DSOs are a hot topic in the dental marketplace. These companies are rapidly growing in many ways and forms. The structure of these companies varies widely with some companies electing to acquire practices and others to partner with them. In short, these companies help off-load the non-clinical aspects of a dental practice to allow the practitioners to focus on clinical care.
Most of these organizations are highly sophisticated and it is critical that dentists are well-represented by a professional team that can go toe-to-toe with the DSOs. Wood and Morgan is one of the leading law firms in the nation that assists dentists in their negotiations with DSOs and private equity groups. The firm helps its clients with sales, acquisitions, partnerships, investments and associate agreements. We further consult with groups and dentists throughout the country regarding the formation and organization of DSOs and ensure that clients are well-advised regarding applicable state and federal laws, rules and regulations.
What is a DSO?
Dental service organizations (or dental support organizations) are companies that were formed to provide business support services to dental practices. The services offered through these companies can vary widely, but generally include staffing, advertising, management and revenue cycle management. Additionally, once a DSO gets to a particular size, it can centralize operations and leverage its negotiating power to reduce a practitioner’s costs for labs, supplies and equipment.
DSOs are typically structured to avoid violating state laws against the corporate practice of medicine. The DSO will acquire the non-clinical assets of the practice and enter into several agreements with a licensed dentist who retains the clinical assets, ownership of the patient records and remains responsible for clinical care. This structure follows because most states bar non-dentists from owning a dental practice, excepting jurisdictions like New Mexico and Arizona. Most DSOs support dentists from a business/administrative perspective while allowing the doctors to maintain their clinical autonomy.
Although DSO structures vary, there are two primary types:
Dentist Owned and Operated (DOO) - Centralized Management
In the DOO model, licensed clinicians are the sole shareholders of an umbrella corporation that manages multiple practices and can function like a professional association. In a DOO, the dentist owners may:
- Elect a board of directors to help run the organization;
- Hire independent consultants to recommend internal management policies and procedures;
- Control various business decisions, including vendor selection and negotiation, labor and employment decisions and policies, marketing strategies, equipment and supplies purchases and corporate development strategies;
- Create strategies to maximize profitability including setting revenue targets and production goals and outlining clinical care guidelines and standards along with case presentation methods.
Dental Management Services Model (DMSO) - Decentralized Management
In the DMSO model, practice management is not centralized, but is outsourced to another company. Here, the dentists enter into a business services agreement with a third-party management service organization (MSO), which effectively will manage the company and is tasked with increasing the profitability of the practice or freeing up the practitioner, or both. Effective DMSOs will preserve a high level of clinical care while increasing productivity, profitability and patient satisfaction.
The fundamental difference between these two models is whether the company manages the business side of ownership internally (DSO with internal management) or outsources it to another company (DMSO).
Private Equity-Backed DSOs
In the last few decades, the dental industry has attracted the attention of well-funded private equity groups interested in making steady returns on their investments. As a result, they have financed DSOs that have rapidly expanded into the marketplace by acquiring dental practices throughout the country by using various acquisition strategies and management models. Some of these groups are profit-driven while others are focused on supporting clinicians; regardless, it is critically important that practitioners retain a solid team of advisors before engaging with well-funded, sophisticated counter-parties.
DSO Acquisition Targets
DSOs actively seeking to expand by acquiring dental practices are incredibly sophisticated in their preferences and employ business and corporate development professionals to execute their strategy. These organizations are often focused on profitability and return on their investment. Profit and profitability are some of the most important factors influencing a DSOs decision to buy a practice. Profit refers to the amount of money the DSO will earn after paying for all business expenses, including clinician compensation. Profitability refers to the amount of profit per dollar of revenue. Other critical characteristics include:
- Location: Easily accessible with high-visibility and within 60 miles of a large population center
- Revenues: Over $1 million yearly
- Factility: Good operating condition with five or more operatories
- Clinicians: Owner doctor or associate doctors, or both, who intend to stay involved for at least 2-3 years following the sale
Why Sell to or Partner with a DSO
Depending on the circumstances, there can be compelling reasons to sell to or partner with a DSO rather than holding on to a practice or selling to a private buyer. Before making this decision, one should absolutely consult with sophisticated professionals to ensure that the decision and subsequent sale or partnership is in that person’s best interests. Here are a few reasons why our clients choose to sell to or partner with a DSO.
1. Administrative Support
Managing dental practices involves a large number of administrative duties that can interfere with the actual practice of dentistry. Every line item on a profit and loss statement can take up enormous amounts of time. These items include employees, advertising, accounting, bookkeeping, insurance compliance, insurance billing, tax management, labor and employment issues and Accounting, tax management, insurance compliance, labor and employment issues, marketing and ordering supplies. DSOs handle many of these tasks using their expertise in finance, human resources, supply chain management, and other areas. Outsourcing this work lets dentists focus on clinical work and patient care and leave the rest to the DSO.
2. Talent Recruiting, Training and Management
Dental hygienists and office staff often spend more time with patients than doctors do. In order to build a successful business, it’s important to find the right team for the dental practice. DSOs often handle human resources, which includes finding and training the best talent and ensuring employees receive the benefits they deserve.
3. Legal Compliance
Dental practices must comply with state and federal laws regarding patient care and recordkeeping. DSOs assume responsibility for ensuring practices are compliant with applicable laws and implementing best practices to keep clinicians out of trouble with their patients, employees and the government.
4. Modern Equipment & Negotiating Leverage
State-of-the-art labs, software, supplies and equipment can be incredibly costly for practice owners. DSOs often have access to vendors that allow them to secure deals on these items at less expensive prices, allowing practices to obtain the latest technology needed to run the business and care for patients.
All DSOs are not alike. Although selling to or partnering with a DSO can cause a liquidity event for a doctor, it is of paramount importance that the selling doctor fully understands who he or she is dealing with. Some organizations are intimately involved in the management of the practice, others adopt a hands-off approach and yet others might fire the staff overnight to reduce overhead and outsource job functions deemed non-critical. Given the firm’s unique position in the marketplace, the firm has a deep knowledge and understanding of most of the potential partners in this space and is a member of the Association of Dental Support Organizations. With this knowledge, the firm is well-positioned to advise clients on DSO transactions and partnerships based on the organization’s culture and business practices.
Due Diligence Before a DSO Transaction
A DSO transaction usually involves a much more extensive due diligence process than a private buyer transaction. A DSO buyer will need to access the seller's entire practice information, including practice financials, practice management software, employee information, bank statements, vendor contracts, and fee schedules. Additionally, because DSOs are highly sophisticated, their business people will ask detailed questions and identify weak points in a value proposition to create negotiating leverage.
A DSO's deal structure and legal agreements must generally remain consistent from transaction to transaction. Thus, DSO buyers usually require the parties to use their legal agreements (Purchase Agreements, Transition Agreements, Employment Agreements, etc.) and will be less flexible in modifying terms and conditions compared to private buyers. To facilitate the negotiation of the deal points and legal documents associated with a dental practice sale, it's imperative that sellers engage the services of a dental practice broker and dental attorney who are experienced in handling such deals.
Our Dental Attorneys Can Help with DSO Sales and Partnerships
At Wood and Morgan, we understand that partnering with or selling to a DSO is an enormous decision for our clients from a personal, professional and financial perspective. Therefore, it’s imperative that you refrain from responding to unsolicited offers and attempting to negotiate a deal without proper representation. We cannot stress how important this is as we have seen too many doctor-negotiated deals that unfairly favored a DSO partner in the past. We represent sellers and serve as advocates for our clients.
Our law firm has also taken the lead in establishing DSO management companies which comply with various state regulations. We have helped many of the country's largest DSOs to provide services to dentists while staying within the bounds of state laws associated with the practice of dentistry.
Whether you intend to sell your practice to a DSO buyer or establish a Dental Service Organization, you should retain the services of an experienced dental attorney who can help you explore your options, design a transition plan to meet your personal and professional goals, and represent your best interests.
Wood and Morgan has represented over 8,000 dentists since 1980 and focuses its efforts on supporting the dental community with their business needs. If you have questions about buying or selling a dental practice or partnering with a Dental Service Organization (DSO), don’t hesitate to contact us at 800-499-1474.