There are many things to consider when thinking about selling your dental practice to a DSO or an Orthodontic Service Organization.
By Bruce Bryen, CPA, CVA
As an owner of a dental practice becomes more impatient with his or her administrative duties, the thought about selling the practice may become clear and attractive as an idea. The continuing thought of the hiring and firing process is an annoying and worrisome task. If it is a mistake that occurs with the hired employee, the process begins all over again when the unpleasant task of firing that employee takes place and then the hiring process begins again.
Dealing with insurance brokers, health care providers, accountants and attorneys also can be nerve wracking for the dentist. Even if an office manager is hired to take charge of many of the administrative chores, the owner will still be spending time and may have frustration checking on the office manager’s work. Selling to an individual dentist or a small partnership group will typically allow a payment for value of the dentist’s practice. In the event there is an earn out involved, there may be a little more money later. The alternative is a dental service organization (DSO) for the general dentist or an orthodontic service organization (OSO) if the seller is an orthodontic practice.
What are some of the reasons that a dentist would sell to the DSO or OSO?
Unlike the sale of a practice to an individual or a small partnership group where there is usually a one-time payment for the assets of the practice, the DSO or OSO offers a big kicker to entice the sale to occur. During the negotiations between the practice and the service organization, almost everything is available to discuss.
The service organization will explain to the practice owner that the service organization wants to acquire many practices, and they also want to report a lot of income. As more income is reported, the enticement of other practices to follow and join the service organization will increase. The service organization will eventually discuss its goal, which is almost always the sale of itself with the many dental practices that have joined it, to a much larger dental or orthodontic service organization. Its goal may also be the sale to a venture capital firm or a hedge fund but definitely to a business larger and stronger financially than they are. When that occurs, it will afford the dental or orthodontic practices that have joined it to cash out and to collect the financial upside that they can get with the service organization that they could not obtain with the sale to the individual practitioner or small partnership group. What the dentist receives when the next level of ownership takes place, depends on the investment made by the dentist compared to the other dental practices that have previously joined the service organization and what the percentage of ownership is when the larger organization takes over. This is what the sellers of their practices wanted when comparing their service company acquisition of their practice and its upside to the probable one-time payment from the individual or small partnership group.
How do the sellers of their practices and the service organization work with each other? What are the current benefits to each?
Getting along while whatever period of time is needed for the service organization to reach its goal and get to the point where the larger business owner takes control of the organization will take time. It may take a few years or a lot of years. While the time is passing, one of the biggest headaches for the dentist who sold to the service group should be resolved. The individual dentist practice owner’s process of hiring and firing, raises and benefits, promotions and demotions will no longer be the responsibility of the him or her. The service group will now oversee staffing and benefits.
The meetings with the accountants and attorneys will be undertaken by the service group. The responsibility for the dentist is to work on the clinical side treating patients and then leaving for home with some minor discussion about how the day proceeded. Going to seminars for improvement with education will continue as will marketing the practice. Advertising and marketing would be a good thing for the dentist as his or her compensation package will probably depend on the net income to the profit center that has been established with the dentist’s practice.
The purchasing power of the service group with its many members allows it to acquire dental supplies and equipment at great savings and with lenient financing terms. This is in comparison to regular dental customers who purchase dental supplies and equipment and who pay more of a retail price rather than a wholesale price that has been discounted. This is mainly because of the quantity purchased by the service group compared to the much smaller purchase amount needed by the solo or small group practitioners.
What is the downside to the solo or small partnership who has sold to the service organization?
One of the things that bothers the seller to the service group is the wait for the big reward that was promised. It is typically not written in the agreement that the takeover of the control of the service group will be as of a certain date. There are so many factors that enter when this will occur or even if it will occur. The explanation of the income that must be reported will be addressed in detail by the service group’s representative to the selling dentist. If the income levels are not met, that will be a setback to the service group and the dentists who have sold to it. That means that the dentist has given up control and is hoping for everything to fall into place so his or her pot of gold will arrive sooner rather than later. The service group wants the next bigger business to come along so it can cash out as well. This means that each group has the same goals as far as getting the big killing as soon as they can.
For more articles on similar topics from this author, visit dentistrytoday.com.
About the Author
Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He 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 Bryenb@baratzcpa.com.
