May 16, 2023
More Reasons to Sell Your Dental Practice to a DSO
Now more than ever, dental entrepreneurs are learning that dental service organizations (DSOs) wrongfully got a bad reputation. But thanks to the industry-wide consolidation trend, working with a DSO can be mutually beneficial. Depending on your transition goals, now is a good time to join a DSO with more than 350 DSOs currently from which to choose. Here are even more reasons to sell your dental practice to a DSO.
Invest in equity arbitrage
Even if you’ve heard the term before, you may not know that equity arbitrage is a financial concept that was rarely utilized by dentists before private equity started investing in the space. In short, it all has to do with how valuable the equity is in your practice currently and how much your equity ends up being worth after the sale of your dental practice.
With DSOs, a much higher financial result is accomplished, and the dentist can be a beneficiary of that arbitrage with less risk to the provider. This happens because dental practices have a steady cash flow and returning clientele, making them appealing to private equity investors and can be very profitable. The best way to know the true value of your dental practice is to have it appraised to learn its enterprise value, which calculates earnings before interest, taxes, depreciation, and amortization (EBITDA), along with how many multiples of this value groups will consider offering.
Equity arbitrage is yet another reason to consider selling before you’re ready to retire, so you don’t leave money on the table with opportunities left for recapitalization events and ultimately why younger dental entrepreneurs are electing to sell to DSOs.
Understand your options
- 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, while 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 transfer their equity into the DSO as a whole.
- 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 buy-out with controlling interest transferring to the investor, or it can be a minority growth investment.
- In a roll-up, multiple dental practices are combined under one entity in a group to maximize the economies of scale. A well-laid roll-up plan will then receive a higher valuation when the practice is purchased. This is especially relevant with inflation top of mind.
Receive higher valuation
It’s no secret fewer dental practices are selling to individuals than ever before. With an increase in DSOs comes more competition available to dentists looking to sell. And 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 thanks to private equity money, economies of scale, cost structure optimization and the amount banks are willing to lend. In the end, not only will you receive a higher valuation for your dental practice, but you’ll also get a higher price point than if you were to sell to a single practitioner.
Promote better health care
It’s no secret the connection between oral health and overall health has become stronger over recent years. But the connection between DSOs and better medical and dental integration may not be as obvious. After all, DSOs are better equipped to handle “whole person” treatment and have the ability to partner with other medical professionals to play a part in treatment and prevention. These days, DSOs are leading the charge, which is why transitioning to one of the DSO models might be the right move for your dental practice.
Explore partnership options
When co-owners of a dental practice choose to part ways, there’s a lot that can be done ahead of time to make the transition easier for all those involved. This often happens when one dentist is looking to retire and the other wants to stay on to practice. Even in a partnership, everyone has different paths they want to explore, and joining a DSO helps to navigate the situation and ensure a smooth transition.
Release managerial responsibilities
DSOs fit the dentist who craves a work-life balance and don’t want the added stress of the managerial responsibilities that come along with owning a business. Working 32 clinical hours instead of six days a week with early mornings is appealing to both the younger and older generation, perhaps leading up to retirement, and avoid burnout. For those looking to ease into retirement, working for a DSO can offer an abbreviated schedule rather than the added stress of a transition to another dentist. What’s more, you have the chance to expand and move toward a one-stop-shop model, all while increasing the value of your dental practice.
Retain clinical autonomy
Gone are the days of having to hit quotas and report how many procedures have been performed. These days, dental entrepreneurs are looking for a true business partner rather than just someone to buy their practice. Modern DSOs are much more hands-off than they used to be, and with more than 375 DSOs in operation today, sellers are able to find one that is aligned with their clinical and cultural philosophies for a smoother transition for both patients and staff.
It’s easy to get wrapped up in the conundrum that still exists in the world of DSOs if you try to take the sale of your dental practice into your own hands. Contact the experts at Professional Transition Strategies to learn why not all DSOs are created equal.