We ask two experts the same question on a complex issue.
Question:
I’m thinking about selling my practice to a DSO.
How might this be different from a traditional sale, and what special terms should I look for?
Marie Chatterley
Most DSOs are very particular about the practices they purchase. They have specific parameters when it comes to size, revenues, location, number of operatories, and so forth.
If your practice meets what they are looking for, you may be in a position to entertain offers from a DSO as well as independent buyers. You can expect a sale to a DSO to be different from a traditional sale in these main areas: time frame, due diligence, financing (or payment of the purchase price), and transition structure (particularly seller work-back requirements).
Established DSOs will have a team of individuals dedicated to acquiring practices. Their primary job will be to dissect all of your practice data to determine if your practice represents a sound investment for them. This process is often very time consuming and demanding on the seller and his or her advisors.
In a traditional sale, it is common for the seller to be completely cashed out for the purchase price at closing. A full cash payment is less common in a DSO acquisition. Often the DSO will make a portion of the purchase price contingent on either the seller staying on as the associate dentist in the practice for a period of time after the sale (an earn-out), or on the performance of the practice for a period of time after the sale (a performance-based buyout). If so, it would be prudent for you to learn as much as possible about the company, its principals, history, performance, as well as talk to current and past sellers and associates.
In most DSO sales, the DSO will require the seller to stay on and work for the company for two to three years or longer. These work-back requirements may be tied to a purchase price payout or cash penalty if the seller exits early.
If you are considering a sale of your practice to a DSO, consider the requirements they make of you as terms of the sale, make sure the numbers add up, do your due diligence on the DSO, measure your expectations and values against what they have to offer, and finally, seek professional advice.
Stephen H. Kaufman
There are three important things to consider when deciding between selling to a DSO or to an individual dentist.
First, do you want to keep working after the sale? If so, for how long? In a typical non-DSO sale, the seller is usually asked to leave immediately or shortly after the sale because to generate the money needed to pay the purchase loan, the buyer needs to quickly replace the seller as a worker. Quick termination also helps establish clear control over staff, which can be difficult when the old boss lingers. A DSO, on the other hand, doesn’t usually have a replacement dentist to substitute for the seller. It wants the seller to keep working hard at associate-level pay, sometimes for years after the sale.
So, if you want to retire immediately, do a traditional sale. If you want to keep working but believe that selling well in advance of retirement would be advantageous (maybe the market is good now and sale prices are high), consider a DSO.
A second consideration of selling to a DSO versus an individual is how well you deal with loss of control. If you sell to a DSO because you want to keep working, you will be an employee, not an owner. The DSO will set your work hours and vacation schedule and decide who will be on your staff. You may be required to change labs or referral patterns. For some dentists this does not matter. For others it will cause endless aggravation. Before you sell to a DSO, do some honest self-reflection.
Finally, assess your risk tolerance and when you need the money from the sale of your practice. In a traditional sale, you will receive the entire purchase price at closing. DSO deals are often different. To encourage you to keep working, a DSO will typically hold back some of the purchase price, which is paid later pursuant to a non-guaranteed earn-out that pays you a percentage of future profits or revenue. If revenue drops, earn-out drops and you may not receive your full anticipated sale price. To avoid this problem, try to limit the DSO’s ability to fire you before the earn-out is complete and try to retain some control over operations. If you are risk-averse and can’t get those protections, a DSO may not be for you.
Marie Chatterley is with CTC Associates and specializes in transitioning dental practices. Contact her at (303) 795-8800 or visit
ctc-associates.com.
Stephen H. Kaufman is the head of his law firm’s health-care department. He helps doctors with all aspects of their professional and personal legal needs. He lectures on a wide variety of business, employment, and health-care subjects. Contact him at (410) 659-1385 or
[email protected].
