Why to Sell Your Dental Practices as a Package Deal Rather than Individually

Owning more than one dental practice is a good strategy when your businesses are running at full capacity, but what about when you’re ready to hang up the proverbial hat and transition your practices? When it comes time to create a prospectus and valuations for your practices, it may be more advantageous to group the practices together rather than selling them individually. Here’s why.

Higher multiples

An increase in multiples is a direct correlation to an increase in the value of your dental practice. When looking at the earnings before interest, taxes, depreciation and amortization (EBITDA) of a practice, these multiples are then used to figure out the value during the process of creating a prospectus. Higher multiples, in turn, result in a higher value.

Economies of scale

The economies of scale for purchasing can be used to help with the overhead of the collective practices. As a result, it can give the buyer more power for purchases the practices make before the transition occurs.

Transaction options

Selling multiple dental practices as a package deal gives the seller more options for the type of transaction under which the deal will transition to the buyer. While options still include selling to an individual, selling more than one dental practice opens the door for offers from different dental service organization models, such as a joint venture.

Diversify risk

As with any major life decision, the more options you have to ease the transition, the less risk for all parties involved. This is especially true when the practicing dentist is looking to divest themselves of just one of the practices while maintaining ownership in the others. With the complete picture in mind, a prospectus will illustrate why not to put all your eggs in one basket.

Location

Alternatively, if the practices are located too close to each other and the seller continues to practice in close vicinity, a buyer will realize the potential high attrition rate because many patients will simply follow the selling dentist to the other location. Consequently, the seller will be presented with fewer options from which to select.

What’s next?

Contact the experts at Professional Transition Strategies to get the ball rolling on your dental practice valuation to figure out which option is best for you.

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.

Sub-DSO

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.

Equity roll

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.

Competition-based model

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.

What’s next?

Contact the experts at Professional Transition Strategies to see which DSO option works best for you and your practice.

The DSO Conundrum

When it comes to selling your dental practice, it’s easy to rule out the option to sell to a dental service organization because of their negative yet false reputation of corporate interest. In fact, a DSO might be a good fit when the seller is looking to stay on with the practice but wants to release managerial responsibilities, such as in a retirement situation, anyone who is looking to maintain a work-life balance, or a dentist who wants focus on the clinical side and patient care without contributing time and money associated with running a business. Here are all the facts you need to know about selling to a DSO.

What is a DSO?

A DSO is a business organization with the sole purpose of allowing non-dentist investment into dental practice ownership. A DSO isn’t necessary if all of the owners will always be dentists. But, you are limiting the value that can be achieved as the growth is limited by the personal funds of the owning dentists and their ability to carry debt.

The backstory

Dating back to the 1990s, many DSOs started from a single office that became very successful and its owner decided either to buy or start up other offices around them to keep up with the financial growth. However, most dental boards around the country have regulations limiting practice ownership to only dentists. In the 2000s, investors began putting together structures to help these large groups thrive, and this activity has expanded dramatically in the last 10 years.

Their responsibilities

DSOs provide non-clinical functions on a continuum. Some do a little, such as financial backing or accounting services; some do a lot, such as supply and lab formularies. However, they are a consulting group, a buying group, or an outsourced business services company. But, they may offer some or all of these services as they grow.

A new approach

Whether considering a typical transition or blended approach, it’s important to note that some may approach a DSO with hesitancy. Patient interest and office culture are just a few concerns staff can manifest when going into an unknown situation. But, the incentives have been aligning investors and doctors as both have goals they want to achieve. 

The pitfalls

Before entering into an agreement, have an appraisal done by an independent party that includes a range based on other comparables. Avoid dealing directly with the DSO in any cases, and be sure to consider more than one or two groups when looking to transition. Lastly, conduct an accurate return-on-investment calculator to see what the long-term result will be in any situation.

What’s next?

Contact the experts at Professional Transition Strategies to learn more about existing DSO options and investors starting DSOs.

Why Now Is a Good Time to Join a DSO

During these uncertain times, you may be hesitant to make a drastic change. But now more than ever, dental service organizations are looking for private practices to purchase in spite of economic standings. Banks are still lending, and DSOs are still buying. Here’s why you should consider selling your practice to a DSO in the foreseeable future. 

Buyer’s choice

New buyer groups have emerged in light of the recent changes. Fewer legacy DSOs will be buying practices at this point as they need to concentrate their efforts on managing the ones they have. Smaller DSOs, Small Business Investment Company-backed DSOs, new private investment-backed DSOs, and family office-backed DSOs will emerge as frontrunners when it comes to buying. 

Act now

Deals now will receive 2019 values thanks to earn-outs in the next year, if not sooner, while those that wait will see a lesser value. Waiting puts at risk lesser values in 2021 since 2020 numbers will weigh heaviest during the valuation process. What’s more, tax rates are expected to double. It’s easy to forget that cash is kind in times of need. 

Benefits

Partnering with a DSO means support with operations, marketing, research, purchasing, recruiting, and, above all, a guaranteed exit strategy, among other reasons — all of which are need more now than ever. 

Targeted states

DSOs have identified the following states for possible purchases: Arizona, Colorado, Florida, Georgia, Indiana, Ohio, Rhode Island, Tennessee, and Virginia. Other states include Arkansas, Connecticut, Delaware, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, North Carolina, Pennsylvania, South Carolina, Utah, and Wisconsin. 

What’s next?

Contact the experts at Professional Transition Strategies to get a prospectus done and figure out if selling to a DSO in these times is the right course of action. 

Why DSOs Can Pay More for a Practice than a Single Practitioner

Now that you know for a fact that fewer dental practices are selling to individuals, the next natural question is, “Why?” When it comes to putting pen to paper, selling to a dental service organization can make financial sense for both the buyer and seller. Here’s what you need to know to make sense of the process.

Private equity money

Since DSOs typically do not have to rely on bank financing because they are funded by private equity groups, they can pay more for practices than the standard individual. What’s more, you’ll get a higher valuation because a DSO won’t take hard assets into account but rather will focus on collections and other finances. DSOs also have private equity money, which is favorable to a bank over an individual buyer when it comes to securing a loan.

Economies of scale

With an increase in dental service organizations comes more options available to dentists looking to sell. More doctors today are affiliating with DSOs than ever before because of the variety available. Selling to a DSO makes sense when the seller is looking to stay on with the practice but wants to release managerial responsibilities, such as in a retirement situation or anyone who is looking to maintain a work-life balance.

Cost structure optimization

DSOs have gotten a negative reputation because of their seeming corporate interest. A DSO is a likely buyer when the seller is looking to stay on with the practice but wants to release managerial responsibilities, such as in a retirement situation or anyone who is looking to maintain a work-life balance. Selling to a DSO allows you to focus on the clinical side and patient care without contributing time and money associated with running a business.

Loan amount

Banks are typically not able to loan on larger practices that value somewhere around $2 million to single practitioners; however, DSOs can. Simply put, banks essentially have a set amount of how much they will loan a dental practice, while DSOs have the ability to compete in bidding wars without set limits.

What’s next?

Contact the experts at Professional Transition Strategies to see which transition option works best for you.

Why Are Fewer Dental Practices Selling to Individuals?

It’s no secret that fewer dental practices are selling to individuals than ever before. That’s not to discourage new or transitioning dentists but rather some encouragement to think outside the traditional transition box. Here’s what you need to know to get your dental practice transition on track.

Increased DSOs

With an increase in dental service organizations comes more options available to dentists looking to sell. More doctors today are affiliating with DSOs than ever before because of the variety available. Selling to a DSO makes sense when the seller is looking to stay on with the practice but wants to release managerial responsibilities, such as in a retirement situation or anyone who is looking to maintain a work-life balance.

DSO funding

Since DSOs typically do not have to rely on bank financing because they are funded by private equity groups, they can pay more for practices than the standard individual. What’s more, you’ll get a higher valuation because a DSO won’t take hard assets into account but rather will focus on collections and other finances. DSOs also have private equity money, which is favorable to a bank over an individual buyer when it comes to securing a loan.

Transition options

More practices are forming private groups and are more interested in associates than bringing on partners than ever before. Most dentists take on an associate in hopes of potentially selling the practice in the future, and because the average dental school loans are close to $300,000, dentists typically need to take on an associate for a few years prior to buying a practice.

Experience

Simply put, new dentists are less specialized than older dentists who are selling their practices. As is the case with a general dentist who has practiced for more than 30 years and has now decided to specialize in TMJ or implants, a new doctor hasn’t practiced long enough to specialize in these aspects of general dentistry.

What’s next?

Contact the experts at Professional Transition Strategies to figure out which selling option is right for you and your dental practice.

3 Reasons to Start Your Dental Practice Transition Early

Dental practice transitions don’t happen overnight. In fact, a well-laid plan can take as long as five years if done properly. Even if you aren’t ready to hang up the proverbial hat, it doesn’t hurt to take a few steps in the right direction. Here are some suggestions to make sure your dental practice lands in the right hands. 

More transition options

Once upon a time, the only options for transitioning out of a dental practice were to sell to another dentist or close its doors. But today, the options are seemingly endless. You can choose to sell your practice in whole or a portion to a partner for a longer-term transition plan, sell your practice but continue to work as an associate, merge with another successful dental practice, affiliate with a dental service organization, among others.

More offers

Your options aren’t limited to the type of transition but also the offers you receive. If you wait until the last minute to transition out of your practice, you may be stuck in a situation where you have to take the first offer you receive. By starting early, you can be more discerning on offers that come in and truly only move forward with the one with which you feel most comfortable.

Increase value

The necessary step of valuating your dental practice not only helps determine which type of transition would be best, but also tells you what upgrades need to be made before selling your business. If the value of your practice isn’t enough to clear your debts, you can decide if you need a few more years to build up the value of your practice before taking that next step.

What’s next?

Learn more about your transition options with the e-book “Strategies for Transition,” then contact the experts at Professional Transition Strategies to begin the process.

4 Reasons to Switch to a Cloud-Based Dental Practice Management Software

Simply put, cloud-based software runs on the internet rather than hosted locally on the computer in your dental practice office. In a digital era, it might be surprising to learn that cloud-based management software is not the norm—but it’s moving in that direction. Here are the top reasons to get ahead of the curve and switch your dental practice management software over to the cloud.

Backup capabilities

With cloud-based software, there’s no need to manually back up patient records since backups are performed automatically several times a day. In the event of a power outage or network crash, your records are still protected and easily accessible. What’s more, cloud-based software is written to be HIPAA compliant and safe from cyberattacks since the information is stored off-site.

Integration capabilities

Server-based software doesn’t have the capability to integrate with other programs like cloud-based software does. Think social media plug-ins, text messaging, email communication, appointment reminders, and online scheduling all to free up administrative needs. These services are typically lumped into a monthly rate rather than paying a third-party provider individually.

Virtual access

If your records are stored on the computer in your dental office, you can only ever access patient files and data at that particular workstation. But with a cloud-based platform, you can access records anywhere in the world where you have internet access. So, if you receive an emergency phone call over the weekend or while on vacation, you don’t need to physically be in the office to provide support. This also convenient with dental service organizations that have more than one location.

Physical space

Chances are, if you’re still operating on a server-based software, that server is typically physically located somewhere within your office, taking up precious space that could otherwise be used for dental equipment. Physical servers can also be difficult and expensive to maintain.

What’s next?

Contact the experts at Professional Transition Strategies to help ease the transition from server-based software over to the cloud in your dental practice.

What DSOs Look For When Purchasing Dental Practices

When it comes to selling your dental practice, don’t rule out the option to sell to a dental service organization. DSOs have gotten a negative reputation because of their seeming corporate interest, which is why it makes sense when the seller is looking to stay on with the practice but wants to release managerial responsibilities, such as in a retirement situation or anyone who is looking to maintain a work-life balance. Here’s how to make sure your practice checks all the DSO boxes.

What most DSOs do not look for:

  • A practice that has three or fewer operations.
  • A practice that collects less than $800k.
  • A practicing dentist who is looking to exit immediately.
  • Medicaid.
  • Inconvenient location.
  • If the doctor’s work is not repeatable or is hard to duplicate.

What most DSOs do look for:

  • A practice with at least four operations (though the more, the better).
  • A practice that collects a minimum of $850k, more than a million being ideal.
  • A practice that negotiates with PPOs.
  • A desirable location, mostly urban or suburban.
  • A practicing doctor who is looking to stay on for two or more years.
  • A practice with an intraoral scanner.
  • One dentist for every 1,800 patients.
  • General dentistry practices, although there are DSOs for specialty practices.

What a DSO provides assistance in:

  • Payroll.
  • Human resources.
  • Marketing and branding.
  • Practice support.
  • Accounting.
  • IT services.
  • Recruiting.
  • Capital and financing.
  • Tax services.
  • Risk management.
  • Ordering of supplies and equipment.
  • Negotiating lab costs.
  • Compliance.
  • Strategic thinking.
  • CE (depending on the size of the group).
  • Growth model (acquisition, etcetera).
  • Licensing.
  • Scheduling assistance.
  • All the mundane work a doctor typically doesn’t want to handle.

What’s next?

Unclear where you stand? Contact the experts at Professional Transition Strategies to see if selling to a DSO is the right move for your dental practice.

Webinar: “10 Ways to Prep Your Practice for Transition”

Every so often, Professional Transition Strategies hosts a webinar for sellers to learn more about the transition process. In April, a webinar geared toward sellers detailed the steps and options when considering buying a dental practice. Here are the key takeaways.

Think about your strategy

A seller should begin with the end in mind. Think about your long-term needs, how much time is needed to implement the plan, and what your ideal strategy looks like, including a buy-out, partnership, or associateship, as well as whether or not you would consider selling to a dental service organization, private equity for extensive growth, or merger with another local practice.

Start or keep growing your practice

The biggest failure of owners is letting the practice start to decline when thinking of selling. In turn, the value of the practice drops significantly and can cause a bank to decide not to finance the acquisition. What’s more, it lowers the total options that a broker can deploy. It is worthwhile to market your practice right up until the point of transition to ensure the value won’t decline over the course of time.

Focus on core details

Other than financials, it’s important to take a wholesale look at your practice to assess what has made your practice successful. Do you provide certain treatments that set you apart? What niches do you work in? Do you serve a cetain community very well? Are you engrained in the business sector? Is your management style unique in that it allows you to keep employees for a long time?

Run an equipment evaluation

Most practices are valued using a weighted system that takes into account how old the equipment is. If time allows, it may make sense to purchase upgraded equipment, use that equipment, depreciate it over five years, and achieve a much higher sales price, even though you won’t get a 100 percent return on your investment. Consider going digital if you haven’t already, then upgrade cone beam computed tomography, digital impressions, computer-aided design and manufacturing system, and new chairs and units.

Consider the real estate

If you don’t own the building, notify your landlord that a transition will happen. If possible, sign a new lease or an addendum that allows the lease to be assignable to a dentist who qualifies for bank financing. If you do own the building, which can be sold as an asset to help pay for retirement, start paying yourself market rent. Alternatively, consider relocating your practice to a more desirable location, which can raise your practice valuation by as much as 5 percent.

Clean up your books

In addition to charging yourself market rent if you own the building, if you employ your spouse, consider replacing him or her or at least start paying him or her what market value for the position would be. What’s more, don’t stop writing off items through your practice; keep track of personal travel, depreciation, etcetera.

Know your “why”

One of the biggest worries for a buyer is that they will have to compete with you over time so it’s important to be able to articulate a real and communicable reason to a buyer at least a broker so that they can tell the story for you.

Build an advisory team

Assembling a team of advisors to help guide you through every step of the process will ensure the success of your business is established from the beginning. As with any team, you’re only as strong as your weakest link, so it’s important to choose advisors who have experience in the dental industry, such as a consultant, technology advisor, real estate broker, equipment and supply representatives, CPA, and attorney.

Know your practice’s worth

Creating a practice prospectus that breaks down the profitability of the practice helps to understand the value of the practice and can help determine the best strategy to use, as well as give you a road map for what you need to do before the sale occurs, which could alter your expectations in terms of horizons. Factors such as revenue, net income, seller’s discretionary earnings, and value of assets will all be taken into consideration.

Execute strategy

After determining which strategy to implement and how long it will take to get there, you can start getting the work done that needs to happen before the transition takes place. Now is the time to start working with an advisor to take the next steps toward implementing your strategy over the set period of time.

What’s next?

Learn more about the dental transition process in an upcoming webinar, then contact the experts at Professional Transition Strategies to learn about the next steps.