To Sell or Not to Sell? Best Practices for Assessing a DSO Offer

August 31, 2022

At a glance

  • The main takeaway: Having an offer on the table from a dental service organization (DSO) can be exciting but it’s important to analyze every aspect of the deal, roles and responsibilities, and potential expectations before signing on the dotted line.
  • Impact on your practice: Not only should the DSO’s offer meet your personal needs, financial well-being and expectations for a sale, but you should also have a game plan in place in case the deal doesn’t pan out as you hoped.
  • Next steps: Aprio’s Dental Services Team can help you weigh and evaluate DSO offers and create proactive plans for navigating a range of sale outcomes, all designed to create the most optimal results for you over the long term.

Schedule a consultation with Aprio today

The full story:

Two things might be happening in your dental office right now: The first is that you are gearing up to sell your dental practice and have received an offer from a dental service organization (DSO); the second is you open up your mail and receive an unsolicited offer from a DSO to purchase your practice.

As we have discussed in previous articles, DSO transactions have grown in popularity and have become viable sale options for practice owners on the cusp of retirement or a career change. If you have received a DSO offer and you’re wondering whether or not to take it, there are a few key questions to think about first, in addition to thoroughly evaluating considerations that are unique to your practice and personal life.

How will the DSO offer affect your work-life balance?

Achieving a healthy work-life balance has always been a struggle for many dental practice owners, but the feelings intensified during the pandemic. The pandemic has affected owners’ ability to keep and retain staff, while managing various government regulations and business processes that are necessary to operate in this new world. This turbulence has expedited the transition and exit planning process for many practitioners.

If you are a practice owner who is considering a DSO offer and searching for a better work-life balance, there are a few key points to consider. First, many DSOs require sellers to stay onboard at their practice for at least three to five years before fully exiting. This may not be an attractive option if you’re a doctor who is, say, 70 years old and hoping to retire within three months.

It’s also important to remember that during the transition period post-sale, owners will be going back to day-to-day operations and simply practicing dentistry versus running the business. If that is what you’re looking for in your transition experience, then the DSO you’re courting could be the perfect fit for you. This type of arrangement would allow you to escape from the billing cycle and the staffing, human resources, patient acquisition/retention and administrative tasks you have had to deal with previously, ultimately providing you with more personal freedom.

What production capacity does the DSO expect you to meet?

The benefit of selling to a DSO is that you’re selling to an organization that has the depth and breadth of resources, tools and technology needed to not only maintain your current production schedule but even exceed it. But in order to get the full value out of a deal, you have to commit to fulfilling your historical production levels for the duration of the transition and sale process.

Typically, DSOs will offer practices a percentage of money upfront, and then the receipt of the remaining portion is contingent on practice performance. This means you will have to maintain general production and hygienist production levels or even grow those thresholds over a 36-month period or more. If you are hoping to retire soon, travel more or engage in activities separate from your practice, then that type of deal structure probably isn’t aligned with your best interests and overall well-being.

Before you accept the offer, pause and take financial stock

If you have determined that your DSO offer meets your personal and professional needs after considering the criteria above, make sure you:

  • Double-check your practice’s financial health: If you have an offer on the table now or hope to have an offer soon, connect with an advisor to revisit your practice financials. What is the best way to make your tax returns and profit and loss statements look desirable in the eyes of a DSO? Clean returns without significant debt are crucial to increasing your appeal. At Aprio, we help our sale-ready clients complete a comprehensive financial health check every 12 months to make sure they are on track with expectations.
  • Reassess your personal financial health and goals: In addition to keeping a pulse on your practice’s health, you should also connect with your personal financial advisor to discuss your own financial house. Are you ready to retire from a financial standpoint? Does your advisor know you have potential cash coming in and have they incorporated this into your long-term income plan? It’s also essential to proactively plan for the tax implications of a potential deal close. You’ll increase the odds of a successful transaction if you are able to structure it in a way that is advantageous for your financial goals and personal situation. After all, your practice is the largest and most important asset you own, and it’s important to prepare for how the residual effects of the sale will reshape your financial plan.

Preparing for DSO sale outcomes

Some doctors will receive offers from DSOs with a 60- to 90-day contingency, which is a relatively fast turnaround for a transaction. That’s why it is crucial to enlist the help of a third-party professional early on in the process so that you understand the expectations and your potential new roles and responsibilities, and can evaluate the offer thoroughly so that you don’t miss out on a golden opportunity.

What happens if you join a DSO and you’re unhappy with the outcome? This is also an area in which advance planning is paramount. Before you enter into a DSO deal, evaluate your post-employment associate contract and noncompete agreements thoroughly. In addition, do your due diligence and fully understand what the DSO expects from you in terms of time and production commitments. What’s the DSO’s requirement for continuing production? How much money would you lose if you decided to leave the DSO after you joined?

You should be aware of these terms and outline all of the pros and cons of a potential sale before you agree to sign on the dotted line. If you are comfortable with the cons (for instance, you may need to relocate to practice elsewhere due to a noncompete agreement), you should have a firm understanding of how that decision will impact you financially. How much money would you leave on the table if you left the DSO, and what can you do to ensure your retirement plan stays on track? Work closely with your professional team of dental CPAs, financial advisors and attorneys to ensure all of the terms are crystal clear before you move forward.

The bottom line

Throughout the sale process and beyond, it’s important to enlist the help of a qualified professional who can help you weigh your options and ensure that you achieve the sale outcomes that fit best with your personal goals.

If you’re thinking about selling your business, schedule a free consultation with Aprio today.

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About the Author

Justin Schafer

Justin is a recognized dental industry leader with more than 12 years of experience guiding clients through practice transitions, mergers, real estate purchases, banking, debt restructuring and practice financing. His experience with financing dental transitions for two of the largest dental lenders in the nation have provided him with both buyer and seller perspectives on virtually every type of transaction imaginable. Justin helps dental practice owners understand the valuation of their practices for potential sales and the financial impact of selling on long-term personal wealth.