July 10, 2024

More Reasons To Sell Your Dental Practice to a DSO

dentist working on a patient

Now more than ever, dental entrepreneurs are learning that dental service organizations (DSOs) have wrongfully received a bad reputation. Thanks to the industry-wide consolidation trend, the industry has gone from a buyer’s market to a seller’s market, further ensuring that DSOs are mutually beneficial for all parties. But in just five years, DSOs may no longer offer investment options like equity rolls and other lucrative opportunities currently available.

This shift underscores why dentists should seize the advantages of joining a DSO now. With over 375 DSOs to choose from, the time is ripe to explore the many benefits they offer. In this blog, we share even more reasons why selling your dental practice to a DSO is the best strategic move for your future.

Equity Arbitrage

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, dentists receive a much higher financial result compared to selling to a private party, 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 since they 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 that groups will consider offering.

The window for equity arbitrage is closing as the industry moves towards consolidation. Dentists, particularly younger entrepreneurs, are increasingly selling to DSOs to seize these opportunities before they diminish. Act now to avoid missing out on maximizing your practice’s value and potential recapitalization events in the next five years.

Higher Valuations

It’s no secret fewer dental practices are selling to individuals than ever before, and there’s good reason why. 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, and cost structure optimization.

In individual sales, banks often assess practice values based on collections and seller’s discretionary earnings (SDE), which can restrict the maximum price individual buyers are willing to pay. In contrast, DSOs base their valuations on EBITDA, which considers the practice’s profitability and growth potential. This approach aligns more closely with the long-term financial strategies of DSOs supported by private equity.

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.

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.

Flexible Options

Before deciding to partner with a DSO, it’s important to explore other options that exist beyond selling 100% of the practice to a traditional DSO:

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. Additionally, participating dentists typically have the opportunity to share in the practice’s profits, aligning their financial incentives with the success of the venture.
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 traditional equity roll, the practice owner will sell 100% of their practice. They will then transfer their equity into the DSO as a whole to continue growing their investment. However, there are additional options available that don’t require selling the entire practice. For instance, in a joint venture (JV) model with an equity roll, you can choose to roll a portion of your equity or investment into the DSO. This allows dentists to maintain partial ownership of their practice while benefiting from the resources and support of the DSO.
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.
With a 100% affiliation model, the practice owner sells their entire practice to a DSO, transferring full ownership and operational control to the DSO. This approach allows the dentist to exit completely from practice ownership after a transition period while benefiting from a lump-sum payment and, if preferred, maintaining involvement in patient care.
In a direct investment scenario, the investor (typically a private equity firm) purchases a stake in the dental practice, which means they become a shareholder or partner. This type of arrangement typically occurs with very large practices or groups of practices that already have robust infrastructure in place. 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. The dentist, as the owner of the dental practice or group, continues to manage the clinical and operational aspects of the practice. The investor provides financial resources and strategic support to enhance the practice’s growth and operational efficiency while respecting the dentist’s expertise and role as the primary clinician and business leader.

Defined Exit Strategy

For many dental practitioners, the thought of retiring or transitioning out of practice can bring a significant amount of anxiety. They have concerns about legacy and the future of their practice as they enter the final stages of their careers.

If your exit plan involves selling your practice to another practitioner and then gradually phasing out, it’s important to be aware of potential pitfalls. Once ownership is transferred, you may lose agency in decision-making, which could harm your practice’s reputation and legacy. We’ve seen cases where new owners make sweeping changes that alienate staff and undermine the reputation the previous doctor worked hard to build.

Alternatively, forming a deal with a DSO such as a joint venture can be more beneficial. In such arrangements, the outgoing doctor remains involved in key decisions, maintaining stability within the practice. This model ensures that the practice continues to reflect the standards and values established over many years.

By partnering with a DSO, instead of waiting until retirement is imminent, dentists can develop an exit strategy well in advance. This proactive approach ensures a smoother transition and helps mitigate potential transition issues.

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. The reality is that 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.

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, especially leading up to retirement and to 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 compared to their past reputation. With over 375 DSOs currently operating, sellers can find one that aligns with their clinical and cultural philosophies. This alignment ensures a smoother transition for both patients and staff, allowing dentists to maintain full clinical autonomy while benefiting from DSO support in operational and administrative areas.

Capitalize on the Consolidation Wave

The dental industry is currently halfway through its consolidation wave, only expected to continue for the next 5-7 years, driven by the significant advantages that DSOs offer both financially and operationally. This trend is transforming the landscape, making it an ideal time for dental practitioners to act now. By selling your practice to a DSO, you not only benefit from a higher valuation and reduced managerial responsibilities but also position your practice to thrive under a model that promotes better healthcare integration and operational efficiency.

As this wave continues, the competition among DSOs for quality practices will increase, but it won’t last forever. This means acting now can maximize your financial return and ensure a smooth transition for your practice. Embracing this trend can safeguard your legacy and provide a stable, profitable future for your practice.

Bottom Line

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 ensure your dental practice transition goes smoothly while preserving the legacy you’ve worked so hard to build.

June 18, 2024

Is Now the Time to Sell Your Dental Practice? Insights from Kim McCleskey on The DrBicuspid.com Podcast

Professional Transition Strategies Consultant Kim McCleskey recently joined The DrBicuspid.com Podcast to discuss the current economic climate and its implications for dentists interested in selling their practices now or in the future. With 30 years of experience in the industry, McCleskey provided valuable insights into the evolving landscape of dental practice ownership. Here’s a summary of the podcast conversation.

Understanding the Current Economic Climate

McCleskey highlighted the current state of the dental industry, noting that it is approximately 35% consolidated, which is about halfway through the consolidation wave taking place. Consolidation is projected to reach the full 60-70% within the next 5-7 years, signifying a paradigm shift in the industry’s investment dynamics. With a growing number of practices falling under private-equity backed DSOs, the influx of investor capital will eventually slow. McCleskey emphasized the significance of this shift, as it will fundamentally alter the ownership landscape of dental practices.

Urgency in Decision-Making

With the impending wave of dental consolidation, there is a sense of urgency for dentists to consider their options. McCleskey discussed the pressure on dentists to sell now versus potentially waiting. Your options in the next three to four years following the peak of consolidation are going to decrease and change, she noted. She also stressed the importance of dentists understanding their options and making informed decisions to navigate this evolving landscape effectively.

Treating Dental Practices as Businesses

McCleskey underscored the importance of treating dental practices as businesses and understanding their profitability and value. The first step down this path is to get dialed into conversations about profitability. Working with experts like PTS to create a prospectus can help you understand your business and options, whether you’re selling to an individual or a DSO. This business-oriented approach ensures dentists make informed decisions that enhance the financial health and marketability of their practice.

Preparing Your Practice for Sale

The dental industry consolidation wave is nearing its peak, with only one to two rounds of recapitalization events likely remaining. Translated for your practice: This is a limited-time opportunity to maximize your wealth through a sale. For instance, for a practice valued at $2 million with $500,000 EBITDA (earnings before interest, taxes, depreciation and amortization), it can be a difference between selling for $2.75 million vs. $3.25 million for the same deal with two recapitalization events. Don’t miss out on the chance to capitalize on a strong seller’s market.

In preparation to sell, it’s imperative to build the profitability of your practice and its infrastructure now. McClesky advises that if you want to use your practice as an investment vehicle, now is the time to make sure your practice has the kind of value that will help with your personal and professional goals. She advises that it’s never too early to have an understanding of where your business is and to have a valuation done to understand what you can do differently to move the needle in your favor for when it comes time to sell.

Exploring Alternative Options

Selling to a DSO is a great option for many dentists, especially for those with practices that aren’t currently profitable and are considering retirement. Instead of closing up shop and walking away with nothing, DSOs offer an alternative that can help improve profitability and secure a better outcome for your practice.

McCleskey emphasized the importance of understanding the range of deal options DSOs provide. DSOs provide various deal structures tailored to meet different needs and goals. These include outright sales, equity rollovers, joint ventures, 100% buyouts and hybrid options. Each type of deal offers unique benefits, such as maintaining some level of ownership, receiving ongoing income or benefiting from the DSO’s resources and support to enhance practice profitability.

DSOs can help transform an unprofitable practice into a more valuable asset, offering a practical and profitable exit strategy for dentists close or ready to retire. By leveraging these options, dentists can find a deal structure that aligns with their personal and professional objectives.

Exploring Alternative Options

What’s Next?

Listen to the recent episode of The DrBicuspid.com Podcast featuring McCleskey to gain insights on the pressing market dynamics and understand if now is the right time to consider selling.

Contact the experts at Professional Transition Strategies for guidance on practice valuations, profitability consulting, and exploring the best transition options for your unique goals.

February 28, 2023

What It’s Like to Work With a Dental Practice Broker

dentist working on a patient

Equity Arbitrage

Higher Valuations

Partnership Options

Flexible Options

Before deciding to partner with a DSO, it’s important to explore other options that exist beyond selling 100% of the practice to a traditional DSO:

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. Additionally, participating dentists typically have the opportunity to share in the practice’s profits, aligning their financial incentives with the success of the venture.
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 traditional equity roll, the practice owner will sell 100% of their practice. They will then transfer their equity into the DSO as a whole to continue growing their investment. However, there are additional options available that don’t require selling the entire practice. For instance, in a joint venture (JV) model with an equity roll, you can choose to roll a portion of your equity or investment into the DSO. This allows dentists to maintain partial ownership of their practice while benefiting from the resources and support of the DSO.
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.
With a 100% affiliation model, the practice owner sells their entire practice to a DSO, transferring full ownership and operational control to the DSO. This approach allows the dentist to exit completely from practice ownership after a transition period while benefiting from a lump-sum payment and, if preferred, maintaining involvement in patient care.
In a direct investment scenario, the investor (typically a private equity firm) purchases a stake in the dental practice, which means they become a shareholder or partner. This type of arrangement typically occurs with very large practices or groups of practices that already have robust infrastructure in place. 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. The dentist, as the owner of the dental practice or group, continues to manage the clinical and operational aspects of the practice. The investor provides financial resources and strategic support to enhance the practice’s growth and operational efficiency while respecting the dentist’s expertise and role as the primary clinician and business leader.

Defined Exit Strategy

Better Health Care

Release Managerial Responsibilities

Retain Clinical Autonomy

Capitalize on the Consolidation Wave

Bottom Line

December 14, 2022

Corporate Dentistry vs. Private Practice: What Are the Differences

laser dentistry

All dentists who own their practice will eventually reach a point when they’re ready to make a career transition. The circumstances vary by individual dentist. A dentist may decide to sell because they want to retire or move to a new career path altogether. A dentist may assume their only options are to take on an associate — often with an eye toward partnering and an eventual buy-out — or a straight buy-out of their practice. Little do they know, there are more options out there.

Selling a practice to a dental corporation is another option, but if you are a dentist who has thoughtfully built a practice over a number of years, creating a patient-centered business and cultivating a caring team, you might have misgivings about that idea. You may worry that a corporation won’t ensure patients are treated with the same level of care or your staff might be asked to cut corners and short-change patients in the name of profit.

It’s not an unreasonable concern. Committed, highly trained health care providers, like dentists, act in the best interests of their patients, and they don’t like the idea of a bean-counter who doesn’t have the appropriate clinical training weighing in on care plans. That said, it’s important to know there’s a wide range of operating models used by dental corporations. Dental service organizations (DSOs) are an increasingly popular choice for dentists.

DSOs aren’t a monolith — there are many types of DSO arrangements, as they can provide staff and patients with more opportunities while offering financial benefits for doctors. So, it pays to keep an open mind and not write DSOs off as “corporate dentistry.” It’s a good idea for dentists who are planning a career transition to get a better understanding of what DSOs are, why they are gaining marketplace traction, and the pros and cons of working with a DSO. Here’s a closer look at DSOs that can help you make a more informed decision about private practice versus corporate dentistry.

Why more dentists are choosing DSOs

The American Dental Association (ADA) defines a DSO as “entities that dental practice owners contract with to manage the administrative, marketing and/or business sides of that dental practice.” Put another way, they are organizations that handle the non-clinical aspects of a practice. For many dentists, the non-clinical portions of managing the practice are exactly the part they’d willingly hand off to someone else so that they can focus more of their attention on patient care.

DSOs come in all shapes and sizes, ranging from teams that manage a handful of practices to large DSOs that manage more than 1,600 offices. The fact is that fewer dental practices are selling to individuals now than ever before. One reason behind the shift is the high debt load new dentists carry: The average dental school graduate owes more than $290,000 in student loans today, so they are less likely to be in a position to buy a practice.

In addition to the debt load, dental practices have historically been undervalued by banks and an individual dentist is typically beholden to what a bank is willing to lend.

So, why the move toward DSOs? For one, there are simply more DSOs operating today than in the past and their more differentiated than ever, which makes it more likely that a dentist who wants to make a transition will choose a DSO. Also, because DSOs offer a variety of arrangements, dentists are more likely to find a DSO offering terms that help them meet their objectives, such as an arrangement where the dentist stays with the practice to provide patient care but relinquishes management responsibilities. That option could be a good fit for dentists in a variety of scenarios, including those who are planning for retirement in a few years and those who are seeking a better work-life balance.

Another factor that is contributing to the rise of DSOs is that they have a funding advantage. Individual buyers typically rely on bank financing, which can be hard to obtain for some would-be purchasers, particularly in an uncertain economy when banks are tightening standards. DSOs are usually funded by private equity groups, so they can pay more to purchase a practice.

Available DSOs models

Although some dentists may put DSOs under the “corporate dentistry” heading and conclude that selling to a DSO is tantamount to selling out to a corporation, the truth is there are many different types of DSOs. Here’s a brief look at DSO models and how they affect the dentists who sell their practices under each type of DSO investment arrangement.

Joint venture: In the joint venture model, the dentist who is selling and the DSO investor both contribute capital in the form of money, equipment and other types of assets into a joint venture, and they share in the growth of the practice proportionally, according to the terms of the joint venture agreement. In this arrangement, the dentist maintains day-to-day clinical control of the practice, and a doctor will often sell between 60% and 70% equity in their practice.

Equity roll: This type of arrangement is a group affiliation as opposed to a partnership with a group. In an equity roll, the practice owner sells 100% of the practice and then trades in a portion of their equity into the DSO as a whole.

Sub-DSO: In this type of practice transition, the dentist who owns the practice exits the transition debt-free with a substantial upfront payment and typically retains 40% ownership and profit shares in a holding space outside the DSO or practice level. Returns can be made on a variety of levels, including equity, profit sharing and exit after parent DSO recapitalization.

Direct investment with private equity: In this model, your practice may be large enough that you don’t need a DSO. You can circumvent the DSO and go directly to private equity. That way, you become a founding member of a DSO.

The key point to keep in mind is that DSOs are not one-size-fits-all. That’s why it’s important for any dentist who is considering a practice transition to be aware of their options, preferably by discussing them with an objective party, like a dental practice broker. It’s not a matter of “corporate dentistry versus private practice” — the terms of the arrangement and the value the selling dentist realizes are the most significant factors.

DSO pros and cons

Dentists who are planning a career transition should think outside the “corporate dentistry versus private practice” box, and it starts by better understanding what a DSO offers. In some situations, DSOs can offer the most value and still enable you to maintain high standards of patient care. But not all DSOs are alike, and neither are dental practice transitions, so it makes sense to review the pros and cons of selling to a DSO, as well as pros and cons of selling to an individual.

For a dentist who is not yet ready to retire but is nearing the end of their career and wants to offload some of the hassles associated with running a practice, a DSO can be a great option. The right DSO can make daily operations easier by handling the business side while the dentist manages clinical decisions. The DSO can handle collections, supplies, marketing and more, increasing profits without the dentist having to focus on business operations.

DSOs typically pay more than individual buyers for a practice because of private equity investment rather than having to use traditional bank financing and can offer other advantages to dentists who are nearing retirement age, including the ability to cash out with a higher valuation. In some scenarios, the dentist works the same or fewer hours after the sale. This approach can accelerate the transition timeline and reduce uncertainty in the retirement planning process.

DSOs can also be a great option for mid-career dentists. Not every dentist enjoys the business side of running a practice, so they may opt for a DSO arrangement to offload the aspects of the operation they don’t want to handle, like human resources and marketing, and focus on what they do best — patient care.

Younger doctors can oftentimes make out better when working with a DSO, especially with a joint venture deal structure. A DSO should help make the practice more profitable; therefore, when the doctor sells the rest of their equity, the value should have increased significantly over the years.

Working with a DSO can help dentists achieve a better balance in their lives, so it may be a good option for doctors who want to spend more time with their families and friends but aren’t yet ready to hang up their white coat just yet.

That said, not all DSOs are a fit for everyone. Like any other category of organization, some are run well, and some are managed poorly. In addition, poorly run DSOs will only focus on the bottom line and not on patient care. They can push unnecessary procedures to benefit their own interests. It’s a good idea to ask a DSO for references, i.e., the names and contact information for dentists who have recently transitioned their practice to the DSO, so you can get an insider’s view of what it’s like working with them.

Exploring options and taking the next step

DSOs aren’t the only practice transition option — fewer practice sales between individual dentists are happening now than in years past, but it’s still an effective and fulfilling route dentists who are planning a practice transition can pursue. Bringing in an associate is still an option, though it has about a 20% success rate. A dentist who is planning to retire can also choose to see fewer patients and eventually just close their doors. It’s important to note that transition plan leaves hundreds of thousands — if not millions — of dollars on the table.

It’s all about finding the right option for the doctor’s transition goals, whether it be selling to an individual or going the group route. Because finding the right option is important, it’s also imperative to know that the process takes time, and we recommend beginning the planning process up to five years in advance.

The corporate dentistry versus private practice conundrum can be complicated, so the best bet if you are thinking about a practice transition is to find a dental practice broker with the experience and expertise to help you explore the many options available to you. A dental practice broker like Professional Transition Services can help you achieve the best outcome, so don’t go it alone.

December 12, 2022

Why Most Dental Practice Associateships Fail

dentist working on a patient

Equity Arbitrage

Higher Valuations

Partnership Options

Flexible Options

Before deciding to partner with a DSO, it’s important to explore other options that exist beyond selling 100% of the practice to a traditional DSO:

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. Additionally, participating dentists typically have the opportunity to share in the practice’s profits, aligning their financial incentives with the success of the venture.
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 traditional equity roll, the practice owner will sell 100% of their practice. They will then transfer their equity into the DSO as a whole to continue growing their investment. However, there are additional options available that don’t require selling the entire practice. For instance, in a joint venture (JV) model with an equity roll, you can choose to roll a portion of your equity or investment into the DSO. This allows dentists to maintain partial ownership of their practice while benefiting from the resources and support of the DSO.
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.
With a 100% affiliation model, the practice owner sells their entire practice to a DSO, transferring full ownership and operational control to the DSO. This approach allows the dentist to exit completely from practice ownership after a transition period while benefiting from a lump-sum payment and, if preferred, maintaining involvement in patient care.
In a direct investment scenario, the investor (typically a private equity firm) purchases a stake in the dental practice, which means they become a shareholder or partner. This type of arrangement typically occurs with very large practices or groups of practices that already have robust infrastructure in place. 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. The dentist, as the owner of the dental practice or group, continues to manage the clinical and operational aspects of the practice. The investor provides financial resources and strategic support to enhance the practice’s growth and operational efficiency while respecting the dentist’s expertise and role as the primary clinician and business leader.