A Guide for Dentists: How to Sell your Practice to a DSO

Throughout the United States Dental service organizations (DSOs) are working with licensed dentists to acquire existing dental practices at an accelerating pace. DSOs offer to bring economies of scale to existing dental practices to reduce overhead and fuel expansion. 

Our clients have opted to partner with DSOs for varying reasons. Some doctors are nearing retirement, while others want to offload management and administrative functions to a dedicated team. Some want to cash out. Regardless of your goals, it is important to understand the process.   

This article will provide an overview of the process to sell a practice to a DSO including the benefits, valuation, and key characteristics that DSOs look for in an acquisition target.  

Why Practitioners Sell to DSOs  

We find that our clients and other dentists sell to DSO for a few key reasons: 1) DSOs are paying “higher” prices for practices; 2) the Dentist is looking to slow down, retire or establish a succession plan; 3) the Dentist wants to focus on clinical care rather than management; or 4) the Dentist seeks to join a larger organization in hopes of reducing overhead and increasing efficiency.   

One of the most common reasons practitioners sell to DSOs is the sales price. DSOs typically buy practices for anywhere from 4 – 8 times EBITDA (earnings before interest, taxes, depreciation and amortization). Private sale prices can be substantially less than this sum, but are typically all cash deals while DSO transactions are typically a blend of cash, contingent compensation and equity. Understanding the difference between the stated purchase price and the expected purchase price is critical and should be evaluated with professional assistance.

Transition planning is another reason why our clients have elected to sell to a corporate partner. In certain circumstances, a corporate partner can facilitate the path to retirement by offloading management and administrative duties from a doctor seeking to slow down or focus on clinical care or helping the retiring doctor hire a replacement and establish a growth and succession plan. 

Similarly, for those interested in maximizing time focusing on clinical care and growing the practice, corporate partners can serve a key role. A fundamental component of a corporate dentistry partnership is that the DSO partner off-loads management and administrative tasks which permit the selling doctor to focus on clinical care or business development, or both. Additionally, the DSO seeks to reduce overhead and certain costs by leveraging its size in negotiations with suppliers and other vendors.  

In certain situations, there are no private buyers for dental practices. DSOs have effectively created a means by which a dentist can sell his or her share of a larger dental practice to a corporate buyer. When practices reach over $2,000,000 in collections, the marketplace for buyers is limited due to financial limitations. DSOs have stepped into this hole in the marketplace and have created an opportunity for the owners of these larger practices to sell. 

There are myriad other reasons individuals sell to DSOs, but these are some of the most common. Regardless of why you might consider looking for a DSO buyer, it’s important to find one who makes you feel comfortable about the future of the business you’ve worked so hard to build.

Attracting a DSO

Some dental practices need only a few minor tweaks in their operations to be an attractive option for a DSO. Others may need to make more substantive changes if they want to get multiple competitive offers or to maximize the value upon sale.

In either event, it’s important to start planning early. Even if you decide you don’t want to sell for a few more years, the steps you put into place now can make your business more valuable (and improve your cash flow in the meantime), no matter when you decide to sell. Here are a few things to consider as you plan for the sale:

  1. Revenues and Profitability 

Cash is king. Revenues, profitability and upside are fundamental factors DSO partners are looking for in acquisition targets. In general, most corporate buyers are only interested in practices that generate in excess of $1,000,000 in revenues and have significant upside potential, whether that be because of underutilized space at the practice, limited service offerings, or a schedule that can be maximized. 

To attract a corporate buyer, you should seek to increase revenues and profitability without damaging the long-term prospects of your business. For example, drastically cutting supplies or the costs of labs in the short term to boost profits will not likely work as a sophisticated corporate partner would identify this trick during diligence. Rather, seek to increase the patient base or hours of operation, add a part-time hygienist, dentist or specialist or streamline some processes to increase profitability – or all of the above.  

  1. Unique Characteristics 

Each corporate partner has a different business and investment philosophy. In addition to revenues, corporate partners typically seek to acquire a practice that (a) is within a bustling city or growing suburb, usually within a 50-mile radius; (b) have collections meeting or exceeding $1,000,000 – practices with higher revenues typically receive higher offers; (c) has more than 5 operatories or room to grow.  

  1. Updating Your Office 

A bit of polish never hurts. If your office has had the same décor for years, it’s probably time for an update. Worn carpets, chipped countertops, or dated magazines can make your business appear shabby and dated. Additionally, having an attractive space can help attract new patients and generate more interest in your practice. 

These improvements don’t need to involve an extensive renovation; something as simple as a few bright prints on the walls, a rug to cover problem areas on your carpet, or clean, sleek furniture can give your office a much more modern look. 

Upgrading your equipment and systems can also be helpful – regardless of whether you are looking to sell to a private dentist or corporate partner. Yet, take care in your approach to upgrading your dental equipment. It doesn’t always make sense to purchase expensive equipment you’ll only use for a few years before selling your practice; but to the extent this equipment can allow you to see more patients or perform more extensive procedures than before, it may be a good investment. Furthermore, investing in new systems might not be attractive to a DSO as they will implement their own systems after an acquisition. 

  1. Know Your Numbers 

We cannot overstate how important it is for our clients to be organized and well-versed in the financial details of their practices. We find that our most financially sound clients know their numbers, including EBITDA, overhead, rent, employee expense ratio to revenues, and their profit margins. While one can certainly sell their practice without being knowledgeable about the finances of his or her business, organization and tracking key performance metrics can have meaningful impacts on the bottom line. 

Due diligence during a transaction is always a rigorous process. But when transacting with sophisticated corporate partners, due diligence can be much more intense. This process can be simplified and made easier if an owner has full command over the financials of his or her practice and can increase the purchase price and likelihood that the transaction closes. If this feels overwhelming, do not fret, when working through a complicated transaction, the owner should have well-versed legal and financial advisors to provide support from the opening to the closing of the transaction. 

Statistics are also helpful. Knowing where the opportunities lie in your patient case acceptance rates, collection rates, and adding procedures can help during the sales process and boost the valuation of the practice. It can also help the owner direct the DSO and his team post-sale to further increase revenues and profitability of the practice without sacrificing clinical care.  

DSO transactions are incredibly complex and the counterparty is usually sophisticated. For this reason, it is important to have experienced professional support and be informed on the process, structure and pit-falls of these types of deals. Here’s a link to additional information on DSO transactions. Our firm regularly publishes general information to support our clients, so do not hesitate to check our site from time to time for new information. 

Practice Valuation

Do not attempt this on the back of a napkin. Practice valuation for offices exceeding $1,000,000 in revenues in the context of a DSO sale is not the same as the general rules of thumb applied in private transactions. DSO sale valuations are typically based on a multiple of EBITDA, and can exceed 8x EBITDA depending on the transaction. 

Work with professional support when determining your practice’s valuation. There are many dental valuation and appraisal groups in the marketplace. Some are better than others. If you’re a dentist considering putting your practice up for sale, it’s important to get the ball rolling well in advance. Going solo into this venture may not yield the most desirable outcome; however, teaming up with a DSO can offer plenty of benefits and make sure you land top dollar. Our firm is happy to work with our clients on the front end to assemble the team of professionals to help during these transactions and obtain the most favorable outcome. 

If you are interested in learning additional information, please contact us today for guidance at 800-499-1474. Wood and Morgan has represented over 8,000 dentists since 1980 and focuses its efforts on supporting the dental community with their business needs.