What is the service organization really paying you for the acquisition of your dental practice?
By Bruce Bryen, CPA, CVA
The sale of a dental practice with the traditional structure still occurs today, but the hot item in the dental practice world these days is the sale of a practice to a dental service organization (DSO) or an orthodontic service organization (OSO).
There is a tremendous difference between the 2 approaches to each transaction. Analyzing each is quick even though the result of each transaction is incredibly different. Looking at the old traditional sales method, the summary of the transaction is that the buyer and seller agree on a price and the settlement of the transition occurs. The agreed price is paid at the closing of the sale. The buyer typically requests a loan from the bank and pays the seller that amount. Unless there are extenuating circumstances such as an earn out, where there is a possibility for more money later, the closing date for the transaction ends the relationship between the buyer and the seller.
This explanation is a quick summary of the transaction. Of course there are attorneys, accountants, and financial advisors involved so that the transaction going to closing typically takes a few months. That is if everything goes well. The following paragraph describes a summary of why a dentist may forgo the traditional sale and look to a transition with a DSO (or OSO).
What does the DSO offer and why may a dentist be interested in selling to it, rather than being involved in a traditional transaction?
There are several reasons why a dentist may opt to sell to a DSO. One of the first, which is a non-monetary decision, is that the DSO has a management division that is responsible for the financial responsibility of the dental practices that are under the umbrella of the DSO. One of the biggest headaches for dentists is management of the money coming into the dental practice as well as the funds being disbursed from the practice. The main reason for the DSO’s attractiveness to the dentist who may be interested in selling his or her practice, is the financial incentives that are included in the DSO’s offer. Besides a reasonable amount of money paid at the settlement table to the selling dentist, a typical DSO offer to purchase will probably include cash payment incentives upon attaining certain goals for the practice.
Related Reading: Who Should Sell to a DSO and Why?
Additionally, the sale of the DSO to a hedge fund or to a larger DSO will afford the dentist the right to additional money or an investment in the new acquiring company. The question for the selling dentist who sold to the first DSO is whether these incentives can be met. The marketing by the DSO is normally very upscale with all kinds of promises for plenty of money and a much easier life. Many DSOs have done extremely well and the dentists who have sold to them are very happy. Unfortunately, there are also many DSOs who have seen the incentives and bonuses promised to the dentists not been attainable with the selling dentists extremely unhappy. Lawsuits occur and the dentists who have sold to the DSO may begin questioning why they did so.
Which transition is better for the selling dentist, a traditional sale or a sale to a service organization?
The answer to the above question is that it depends on the circumstances of the selling dentist and how long he or she wants to wait for the transition to occur and to receive payment for the transition. Also, a question may occur as to what additional services are required of the selling dentist once the transaction occurs?
Let’s start with a traditional sale whereby there is a selling dentist and a buying dentist. Almost always the buyer will ask the seller for cooperation in handling the patients, their requests and any additional services that need to be performed for them. The seller will almost always work with the buyer since the time frame for the conclusion of the traditional sale is typically short. Sometimes the seller is asked to remain at the practice for a short time after the sale to assist the buyer with routine work and introductions to the patients. The seller will almost always be paid for his or her time at the practice after the sale. The description of the transition to the DSO and its requirements for the selling dentist takes place in the following paragraph.
What happens to the selling dentist upon the sale?
In the typical sale to the DSO, the seller has many responsibilities and an expected long term of working with the DSO. Most DSOs want their acquired dental practice to have the owner of that practice continue working for the DSO once the transaction of sale takes place. They want the seller to continue to run the practice and oversee all the clinical decisions about the dental practice. The relief for the dentist is that the DSO will now be responsible for all the administrative matters such as hiring and firing, setting wages, insurance matters and accounting, among other items. Because of the incentives that were part of the transition included in the DSO contract, the seller may want to continue working with the DSO to be able to see what is happening for himself or herself and not merely wait for a written report about the status of the practice. This may take years for the contract to be completed. In the final analysis, the quick summary of each transition is that once the traditional sale takes place, the buyer and seller usually part ways. The buyer receives his or her money and may remain at the practice for a short term. With the sale to the DSO, the seller remains at the practice after the transition for a much longer term. He or she receives some money with almost of it being received if the goals in the contract are reached. With a lot of assistance for his or her advisors, an educated decision is reached.
Editor’s Note: Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He is a regular contributor to Dentistry Today and more articles on finance and practice acquisitions can be found at dentistrytoday.com. Bryen specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. You may contact him at [email protected].
