Selling to a DSO or MSO: How to Determine Value, Equity, and Liquidity

Setting expectations for long-term and short-term gains when selling your practice.

At Practice Transitions Group, we work with top-tier doctors and dentists who have reached a level of success that merits a marketable practice. Our clients come to us with obvious talent and understanding of their expertise, but may not always be clear on the vocabulary, structuring options, and other nuances inherent to the practice selling process. We understand that behind the layers of questions, the question that impacts them most directly is, “How and when will I receive cash value from the sale of my practice?”

If you plan to sell to a DSO or to MSO, this article will answer questions surrounding how the industry determines your practice’s worth and the aspects of liquidity – in other words, how and when the cash from a sale will land in your account.

Basic terminology

To start, here are three answers to common questions about industry terminology:

Q: What is practice-level equity?

A: Practice-level equity is the value of shares you have in your practice.

Q: What is practice level equity vs DSO level equity?

A: Practice level equity is when you keep stock in your particular practice, while DSO or MSO level equity is when you diversify ownership across all practices that are part of the corporate company at large.

Q: What is cash?

A: Cash is the liquid asset that you are paid when the deal closes.

Determining valuation

Your practice will have a valuation that is typically a multiple of earnings. Nevertheless, this appraisal depends on several other variables, including

  • Location of the practice
  • The age of your practice
  • The practice’s website and google results
  • How transferable the practice seems
  • How much the buyer likes you 

Structuring your sale

The options for structuring the sale of your practice are not always in your control. Several variables rely on aspects of your business that you cannot change. At the same time, deciding where, and if, you keep equity in the practice or holding company can depend on how entrepreneurial you want to be beyond the deal closing. For instance, DSO-level equity is more protected as your investment is diversified across many practices. On the flip side, retaining practice-level equity might be the right equity structure for you if you believe in the future success of your specific practice and are perhaps staying on to work for the parent company.

Once your practice is evaluated, there are four ways that you can structure a deal if you sell to a DSO or MSO:

  1.  100% sale with holdback – traditional model of sale with 75% cash at close and a 25% earn-out, or a way to obtain additional compensation in the future if the business achieves certain financial goals
  2. Sale with DSO equity – 75-80% cash at close, with a 20-25% investment incentive kept in the parent company and an opportunity to sell in the future
  3. Joint venture model – 60-70% cash at close, and 30-40% retained practice level equity
  4. Hybrid model – 70% cash at close, 15% joint venture, and 15% DSO or MSO level equity

 Summary

As with most things, self-knowledge is a good place to start. Know your season of life, your personal financial goals, and have a clear understanding of the strengths and weaknesses in your practice. Taking stock in these reflection exercises will likely impact the course you end up pursuing with both your agent and buyer.

Morgan Burrell

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