The allure of DSO partnership often lies in promises of financial security, operational support, and a path to long-term success. However, not all DSO partnerships live up to their initial promises.
When promises fall short
While DSOs may present attractive offers, practice owners must be wary of situations where overly ambitious financial projections fail to deliver. Here are some anonymized examples of what can go wrong:
- Equity that underperforms: A group of dentists partnered with a DSO that promised significant growth in equity shares. However, after several years, the expected returns fell far short due to mismanagement and lack of reinvestment into the practice. Despite working under the DSO umbrella, the dentists realized little to no financial benefit from their equity, which had been touted as a cornerstone of the deal. Unrealized buyout potential: Another practice sold to a DSO with the assurance that their retained equity would dramatically increase in value during a subsequent recapitalization event. When the recapitalization occurred, however, the practice’s valuation did not meet the promised benchmarks, leaving the original owners with diluted shares and a fraction of their anticipated returns.
Misaligned partnerships
These situations highlight a troubling trend: DSOs sometimes overpromise and underdel iver on f inancial outcomes, particularly regarding equity returns. For practice owners, this can lead to:
- Loss of financial independence: Selling equity under the assumption of high future returns can lock practice owners into agreements that yield minimal benefits and no control.
- Legal and operational entanglements: Disputes over unfulfilled financial promises can result in costly legal battles and strained operations.
- Compromised retirement plans: When promised equity returns do not materialize, dentists' long-term financial stability can be severely impacted.
The right advisor
Navigating the complexities of a DSO partnership requires expertise and due diligence. An experienced advisor can play a pivotal role in helping practice owners avoid the pitfalls of overpromised and underdelivered returns. Here’s how:
- Realistic valuation assessments: Advisors scrutinize a DSO’s financial projections and ensure that equity valuations are grounded in realistic market expectations.
- Structured negotiations: Skilled advisors negotiate terms that protect the seller, such as guaranteed minimum payouts or transparent equity growth benchmarks.
- Strategic due diligence: Advisors can identify red flags by evaluating a DSO’s past performance, growth trajectory, and recapitalization history.
- Tailored exit strategies: Advisors help practice owners structure deals with flexibility around roles and responsibilities postclose.
Choosing the right advisor
Selecting an advisor with a deep understanding of dental practice transitions and DSO partnerships is critical. Look for these qualities:
- Proven industry expertise: An advisor with a track record in dental mergers and acquisitions can provide unparalleled insights into the nuances of DSO deals.
- Transparency and integrity: Advisors who prioritize their clients’ goals and provide honest evaluations of partnership opportunities are invaluable.
Securing your future
Partnering with a DSO can be a transformative opportunity, but it is not without risks. Overpromised equity returns and unrealistic financial projections can lead to disappointment. By engaging a knowledgeable advisor, practice owners can ensure that their partnership not only aligns with their immediate needs, but also supports their long-term professional and financial goals.
Editor's note: This article appeared in the January 2025 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
