In my opinion (backed by almost two decades of experience in the dental industry as a certified public accountant and founder of a dental accounting and financial planning firm, combined with a lot of homework reviewing over 100 dental service organization (DSO) “deals” as either term sheets or letters of intent), those who are persuading doctors to sell to a DSO are either lying or they don’t know what they’re talking about. Their ethic reminds me of what one of my golfing buddies said recently, “If your opponent has money in his pocket and can read, you need to take his money.”
There is a lot of “friendly advice” from DSO brokers and reps that is just like bait to trap you. But make no mistake, the dentist is the hunted while they are the “hunters.” Below are some of my favorite pieces of advice from these “hunters.”
'Just get a valuation to see what your practice is worth.'
Nate Williams, CPA, CFP.
If you were a client, I would advise against having a broker “value” your practice.
These business types who are selling for DSOs or brokering practices can run circles around the average doctor when it comes to finances and valuation of your practice. They will say flattering things you want to hear and can “calculate” almost any number on their spreadsheet to make you feel like you’re winning the lottery. But the valuation number they give you will be a bogus number for these reasons:
- First, the sale of your practice always comes with a contract to work, typically for five years. For every year you work for the DSO, you need to subtract one times EBITDA (earnings before interest, taxes, depreciation, and amortization) from the price they’re paying you. For example, a seven times EBITDA sale price to a DSO with a five-year work back is the equivalent of selling for two times EBITDA in a walkaway sale.
- Remember that EBITDA is simply one year’s worth of cash “earnings” from the practice, paid to whoever owns the practice.
- In a walkaway, private sale to another doctor, you’ll generally see practices selling for three to four times EBITDA, depending on a few factors. DSOs tout that they pay doctors five, six, seven, or even 10 times EBITDA!
Just remember, the real price is “whatever they’re telling me” -- one times EBITDA for every year you work for them. And that’s if the deal were 100% in cash, which they never are.
A disproportionate amount of the “value” they “pay” you for your practice will be in DSO “stock” or “equity.” The number they place on this DSO equity is literally a plug figure that they want to use to get their valuation to the number they want to show you. If they want you to see $10 million and they’re willing to pay you $4 million in cash, they’ll magically use $6 million as the “value” of the equity.
But the truth is that neither you nor they has a clue how much this equity is worth.
Sell your practice at low long-term capital gains tax rates.
This is terrible advice. Here’s why:
- When you’re ready to retire, you can easily structure your sale to get capital gains treatment, so this is not a unique selling point for a DSO sale. Saying that you’ll get capital gains treatment for selling your practice is like a restaurant telling you, “We offer free water!”
- Brokers often charge 10% fees on the full, inflated price (including equity). This means you’d pay 20% in fees on the cash portion, assuming they give you 50% in cash and 50% in equity.
- In general, don’t make financial decisions solely for tax reasons. This last bullet point is a sound principle. Follow it and thrive.
You should sell to 'take some money off the table' or to diversify your career.
When it comes to your investment portfolio that you do not control, financial planners absolutely recommend diversification. However, when it comes to your career, you are the product.
Dentistry is unique because the value is tied to your hands. When you sell, you give up control and income. You become the investment. If you’re such a great investment that a DSO wants to own you, shouldn’t you own yourself?
You should 'partner' with an IDSO (invisible DSO).
The principled advice is this: Don’t partner with nonproducers. In the 18 years I’ve worked with dentists at every level, I’ve seen this scenario play out numerous times:
- A younger doctor works for an older doctor (or group) who owns multiple locations.
- The younger doctor runs location C and is the only producer in that location.
- The older doctor (or group) offers to allow the younger doctor to “buy in” to just location C. The younger doctor is excited for this ownership opportunity and takes the deal.
- Eventually, the younger doctor realizes that all the revenue is due to him or her and they get tired of shipping half of the profits to the group.
- The younger doctor eventually gets fed up and leaves, with the words “We told you so” ringing in their ears.
There will never be an exception to this -- 100% of the practice's collections are due to the producing dentist. Therefore, the nonproducer will never be able to add value at the same level that you can.
'You’ll get the money you deserve -- maybe even generational wealth.'
If DSO sales were the jackpot they claim, I’d be the first to encourage it. As an investment adviser, I’m financially incentivized to grow my clients' wealth, but this isn’t the way.
Selling to a DSO is a financial downgrade, and much of what you’re being promised is a scam. The closer you are to retirement, the less harmful it may be, but it’s still the wrong move.
How do I know this?
- I’ve been doing dental finance and accounting for nearly 20 years, and I’ve analyzed over 100 DSO offers.
- Value in dentistry comes from production. Whoever owns the production, owns the wealth. If you are the dentist, you are the investment.
- DSOs make you their investment and the return they earn comes straight from your pocket.
Take just a minute or two or five to ponder these last bullet points. They are intuitive, even self-evident truths. Although they contradict everything every pro-DSO salesman in America is saying, truth is truth.
Dentists are the value in dental practices. We also know that, throughout history, business owners are always the wealthiest people. Add those two together: Dentist + Business owner = Greatest wealth-building opportunity for Dr. ______.
We all knew this five years ago; somehow, the DSO narrative caused a lot of people to believe “The world is flat” after the pandemic and while free money was floating through the economy, fueling the 2021 and 2022 Wall Street/private equity gold rush for dental practices.
What’s the bottom line? DSOs aren’t offering you freedom or wealth. They’re offering a cleverly disguised payday and paycheck with way too many strings attached. The numbers might look flashy, but once you dig into the details, the math doesn't lie and the message is clear: Selling to a DSO is not a smart financial move -- it’s the exact opposite.
You are the engine of your practice’s value. Own that. Control it. And don’t let someone else profit off what you create and produce with your hands. Stay in the driver’s seat. Your future -- and your wealth -- depend on it.
Editor's note: Click below to hear a conversation with the author and consultant Bob Spiel on this topic.
Nate Williams is a certified public accountant, a certified financial planner, and the founder of Practice Financial Group, a firm dedicated to helping dental practice owners build wealth and live good lives. He is also the co-host of the podcast, Just Say No to The DSO, which is dedicated to exposing the biggest scam in dentistry -- that DSOs pay more for dental practices -- and stopping the wealth transfer from practice owners to a relatively few private equity-backed DSOs.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
