Sell to a DSO? What Dentists Need to Consider

The dental industry is rapidly evolving, with dental service organizations (DSOs) becoming an increasingly attractive option for dentists looking to sell their practices. While selling to a DSO can offer significant benefits, it’s essential to carefully weigh the pros and cons to make an informed decision. This guide provides an in-depth look at the factors dentists should consider when evaluating a DSO sale.

What Is a DSO?

A DSO is an entity that provides management and administrative support to dental practices. DSOs often handle non-clinical tasks such as billing, marketing, purchasing supplies and equipment, human resources and regulatory compliance, taking back-office burgers off dentists and allowing them to focus on patient care. In return, DSOs typically acquire partial or full ownership of the practice.

Why Sell to a DSO?

The decision to sell to a DSO can be driven by various factors, primarily including financial incentives, reduced administrative burdens, and access to professional support. Here are some key advantages:

  • Financial Benefits
    • Because many DSOs are private equity-backed, they offer competitive purchase prices and are willing to explore deal structures that can enable doctors to leverage their practice as an investment vehicle
    • Dentists may receive cash upfront and opportunities for long-term equity at the practice or DSO level
  • Reduced Administrative Work
    • By offloading non-clinical responsibilities, dentists can dedicate more time to patient care and regain a better work-life balance
  • Professional Support:
    • DSOs provide resources and expertise in areas like marketing, staffing and compliance, enhancing operational efficiency
    • DSOs also leverage economies of scale to negotiate better pricing for labs and supplies, helping make your practice more profitable

Potential Drawbacks of Selling to a DSO

We always recommend working with a seasoned dental practice broker who is well versed and experienced with DSOs because they are uniquely positioned to help doctors receive offers from qualified DSOs and help evaluate these buyers to find the one most aligned with the doctor-owner’s needs.

Without the help of an experienced broker, dental entrepreneurs might accidentally partner with a DSO that could impose any of the following drawbacks:

  • Loss of Autonomy: Dentists may lose control over decision-making, including clinical and operational aspects of the practice
  • Impact of Practice Identity: Joining the wrong DSO could alter the practice’s brand and reputation, potentially affecting patient trust and loyalty
  • Reduced Income: In rare cases, some dentists report lower compensation after transitioning with a DSO if performance metrics are not met; however, this is not a common occurrence
  • Uncertainty About the Future: DSOs may impose growth targets or operational changes that conflict with the dentist’s vision

Questions to Ask Before Selling to a DSO

To make the best decision, dentists should work with their broker and ask critical questions before committing to a DSO:

  • Expansion or additional servicesWhat are the terms of the purchase agreement, including upfront payments and earn-outs?
  • How will my role and responsibilities change post-sale?
  • What performance metrics will impact my compensation?
  • How does the DSO handle branding and patient relations?
  • Are there non-compete clauses or other restrictions?

Top Mistakes Dentists Make When Selling to a DSO

Avoid these common pitfalls:

  • Lack of Representation: Working without an experienced broker dentist might miss out on building a competitive environment around their practice to leverage up offers and even take an offer that doesn’t benefit them and only benefits the DSO
  • Choosing the Wrong DSO: Not all DSOs are created equal. That’s why it’s essential to put your practice in a competitive environment to find one that aligns with your goals and values
  • Neglecting Due Diligence: Failing to thoroughly review the DSO’s financial health and operational practices can result in future complications

Navigating the Sale Process

Selling to a DSO involves several steps:

  • ValuationDetermine the fair market value of your practice based on metrics including EBITDA – not SDE or a percentage of collections –, revenue, patient base, location, and other factors
  • Finding the Right DSO: Partner with a broker to identify DSOs that align with your practice’s goals and values
  • Negotiation: Work with legal and financial advisors to negotiate favorable terms, including compensation, equity options and post-sale roles
  • Transition Planning: Develop a plan for a seamless transition, addressing staff, patient communication and operational changes

Bottom Line

Selling to a DSO can be a transformative decision for your dental practice, offering financial rewards and operational support. However, it’s crucial to weigh the potential drawbacks, ask the right questions, and seek professional guidance to ensure a successful transition. For personalized advice on navigating the complexities of selling to a DSO, contact the experts at Professional Transition Strategies.

How to Find the Right Buyer for Your Dental Practice

Selling your dental practice is one of the most significant decisions you will make in your professional career. Finding the right buyer can ease this transition and ensure the legacy of your practice remains intact. Here’s a comprehensive guide to help you navigate this process and identify the best buyer for your dental practice.

 

Determine Your Goals for Selling

Before beginning the search for a buyer, define your goals. Ask yourself:

  • Are you looking for a quick sale, or are you willing to wait for the perfect match?
  • Do you want to stay involved in the practice for a transition period, or are you seeking a clean break?
  • Are you prioritizing financial value, cultural fit or a combination of both?

Clear goals will guide your decision-making process and help you communicate effectively with potential buyers.

Identify Potential Buyers

There are several types of buyers for dental practices, including:

  • Individual dentists: Often associates or local dentists are interested in purchasing a practice to establish or expand their own
  • Dental Support Organizations (DSOs): DSOs provide administrative support and resources while allowing dentists to focus on patient care. Selling to a DSO can offer financial stability and access to growth opportunities
  • Private equity groups: For larger practices with high revenue and a robust footprint, private equity groups may see your business as a strategic investment

Each type of buyer has unique motivations, and understanding these can help you tailor your approach.

Evaluate the Buyer’s Financial Stability

One of the key considerations when selling your dental practice is ensuring the buyer has the financial capacity to complete the purchase. Request detailed financial documentation, including:

  • Proof of funds or pre-approved financing
  • Credit history and debt-to-income ratios.
  • A business plan outlining their strategy post-acquisition

What’s more, you should understand where the buyer’s financing is coming from. For example, a significant number of individuals rely on bank financing, which is notorious for capping many of these loans and can result in borrowers being unable to make competitive offers on attractive practices. 

DSOs and PE groups are private equity-backed, meaning they have significantly more cash – which allows them to be much more competitive with their offers. DSOs and PE-back groups are also willing to explore deal structures outside of 100% sell that enable dental entrepreneurs to receive cash upfront and future equity.

Working with a professional broker can simplify this evaluation.

Assess Their Plans for Your Practice

A buyer’s vision for your practice is crucial. Discuss their plans for:

  • Retaining existing staff
  • Growth opportunities for existing staff
  • Maintaining the level of care your patients expect
  • Branding and marketing changes
  • Expansion or additional services

This alignment ensures your practice continues to thrive and that patients and employees experience a smooth transition.

Work With a Transition Expert

Partnering with a broker who understands the dental industry can make all the difference. Brokers can:

  • Market your practice effectively to a pool of qualified buyers to help level up your offers
  • Negotiate on your behalf to secure the best deal
  • Provide a realistic valuation of your practice
  • Knowledgeable about the different types of relevant, reputable and qualified buyers – ranging from individuals to DSOs and even private equity groups
  • Understand the doctor’s needs and goals for their transition to help guide them to the best possible outcome

Interview Potential Buyers

Meeting with potential buyers is your opportunity to evaluate their fit. Ask questions about:

  • Their experience in managing or owning dental practices
  • Their approach to patient care and staff management
  • Their timeline for the acquisition and transition
  • For DSOs, a list of previous dentists who have transacted with them that can be contacted to learn a doctor’s perspective of their management and leadership style

This step ensures you’re making an informed decision about the future of your practice.

Conclusion

Finding the right buyer for your dental practice requires careful planning, thorough research and a clear understanding of your goals. By following these steps, you can ensure a successful transition that benefits you, your staff and your patients.