As the dental industry evolves, more practice owners are considering transitions to dental service organizations (DSOs). Whether you're actively seeking a change or have been approached unexpectedly, understanding the complexities and preparing for this process is crucial. This article, the first in a two-part series on the practice transition process, will guide you through the emotional and financial considerations as you prepare for a potential DSO transition.
The truth behind unsolicited DSO offers
Kim McCleskey.
I've seen it time and time again: practice owners getting direct calls or emails from DSOs with what seems like an amazing offer. It's flattering that someone sees the value in your life's work. But here's the thing -- and I can't stress this enough -- that first offer is almost never the best deal you can get.
You might worry about losing out if you don't jump on that first offer. However, DSOs aim to acquire practices on terms favorable to them, which often is in direct conflict with your best interests. It's essential to approach these offers with caution.
A strong negotiation starts well before an offer is on the table. You should first understand your practice’s worth and financial goals, as well as prepare yourself emotionally for change. Taking the time to carefully assess each proposal, explore multiple options, and seek professional advice will make a significant difference in the outcome.
Your practice represents years of hard work and dedication, and it deserves careful consideration before making any life-changing decisions.
Emotional preparation
Transitioning your practice isn’t just a business decision, it’s a deeply personal one. Before engaging with DSOs -- or taking any formal steps toward a practice transition -- take time to reflect on your goals, and ask yourself the following questions:
- Why am I considering a transition?
- Am I ready for a change in my role and responsibilities?
- How will this impact the next chapter in my career?
Selling a practice can evoke a range of emotions, from excitement about new opportunities to anxiety over losing full control. Consider how comfortable you are with potentially reduced decision-making power and the shift from being an owner to a partial owner or employee.
Many dentists struggle with "letting go," feeling attached to their staff, patients, and the business they built. Taking the time to mentally prepare can help with a smoother transition.
Often, dentists find that partnering with a DSO allows them to focus more on patient care and less on administrative tasks, improving job satisfaction. However, evaluating the "like and trust" factor with potential buyers is key. Cultural fit and long-term compatibility matter just as much as the financial terms.
Financial preparation
Before you even think about entertaining offers, you need to know your numbers. Understanding both your financial needs and the value of your practice is fundamental to a successful transition. Consider these key steps:
- Consult a financial adviser to determine your retirement goals and financial requirements.
- Obtain a baseline valuation of your practice with an industry-specific broker to understand its worth, even if you’re not committed to selling.
- Familiarize yourself with key financial metrics like EBITDA (earnings before interest, taxes, depreciation, and amortization), revenue, and growth potential.
DSOs offer various compensation models, including joint ventures, where you retain partial ownership and continue to share in the practice’s success, or complete buyouts, which provide an upfront lump sum in exchange for full ownership transfer. The variety of deal structures each comes with tax implications and different financial outcomes. Understanding these structures helps you make an informed decision aligned with your long-term financial goals.
What type of owner does best with DSOs?
DSOs typically work best with dentists who are:
- Open to change and adaptable to a larger organizational structure.
- Interested in focusing more on clinical work and less on administrative tasks.
- Seeking growth opportunities within a larger network.
- Prioritizing work-life balance by offloading managerial responsibilities.
- Thinking strategically about long-term financial success. Entrepreneurial owners may thrive in models like sub-DSOs, which offer paths to build equity and stay involved in leadership.
Additionally, DSOs are an excellent option for dentists who are nearing retirement and looking to ease into a new phase of life. This arrangement often comes with the benefit of a large cash sum from a full buyout, providing financial security for retirement. It allows the retiring dentist to transition smoothly, providing continuity of care for their patients and a stable work environment for staff, all while securing their financial future.
Ultimately, successful transitions occur when a dentist’s vision and values align with those of the DSO. Thoroughly researching a DSO’s approach to patient care and practice management helps ensure a good fit.
Common pitfalls to avoid
- Relying solely on colleagues’ experiences: While insights from trusted peers can be valuable, remember that every transition is unique. Your practice's specific circumstances, financial situation, and personal goals may differ significantly from those of your colleagues.
- Choosing the highest bidder without considering cultural fit: While a high offer can be tempting, nonfinancial factors are equally important for long-term satisfaction. Consider the DSO's culture, management style, and approach to patient care. A lower offer from a DSO that aligns better with your values and vision will lead to a more successful transition.
- Accepting an offer without exploring the market: Taking a deal directly from a DSO without comparing other options means you're not putting your practice in a competitive environment. Without other offers to compare, or a broker to assess the details, it's hard to know if the terms are fair or realistic. A competitive process guided by an expert broker helps validate the offer and ensures you're making a well-informed decision.
- Rushing into a decision: Thorough evaluation and negotiation take time but pay off in the long run. Hasty decisions can lead to regret and potential conflicts down the line. Take the time to carefully review all aspects of the deal, including financial terms, operational changes, and your role post-transition.
- Underestimating the emotional impact: The shift from owner to employee can be more challenging than anticipated. Prepare yourself mentally for this change, and consider seeking support from colleagues who have undergone similar transitions. Their perspectives can provide valuable insights and help you navigate the emotional aspects of the process.
The value of professional representation
Navigating a DSO transition without professional guidance is risky. A fiduciary, such as a dental practice broker, serves as your advocate so that every aspect of the deal is thoroughly examined and negotiated in your favor.
When practice owners come to me, they sometimes ask if they can exclude the DSO that already reached out to them. My answer is typically a firm no, unless we’re able to negotiate a higher valuation.
Why? Because an experienced broker can often negotiate an even better deal with that same DSO, especially when a practice is put in a competitive environment. Brokers bring market knowledge and negotiating power to the table that can significantly enhance your bargaining position.
An experienced broker does more than facilitate a sale. They do the following:
- Provide objective advice and industry-specific expertise
- Advise on whether the terms tied to the deal are fair and achievable.
- Present all available options, not just the highest bidder.
- Assess cultural and operational fit with potential DSOs.
- Negotiate better deals and help avoid common pitfalls.
- Ensure a win-win outcome for both parties.
The landscape of DSO offers isn't just about who's waving the biggest check. It's about finding the right fit, the right terms, and the right future for you and your practice.
Even if colleagues have had positive experiences selling without representation, you’re likely leaving significant money on the table or missing out on opportunities like an equity roll or equity arbitrage options. Navigating that landscape is much easier when you've got an experienced guide by your side.
Bottom line
Your dental practice is more than just a business -- it’s been a significant part of your life. Transitioning to a DSO is a major decision that requires both emotional and financial preparation. With careful planning and the right professional guidance, you can navigate the process confidently and make the best choice for your future and your practice.
Kim McCleskey is a practice transition consultant with Professional Transition Strategies. She has worked in dentistry for more than 30 years and is a certified professional business coach. She can be reached at [email protected].
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.
