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Items to Consider When Entertaining a DSO Sale

by Wes Read, CPA, CFP® | September 13, 2023

Many dentists are receiving proposals from DSOs to purchase their practice. These proposals are more complicated than a traditional practice sale. On surface, they generally look very appealing. However, there are various factors to consider when determining if the proposal is, in reality, a good one (or not). These factors include:

  • How much of your future earnings are you exchanging for a payout today? We’ve often seen offers that appear strong. However, when you look at the lost earnings each year in the form of management fees, the offer price may lose its appeal.
  • How much of the sale price are you receiving now and how much is paid out based on future earnings? These “earn outs” should be realistic, and not require unreasonable growth to be achieved (which is often the case).
  • What will be your associate pay rate? Since most DSO sales require you to work back for a few years, you should negotiate a strong “associate pay” rate. Watch out for below-market rates. If your associate contract with the DSO lasts five years, and you’re paid 30% instead of a market rate of 35%, the 5% difference can be a significant offset to the higher offer price.
  • How much of the offer price is being received as equity in the DSO (“equity swap”)? This is important because there’s a significant risk around this portion of the sale price. On the one hand, if the DSO fails, you’ll likely never see that money. On the other hand, if the DSO is successful, you may see 2-4 times return in the first 4-6 years after sale on that portion of the sale. Also, if the DSO is large already, your upside is limited. However, if the DSO is new (i.e., less than 20 offices) the upside can be significant.
  • How much operational support will you receive? DSO's are “management companies” which means in theory, they exist to take over a lot of the administration of the practice (HR, billing, supply ordering, accounting, payroll, marketing, etc.).  In reality, DSOs are all over the place when it comes to administration. Some DSOs are hands off. Others require full adoption into their systems, which may include switching your practice management software. Generally, the DSOs that don’t centralize operations are looking for a quick sale to a “bigger fish” to cash out.  On the other hand, DSOs that focus on the hard work of centralizing operations have a long-term focus of sustainability and a stronger business model.

At this year's annual Dykema Conference, DSO executives repeatedly stated that they weren't interested in doctors that want to sell and walk away, or work less vigorously.

Rather, they want “partner” doctors; i.e. doctors that will turn up their energy and production levels after the sale. With that said, don’t be fooled. DSOs are well aware of their costs and risks. And they protect against them. Be prepared to work harder AFTER you sell to a DSO than before. That’s the only way you’ll receive a stronger economic benefit than not selling at all, or selling to a private buyer.

As the age old saying goes, you can’t have your cake and eat it too.

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