Practice transition experts Dr. Gene Heller and Dr. Tom Snyder make recommendations for selling to a dental service organizations (DSOs) or small group networks (SGNs)
Dentists considering the sale of a practice in today's marketplace have two new groups to consider as potential "buyers." The first is dental service organizations (DSOs), now more commonly referred to as dental management organizations (DMOs) or "corporate buyers." The second, which is less well known, is an emerging buying group referred to as small group networks (SGNs). This article will give an overview of these two groups and discuss key considerations for dentists looking to sell to them.
Dental management organizations
DMOs have been in the market for more than 20 years. They usually own 30 to more than several hundred dental practices under one or more corporate ownership/management organizations. The majority are typically "branded" under one trade name. Most of these groups have virtually unlimited capital resources for development and acquisition of new practices. The sources of their financial resources are usually private equity funds. Their primary advantages include their ability to provide dentists with well-defined management systems, operational support, and economics of scale that might give them leverage with insurance companies. Many of these groups offer clearly defined internal continuing education programs for dentists and their staffs, which encourage providers to learn new clinical procedures.
DMO ownership is held by a combination of corporate investors and entrepreneurial dentists. These investors have realized that dental practices are one of the safest and highest-yielding investments currently found in the health-care market. It is for this reason that many private equity firms find these groups attractive.
DMOs offer dentists the opportunity to focus on the delivery of dental services by alleviating operational management responsibilities. Given their overall size and rapid growth, DMOs are now the largest group of employers for new dentists entering practice. Some of these groups offer some level of ownership, either in individual practices or within the organization, allowing these "dentist-owners" the opportunity to participate in the practice and/or organization's profitability. This is why many new dentists who join these groups after graduation elect to forgo the traditional solo dentist ownership model.
Small Group Networks
SGNs are defined as "start-up" groups, typically with three to 20 practices under one ownership and management. After witnessing the success of the larger DMO groups, many of these SGNs are owned by entrepreneurial dentists who have learned how to run productive, profitable practices. They are applying their practice management knowledge to owning and operating multiple practices. As with any new but rapidly expanding business, their primary limitation has been access to the level of investment capital enjoyed by the larger DMOs.
Defining the seller's goals
The primary goal of every seller is to experience a successful practice transition. As practice transition advisors, most of the dentists we speak to wish to pass on their practice to a like-minded dentist in order to (1) create a legacy of their life's work and (2) ensure their staff and patients will be treated properly after the sale. However, in deciding to sell their practices, most have not clearly outlined their desired outcome, so specifically identifying how to achieve their goals can be challenging.
Every practice owner needs both a carefully defined "exit strategy" and "emergency exit strategy." The exit strategy plan maximizes the return on a lifetime of practice, and it preserves the equity of the dentist-owner. The emergency exit strategy is needed for the protection of practice owner's family. It maximizes the probability that the maximum value will be maintained and realized upon the sale of the practice should something catastrophic happen to the business owner.
When a dentist approaches us with an inquiry into the sales process, the first question we ask begins the process for a successful transition. Specifically, we ask why the dentist wants to sell. Is it for quality of life reasons, perhaps due to a medical reason or other circumstances that dictate a timely transition? Or is it their desire to sell quickly based upon financial reasons (i.e., to maximize the sale proceeds)? Frankly, most dentists answer, "Both."
However, there can be only one primary goal. To aid in determining a dentist's primary goal, if the dentist says the motivation is financial, we ask whether the dentist is willing to work another three to five years to maximize the financial return. If the answer is yes, then the primary goal is financial. If the answer is no, it means the dentist already has sufficient financial resources to retire but wants the time to enjoy the fruits of their dental career.
Many corporate buyers will offer a premium purchase price for a practice, especially those located in a desirable market. However, getting paid 100% of the sale price is not commonplace. Normally, a portion of the sale price is offered as a deferred payment via a promissory note with interest. The balance of this note is usually paid off after the seller fulfills their minimum postsale employment period. Therefore, if a dentist's financial plan requires all proceeds of the sale to be in cash, this option might be unacceptable.
When selling, a point often overlooked in the calculation of the sale price is the seller's accounts receivable. Typically, in a "traditional sale," accounts receivable is not part of the sale price. That is not always the case with corporate groups. This needs to be clarified at the onset.
Most DMO or SGN purchasers have several requirements that the seller must accept before proceeding with an acquisition. The first requirement is usually, as a condition of sale, that the seller remain with the practice as a provider for a two-year period after the sale. Compensation can range between 25% to 35% of the seller's postsale personal net production. There is no credit for hygiene production other than the doctor examination. Some companies who offer a lower commission will offer the provider a percentage of practice profit based on a predetermined formula. Therefore, if a doctor wants immediate departure from practice, then a sale to one of these groups is typically not the answer.
The final major consideration for a possible sale to a corporate buyer involves the personality and temperament of the selling dentist. The primary reason the majority of dentists have practices as sole proprietors is their desire to control their own destinies. They want to be their own bosses and, as sole proprietors, they develop a style of practice and business ownership that falls into one of many different categories of practice management.
Therefore, if the dentist has been one who wants control over all aspects of their practice life-from clinical performance to management duties-working for someone else may be problematic. It is important to note: most companies have created a practice model that they are reluctant to deviate from! A practitioner who wants to control all outcomes may soon find that working for a company who does things differently will become a real problem.
If the seller owns the real estate, another key factor to determine at the onset is the disposition of the real estate. If the practice owner wants, as a condition of sale, to concurrently sell the real estate, this might become an issue, as many groups are not interested in real estate ownership; they are only interested in signing "long-term leases." There are other options for real estate ownership transfer if the other seller requirements can be met, but these must be carefully written into any sales agreement.
Hiring knowledgeable advisors
This discussion has addressed only a few of the major areas seen when considering a sale to corporate buyers. There are multiple differences to think about when considering a sale to a corporate group versus a sale to a private practitioner. In any event, the actual sale process involves one other important consideration. Should the seller try to save money while handling the details of a sale on their own, or should they hire an experienced transition consultant/practice broker to assist with this important financial transaction?
While the authors of this discussion realize the following may appear to be self-serving, the truth is that sellers who employ an experienced transition consultant to serve as a mediator/guide in this incredibly important financial transaction can net more income, even after the consultant's fee, as opposed to dentists who elect to go it alone. The goal of any buyer, whether a DMO or SGN, is to get the best possible deal for themselves!
Dentists acting on their own are not familiar with the market or what buyers will pay for a given practice. Seasoned transition consultants, who have the experience of handling dozens of sales to these groups, do. Transition consultants are aware that buyers know the following: Whether the corporate buyer pays 60% of last year's gross receipts or 100% of last year's gross receipts, as a result of implementing its systems, it will substantially increase both the gross receipts and net profits. This will easily offset the purchase price.
One of the primary reasons practice values are continuing to rise is the competition for high-end dental practices. This is merely the old rule of supply and demand. A limited supply with an ever-increasing demand has resulted in an increase in market value for not only the high-end practices, but also for smaller practices whose values continue to increase.
For the right person, one who desires to slowly phase out of clinical practice while maximizing their equity return, a DMO or SGN buyer might be the perfect solution. In fact, for the higher-grossing practices, they are frequently the only buyer in your area! Many recent graduates do not have the management experience or clinical skills at the onset to become a viable purchaser of a high-dollar volume practice.
If you are considering selling, doing so to a DMO or SGN may be your best option. In fact, it may be your only option in your community. Make sure you retain a team of advisors to assist you with this most important financial decision!
Eugene W. Heller, DDS, Henry Schein's vice president of transition services, leads the Henry Schein Professional Practice Transitions team. Dr. Heller can be reached at (888) 477-8552 or [email protected].
Tom Snyder, DMD, MBA,is the director of transition services for Henry Schein Professional Practice Transitions. He is a regular contributor to "Transitions Roundtable," a monthly column in Dental Economics. Dr. Snyder can be reached at (800) 988-5674 or [email protected].