Why selling to a DSO is about more than dollars
Key Takeaways
- Transition planning starts with looking inward to determine what you truly want from the sale of your practice.
- Assessing a DSO’s patient care approach and ensuring their practice culture aligns with yours is essential.
- DSO deal structures are more complex than private market sales and need an experienced transition advisor.
Since 2018, Dental Service Organization (DSO) sales have continued to increase, with chatter extending well beyond the number of practices that actually sell. Today, while the pace of sales to DSOs has slowed, the numbers still remain higher than they were five years ago.
According to Christy Ratcliff, Partner at NDP and DSO transition firm 7 Pillars, roughly 20-25% of dental practices are consolidated into DSOs, and the trend is showing no signs of slowing down.
“As more practices sell to DSOs, more dentists are benefitting from watching these transitions play out among their colleagues,” says Christy. “So, there’s more familiarity with both the positives and negatives now than there was a few years ago when the historical DSO failures were all that anyone remembered.”
At the same time, many DSOs are trending toward operating more invisibly, keeping the unique ecosphere of a practice intact. This shift, Christy says, is making the prospect of selling to a DSO even more attractive.
“DSO groups have figured out that buying a practice, changing the name on the building, and making significant operational and cultural adjustments is bad for business.”
So, with the DSO market maturing, is selling to a DSO the right choice for your practice?
Christy says there are many factors to consider, and they are just as personal as they are financial.
Age and timeline
This is one of the biggest factors in determining whether a DSO is right for you. Is your target transition date in two, five, or 10 years? DSOs typically require a minimum of five years of work-back after the sale. For dentists looking to sell in the next year or two and walk away, selling to a DSO is likely not an option.
Personal and professional goals
Doctors often aren’t intentional enough about defining what they want from a personal, financial, and professional perspective. Transition planning starts with looking inward to determine what you truly want from the sale of your practice. Ask yourself: What are you trying to solve for? More work-life balance? A second career? A large nest egg? Peace of mind? There are no wrong answers here, but being honest with yourself, and then being clear with your CPA/financial team about your goals, is key to starting the process.
Clinical autonomy
How much control do you want to retain over clinical decision-making? While there are some DSOs who may alter decisions, many of the more established and smart DSOs offer clinical autonomy and leave the patient care to the doctor. Carefully evaluating a DSO’s approach to patient care and ensuring their practice culture aligns with yours is critical. The best case is that your patients don’t notice any difference post-close with a DSO.
Size and location
There’s not a one-size-fits-all rule here, but in general, DSOs prefer 5+ operatory practices with annual collections exceeding $1,000,000 or EBITDA greater than $500,000. Urban or suburban markets are generally preferred, but there are certainly DSOs with a strategy for rural locations. The key is maximizing your profitability, which leads to the next point.
Practice health
DSO buyers are sophisticated groups. They tend to be more impressed when they see a business that’s operating efficiently and an owner who knows every nuance of their practice. Paying attention to profitability, trimming expenses, increasing reimbursement rates, keeping technology current, being properly staffed, and fully utilizing each staff member are all checkboxes on a DSO buyer’s scorecard even if that means understanding where your weaknesses are.
Specialty
While general practitioners were the first to be targeted by DSOs, other specialties have cycled in popularity for the DSO marketplace: whether the pediatrics, orthodontics, and OMS trifecta or even surgery specialties, each group has their preference. DSOs that have traditionally targeted orthodontics are now also interested in pediatrics because pediatric practices own the patient journey. Pediatric groups are looking to expand into orthodontics. And all of them are looking to figure out how to bring oral surgery into the mix so they can all funnel into each other. Bottom line, there’s a DSO group for any specialty.
Practice trajectory
Practices in a growth curve should carefully consider the timing of a transition. It may be wise to let the practice catch up to the growth for a few years before initiating the sale. This allows collections to catch up with production, show more profitability and maximize value.
At the same time, a practice in growth mode is not always sustainable for one doctor to keep up that pace, so the decision to add an associate versus sell to a DSO really comes down to timing out where the practice is on the growth cycle. If you want to explore a DSO sale while you are in growth mode, paying attention to deal structure will be critical in capturing the full value of your growth.
Education is the key
If you think selling to a DSO is the right choice for you, being fully informed about the pros and cons is essential. DSO deal structures are much more complicated than selling to the private market and require a skilled transition advisor.
For more insight into DSO and private practice transitions, check out Christy’s Transition Talk podcast.
For advice on optimizing your practice in advance of a transition, or any other question about your business or personal wealth, the CWA team is always here to help. Set up your free consultation today.
