A Dental Service Organization (DSO) is an independent business support center that partners with dental practices to provide critical business management and support to dental practices, including non-clinical operations. They are the fastest-growing segment of the dental market. 

Typically DSOs structure practice ownership via a doctor entity (owned solely by a dentist) which owns the patient records and another corporate entity (the DSO entity) which owns all of the tangible assets of the practice (like equipment, furnishings, marketing collateral, lease, etc.) and ultimately controls the net cash flow (EBITDA) of the practice. The exact structure and breakdown vary from group to group.

Sophisticated DSOs leverage their centralized infrastructure to support their partner offices from a business/administrative perspective while allowing the doctors to maintain their clinical autonomy.

Here are several reasons to sell to or partner with a DSO buyer:

• To receive a substantial premium on the practice purchase price compared to a private buyer.
• To unload some or all of the management burden, thereby having less stress and a better work/life balance.
• To take advantage of the economies of scale and support that a DSO can offer.
• To retire debt-free and accumulate substantial liquidity or retirement savings
• To fund future growth or expansion
• To diversify your wealth from your practice and protect against unknowns.

Regardless of the reason for entertaining offers from DSO buyers, you need to choose the right partner that will enable you to accomplish your goals.

While the appetite of DSO buyers varies, most DSOs are looking for practices with the following characteristics:

• Annual revenue of $1 million+
• Updated facility with 5+ operatories
• Located in an area within 60 miles of a major population center
• Easily accessible or high visibility location 
• Owner doctors (or associate doctors) who are committed to staying on for a minimum of 2-3 years following the sale

If your practice doesn’t tick all of these boxes it is still worth having a discussion. There are definitely groups who feel comfortable acquiring practices of all shapes and sizes as long as they have a track record of decent production.

Typically, DSOs determine the value of dental practices based upon a multiple of EBITDA, along with some consideration for the unique characteristics of the practice. Those may include location, quality and size of the facility, equipment/technology, patient mix, and upside potential, among other considerations. 

The substantial premiums that DSO buyers are paying for highly profitable practices are one of the most prominent factors influencing sellers to consider offers from DSO buyers in lieu of selling to a private buyer.

Not sure of the value of your dental practice? Use our Dental Practice Valuation Calculator to see where you stand.

The transition process in a DSO transaction is different from that of a private buyer transaction. In a DSO transaction, the due diligence process is much more extensive. The DSO buyer will expect open access to all of the seller’s practice information, including their practice financials, bank statements, fee schedules, practice management software, employee information, vendor contracts, etc. 

DSOs are typically required to have a certain level of consistency from transaction to transaction in regard to their deal structure and legal agreements. Therefore, DSO buyers typically require the parties to utilize the DSO’s legal agreements and will be less flexible in the negotiation of those contracts than private buyers. 

Given the complexity of DSO agreements, it’s imperative for sellers to work with an experienced dental practice broker and dental attorney to facilitate the negotiation of the deal points and the legal documents associated with the sale.

While you may be able to unlock a substantial amount of liquidity and freedom by selling to or partnering with a DSO, it is important to understand that you are exchanging autonomy and control and a portion of your personal income in return for those benefits. 

Some DSOs may take a “hands-off” approach and leave your practice’s culture, clinical philosophy, staff, etc. intact following closing. Yet, other DSOs may change your culture and systems immediately following closing or shortly thereafter. 

Consequently, it is important to do your due diligence on your potential DSO buyer/partner. Ask for references from several doctors who have sold or partnered with the DSO and ask those doctors how their experience has been following the sale.

If you are 5+ years from needing/wanting to retire fully and find a DSO partner who you feel aligned with the total value to you as a seller can definitely be higher by taking equity in the DSO as part of selling your practice. There are some important considerations on rolling equity in:

• How likely is the DSO to re-capitalize in the next several years?
• How do you feel about any performance hurdles for you built into the deal?
• Is this a DSO partner you feel provides a low-risk path to growth?

Because the risks of the practice faltering are higher with the complete departure of a primary producer/owner you just need to be prepared to give on the price you’re receiving for the practice.

In many transactions where you stay on for a few years, you will remain the figurehead of the practice and can, within reason, keep your current staff in place.

Our preferred fee structure is to only receive payment as a success fee when your transaction closes. A qualified advisor’s guidance typically more than pays for the fee.

We are open to upfront retainers in exchange for a lower success fee in certain circumstances. If your practice falls into the category of practices that are harder to market (lower production, very specialized services, death of the owner/primary producer) we can craft unique fee structures that are fair and work for all parties.