During my time working at a sell-side M&A firm, I came across many questions and concerns from dentists about the entire consolidation process. As this option continues to rapidly increase in the dental space, it’s critical for you to understand how it all works. Whether you are looking for an exit strategy or simply realizing this is where dentistry is going and you want to capitalize on its benefits, having as much information as possible is paramount in your decision making process of moving forward or staying put. I hope these FAQs will shed some light on this option and hopefully you can learn something new. If you have a question that I haven’t touched on below, I would be happy to answer that question for you.
What is the difference between a DSO and an IDSO?
-With a DSO transaction, you are essentially selling 100% of your business and you become an employee doctor. Since they own 100% of the practice, they will make 100% of the decisions related to your practice except on the clinical side. This is a recommended option for doctors looking to sell with a short horizon in continuing to practice.
-With an IDSO transaction, you are essentially selling anywhere from 51%-90% of your business. The remaining balance is either at the practice level, the Holding Company level, or a combination of both. IDSO’s are silent partners, so the doctor will continue to run the practice under their strategy, brand, and staff moving forward. Great for doctors looking to take some chips off the table and monetize a portion of the practice now with favorable tax rates (at the moment). Commitment is longer as doctors are required to stay on board between 3-5 years.
What do these companies actually do?
-They are management companies. They are all run in their own unique ways, but they will handle the majority of the administrative aspects of your business. DSO’s handle banking, accounting, payroll, benefits, taxes, legal, accounting, compliance, credentialing, payor/vendor negotiations, marketing, advertising, recruiting, and HR. By alleviating the admin side of your business, this will hopefully help with your work/life balance and allow you to focus just on the clinical side of the business..you know the whole reason why you became a dentist in the first place.
What will life look like moving forward?
-IDSO’s don’t make a lot of changes to the practice contrary to popular belief. All staff members stay on board and their duties and responsibilities don’t change. Compensation remains the same for administrative staff and associates, as well as better health benefits for all. Your schedule won’t change and you will run the business like you always have. You won’t be told who to hire or fire and your partner will help with recruitment. No one will know you have partnered with a group unless you tell them.
How is my practice valued?
-There are several factors that determine the Enterprise Value of your business. How profitable your business is (EBITDA) after expenses, age of doctor, location of practice, growth rate, and how long the doctor will stay on all play critical roles in the value. Most IDSO’s will typically look at practices doing $1.3M+ in collections to affiliate with. 100% buyout DSO’s will normally look at practices going $1M+. Dentists are currently seeing the highest values in the history of dentistry, but these types of offers won’t last forever.
I have heard horror stories about doctors consolidating with a DSO.
-I hate hearing this because there are also a lot of doctors out there who are thrilled with their decision. BUT, that doesn’t take away the fact some doctors are miserable in their new roles. A lot of doctors take unsolicited deals and sign with the first DSO they talk to. They are swayed by the fast talking sales guy/gal with promises that are never met and the supposed big multiple valuation. It is CRITICAL to speak with every DSO that has interest in you and “date” a bit. Although very important, money shouldn’t be everything in finding a partner. You have to find a partner that understands you, the history of your practice, and what you are ultimately looking to accomplish in a transaction like this. The flip side of that is YOU have to understand the DSOs history, their culture, their parent company (capital investors), and what they are trying to accomplish as well. There are over 300 of these groups throughout the country now..I would recommend maybe 100 of them. Those aren’t good odds. You have one shot at “selling” your practice. I am a big advocate of utilizing a REPUTABLE sell side M&A firm that can walk you through this process so you are making a well informed decision.
How are these deals structured?
-You will receive cash at closing, equity at holdco or practice level, and compensation for chairside collections. 80/20 (cash at closing/equity) is standard, but it ultimately depends on the IDSO, size of the deal, and what is negotiated. Depending on location of practice, most GP’s can expect 30% of collections as compensation. Surgical docs can expect 40% of collections, while Ortho’s will typically see a flat salary. Percentages are negotiable.
I’m looking to walk sooner rather than later but my partner is younger and wants to stay. How does this work?
-No worries here. You will probably be required to stick around for a year or two while an associate ramps up, but I have seen deals where the elder doctor walked away the day after closing. Everything in these deals are negotiable. You can allocate the cash and equity portion of the deal as well so you might want to take more of the cash at closing and your partner may want to take more of the equity portion of the deal. Your partner will help with the recruitment process of finding an associate to bring in and replace you. It always ends up being a win-win for both parties.
I’m worried my associate will walk away if I transition the practice.
-This is one of the biggest reasons why doctors don’t entertain this option. It’s very honorable for a doctor to leave potentially millions of dollars on the table because they have a handshake agreement with their associate to purchase the practice. But associateships fail more than they succeed. I have seen deals fall apart because of associates not wanting a deal to happen. What associates don’t realize is that the new partner involved will provide them with a path to ownership down the road when you retire. They also fail to realize that they will never have to learn the nuances of running a dental practice as the IDSO will run it for them! Makes you wonder what the associate would do if they were in your shoes at this very moment. I have seen deals where the associate received an up front bonus and equity to keep them happy. The IDSO will do everything that it can to make sure associates are happy as they don’t want to lose them. They can’t afford to in this day and age.
Multiple DSO’s are interested in partnering with me. Why should I use an advisor?
-You know teeth and advisors know deal making. This process is exhaustive and challenging and a competent firm brings A LOT of value to it. A reputable and respected advisory firm will provide deal values far greater than an offer you get on your own that will far outpace the commission they are owned. They handle the entire process for you. However, there are some bad apples in the bunch so tread lightly. There are a few golden rules that every firm should be following but unfortunately it’s not the case. It should be an honor for a firm to help you with the next chapter in your life’s work and not everyone is out to get you and take advantage of you, but it’s imperative you work with the right firm.
I don’t work for a DSO and I am not an advisor/broker nor am I ‘affiliated’ with anyone involved in this space. I’m an advocate for you and just want to help you make an informed decision when ‘entertaining’ the idea of consolidating your practice. Again, there is no cost for my services so please feel free to ask me any questions. It’s an honor to help.
