentists can tailor their approach to best align with their financial goals, offering a nuanced and strategic method for optimizing the benefits of both structures simultaneously.
The major benefit of this approach is its ability to provide both immediate financial security and continued wealth growth over time. In an industry currently undergoing consolidation, the landscape for the next generation of dentists may be notably different from when their parents initially acquired their practice. Instead of waiting for children to complete dental school and potentially facing the uncertainties of the market at that time, dentists can take a proactive approach by selling to a DSO.
This not only accelerates the dentist’s ability to provide financial support to their children but also allows them to diversify their investments and mitigate risks associated with a single-practice focus. For example, dentists can use the lump sum from selling and put it into accounts/funds designed for their children, which can help build generational wealth. In a rapidly evolving dental landscape, where market dynamics and patient expectations are constantly changing, diversification through a DSO sale can be a strategic move that ensures financial stability for both the dentist and their family.
While the dream of passing down a dental practice to the next generation may be appealing, dentists are increasingly recognizing the merits of exploring alternative avenues for securing their children’s financial future. Selling to a DSO offers a pragmatic and forward-thinking solution, allowing dentists to navigate the complexities of succession planning with confidence and strategic foresight. In doing so, they not only secure their family’s financial well-being today but also pave the way for sustained prosperity in the years to come.
There are several other types of deal structure options available, as there’s no one-size-fits-all solution. Contact the experts at Professional Transition Strategies to see which DSO deal structure works best for you and your practice.