There are several reasons why doctors decide to consolidate a portion of their practice and join a large group. Liquidity at low tax rates, higher reimbursement rates, reduction in the administrative burdens and headaches, lower costs, and the ability to continue to practice under your brand, your team, and your strategy plus having the potential upside of equity are all factors driving the consolidation boom. Did you know that 80% of MD’s are affiliated with a hospital or university system? Is that where the dental space is headed?
But many doctors are still very hesitant to enter a partnership. I will state some of the reasons below. These are very legitimate concerns and it’s important to bring them up. I know how important a decision like this is, and it’s always been my goal to provide you with as much information as possible so you can make an informed decision that is beneficial for YOU. This isn’t about the doctor down the street that already made their decision, this is about your decision and your choice. Let’s dive into it:
I am going to lose the decision making and control of my practice.
If you brought up this concern about 15 years ago, I would have agreed with you. DSO “1.0” was the doc-in-a-box approach where the term “corporate dentistry” originated. It’s an old school, outdated approach that failed miserably. Successful, investor backed groups do not get involved in the clinical side of the business…you are the pro, and they leave that up to you. Yes, they will be involved in the operational side of the business, but isn’t that the reason why you are joining forces with them in the first place? Let them handle all the headaches. A silent partner is not going to micromanage you…just keep doing what you have always done, and you will be fine.
I made a pact with my associate, and I don’t want to break our agreement.
I wonder how your associate would be handling this decision if they were in your shoes. Would they be so loyal to their associates? I hope so. Imagine this world: Being 5 years into your dental career and your offered ownership in the practice WITHOUT having to buy in and WITHOUT having to learn the business side of dentistry. Associates seem to overlook (or probably just don’t have a clue) how difficult it is and how much learning and time is involved in running a business. Associates have it MADE in the world of consolidation. Most (if not all) PE backed groups will provide a path to ownership for your associate by offering equity and their compensation will either remain the same or improve. Honestly, the issue of your associate should be the least of your concerns. Their life will be better if you were to join a DSO. Oh, by the way, studies have shown that 85% of associateships fail. Wonder why? My first guess would be something to do with loyalty, but that’s just my opinion.
My staff is family to me. I can’t do something like this because I don’t want them to lose their job or be unhappy.
Who remembers the Great Resignation? Many are still feeling the ripple effects as staffing is the biggest issue in dentistry. Smart DSOs understand how important your staff is to their newly acquired business. They aren’t firing anyone (in fact, you will still oversee firing and hiring) and they want your staff to be happy. Their duties and responsibilities won’t really change. They will more than likely have to become familiar with new practice software as everything is centralized so be wary of that. 401K’s are transferred over to a new entity and the administrative benefits will be better or equal to what they are currently being offered.
I don’t want the pressure of having to meet quotas/expectations and worrying about clawbacks. That’s not what dentistry is about.
There are some traditional DSOs that bake these absurd ideas into their contract. You staying on board as an owner/operator for years should be enough incentive. But most reputable Groups with a strong pedigree will never implement these into your contract (bonus plans or earn-outs will be carved out to give you some incentive to continue to run and grow the business). But honestly not something to worry about, just be aware that they do exist and look out for them if you go about this process on your own. If you run into a contract that has a claw back, you are speaking with the wrong group.
But I will lose a chunk of my ordinary income if I transition.
Yes, this is true. But you will also receive a very large chunk of cash up front that has very favorable tax rates (LT Capital Gains at 20% NOT including state level) compared to your ordinary income that is taxed at about 37%. So essentially you are exchanging future practice distributions (with a high tax attached) for cash now (with a low tax attached). Cash is king and being liquid will allow you to diversify your investment portfolio and eliminate the debt you have on the practice. You will be paid a negotiated rate for your behind the chair collections moving forward as well. Just let me know if you would like a side-by-side comparison of staying status quo vs consolidating. Happy to help with that.
My practice revenues are still growing so it doesn’t make any sense to do something like this now.
If you have a savvy advisor helping you in the process (which I strongly recommend), they will make sure to implement an earn-out for you so you can capture that growth for two years post close. With valuations being so high currently, it would only make sense to take advantage of the higher offers now while also having the ability to make money off your future earnings. Hello! Or you could wait 3 years when the market has dipped significantly. If you feel confident that you will consolidate the practice over the next few years, you should really start to look at this option now. It’s all about maximizing the cash/value you will receive for your business. Remember, you will be required to continue to run your business for the next 4-5 years anyways so might as well cash in now.
The equity I receive is not guaranteed and I’m not willing to take the risk.
Preach. I would have concerns about it too. But every investment has some sort of risk to it, right? There is never a guarantee for a return no matter what type of investment it is. The same goes for when you are investing in a Private Equity backed DSO/silent partner. But some could argue that the risk of investing in a DSO is far less than some of the investments you are currently making! You will typically receive around 30% of the overall value of your business in rollover equity, either at the Holding Company level or at the practice level, so you must educate yourself on it and understand it. You can’t predict the future, but what you can do is understand the goals of the organization, their leadership, their pedigree and past performance of the stock, and the financial profile of the private equity firm backing everything. There are many doctors out there who have seen significant returns on their investments and some who have not. Did the ones who didn’t get a return do their due diligence while choosing their partner?
Thank you once again for reading. If you have any questions or concerns that I have not addressed, please let me know. Also, if you would like to get a better idea of what your practice would be valued on the market, I am happy to provide a ballpark valuation for you. Very quick and easy. I am always available to discuss the world of DSOs and the pros and cons with you at no charge. I’m here to help.
