Direct Offers in Dental Practice Transitions: A Guide
If you’re running a profitable clinic, you may have received a direct offer from a DSO. With private equity-backed DSOs making record-high offers to hardworking, profitable practice owners like yourself, the
- Direct communication,
- Acknowledgement of your well-run practice, and
- Simplicity of the offer
may seem like the easy button.
And perhaps it is in your case.
But it’s not for everyone. Because some high-performing doctors aren’t interested in selling their practice to the first offer or even the second that comes in. Some practice owners want dental practice transitions that
- Take care of their staff and include terms to protect them
- Allows them to double their enterprise value in the next five to ten years
- Give them the freedom to leave the office on their own terms.
If you are ready to cash out regardless of how much money you will leave on the table, you should consider taking the offer.
If you consider yourself in the latter camp, keep reading.
In this article,
- Define the term “direct offer” along with a short list of other industry terms you can use to understand your direct offer
- Answer: Who makes direct offers?
- Understand the DSO industry
- Outline the pros and cons of saying yes to a direct offer
- Propose questions to a DSO before saying yes to the offer on the table
- Uncover a secret you may not know about referrals
With some industry background, a list of pros and cons, and a little intel on how referrals work, you can evaluate a direct offer, even if it’s your first one.
First, what is a direct offer in dental practice transitions?
A direct offer is a non-binding letter from a DSO that includes a price they are willing to pay for your practice. As private equity groups often fund DSOs with plenty of money to spend, the number will likely appear substantial. In addition, you may recall that doctors and dentists who retired just one generation ago did not have this opportunity.
Due to the high price tag and the history of dental practice transitions, you may feel stunned, full of gratitude, and depending on where you are in your practice ownership journey, ready to make a deal,
This letter can also be called an unsolicited offer or offer-in-hand, though the letter doesn’t include an actual offer. The group, of course, doesn’t know enough about your practice to make an offer; how could they? They don’t have payroll, revenue reports, or any other data to do so.
Finally, the letter presumes you are not already working with a broker or M&A Advisor, and the DSO will expect you to negotiate with them directly. They hope to introduce enough doubt about brokers to encourage you to move forward without representation. The choice is yours.
DSOs and “Doc-to-Doc” Dental Practice Transitions
Dental practice transitions is a term that used to refer to a dentist selling to another dentist. That transaction type defined the industry. But now what’s known as a “doc to doc” transition is now just one option practice owners have whether they’re thinking about less time in the clinic or simply retiring.
Dentists alone often do not qualify for the financing needed to purchase the most profitable practices, which is why DSOs have been able to make inroads in the industry. Most dentists must wait until a practice in their specialty and geography comes on the market in their price range. As such, top practices that are too small for a DSO and sell “doc to doc” are extremely competitive for the buyer.
DSOs, on the other hand, enjoy plenty of cash and the potential to make incredible returns for their investors. As such, they are making direct offers to dental practices and are not waiting to find doctors who are ready to retire. The dental industry has been consolidating for the last ten years. Although financial forecasting is never certain, we believe there is still a lot of runway left for these clinics to be acquired.
Saying yes to a direct offer – pros and cons
Saying yes to a direct offer has some perceived benefits.
- You don’t pay a broker. Some doctors are so opposed to paying a broker that they would rather say yes to a direct offer than maximize their sale price.
And we don’t blame them. We believe practice transitions brokers have a poor image as an industry because many do a poor job. They have a history of selling products and services to doctors instead of knowing what it takes to transact with a private equity-backed partner. Simply put, they have no idea what they’re doing.
- It’s incredibly flattering. You have likely never sold a practice or invested in a private equity fund. Saying yes to the experts who speak the terms fluently, use impressive vocabulary, and know how it’s done makes you feel like you’re at the table with the big players. And you are.
- The transaction is seamless. You will know what reports they need and when they need them because the buyer will be driving your deal. They will work on valuing your practice and pushing it through all of the legal milestones. No one on your side will suggest extra calls or slow down the process to ensure the buyer is the right partner. How could it get easier?
There are also some cons to consider.
Your incentives are not aligned with the buyer in a dental practice transition. The DSO pays significant figures to a business development person to get in front of you before you take your practice to market. They know that if they can get you to sign an exclusive without an advisor, they will
- Lose their leverage in the process,
- Go up against competition
- Lose the deal because there is a strong possibility you’ll get multiple offers.
In short, they’ll get the terms they want and will pay significantly less for your practice than if they were competing with other buyers.
Negotiation Dynamics
Corporate buyers are incentivized to get the best deal practices they buy. It’s unlikely that the offer you have in-hand is the best offer you could get or even the best you could get from that specific buyer. As such, letting them drive what could be the biggest financial decision of your lifetime would be a mistake.
- There’s no one on your side of the table. Related to incentives not being aligned, PE investors acquire practices for a living. They are elite negotiators (and compensated as such). You don’t close dental practice transitions for a living. It’s not a fair fight. Even if you believe that the offer in hand is from a buyer that you match.
- Non-monetary concessions. We call it Christmas party money, but non-monetary concessions refer to any terms that can be negotiated for your benefit. These include how long you stay on, what investment options you have access to, and of course, culture-building activities like quarterly bonuses and holiday dinners. An M&A advisor’s role is to work alongside you to clarify your vision post-sale so that your practice, staff, and career are all taken care of. Direct offers will not include these benefits that will protect and sustain your staff, your career, and your practice culture.
Worth Considering
If you’re a dentist or a doctor with an offer in hand, we believe asking yourself the following questions will help you better evaluate your direct “offer”:
- Is this a fair price? How do I know? (Note that high and fair are not always synonymous). A buyer’s primary concern is to buy your practice for a price that benefits them financially. However, the best deals are those where both parties benefit. This can be achieved when both sides are well-informed and agree to a fair price.
- What do I know about the market conditions for practices like mine?
- Do I care about selling for the highest price or am I okay with the first offer even if the buyer decreases it later? DSOs and MSOs can and do walk back offers during underwriting with unrepresented buyers.
- Do I know a broker who can get me an offer that covers at least their broker fee and more?
Answering these questions for yourself or with your partner and a trusted advisor will give you a framework for evaluating the offer.
Finally, a Trade Secret in Dental Practice Transitions –
Your friends get paid to refer you.
When a recent client found out the colleague who referred him to the DSO got paid more than $100,000, he decided to hire a broker. “There’s nothing wrong with that,” our client said. “But it made me wonder what the market might pay.”
As we mentioned before, DSOs pay their business development team and their doctor partners high referral fees. These fees often add up to as much as an advisor or more. Of course, the referring doctor isn’t helping gather electronic medical records, writing Letters of Intent (LOIs), or negotiating compensation for you post-close.
How are the DSOs paying for it? By paying you the lowest possible price off-market. By using your colleagues and friends from medical school to appeal to you, they hope to appear like a trusted, clear solution and efficient pathway to selling.
In Summary,
If you’re a profitable practice owner and have not already received a direct offer, it’s just a matter of time. As private equity groups evolve, they are making higher-than-ever “offers” to doctors for their practices. While this can seem easy and flattering, the offer is worth evaluating before you decide to walk through your dental practice transition unrepresented.
