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How to make your dental practice attractive to a DSO

April 1, 2020
Prepare for a perfect storm of good news: a strong economy, low interest rates, and an aging population are all driving demand for dentistry.

Prepare for a perfect storm of good news: a strong economy, low interest rates, and an aging population are all driving demand for dentistry. These boom times in dentistry have not gone unnoticed by the investment and business community. Dental service organizations (DSOs) are expanding apace—they are buying practices and bringing business and marketing expertise into what has traditionally been a cottage industry, isolated silos of small practices that until recently could not reap the benefits of an economy of scale or consistent systems across a network of offices.

For dentists nearing retirement, DSOs offer new opportunities to sell their practices. As a result, there is an accelerating trend toward the consolidation of dental practices. I spoke with Bill Neumann, CEO at Group Dentistry Now, who said, “Many good practices have not been purchased by DSOs yet. There’s still a lot of leeway.”

To make your practice attractive to a potential DSO buyer, here is what you need to do.

Start early 

The time to begin your due diligence with regard to DSOs is a few years before you are ready to make the transition, not a few months before. DSOs often want a dentist to continue to work in the practice for several years after a sale. For this reason, the transaction should take place well ahead of your retirement date. 

Mike Anderson, director of development at Midwest Dental, told me, “If you’re open to considering a DSO, you should be starting discussions with a few DSOs three or four years before you plan to retire. Generally speaking, DSOs value a seller who’s willing to commit to stay with the practice for an extended period following a sale.” 

It’s smart to shop around ahead of time because DSOs have different models and personalities. You need to find the one that is a good fit for your practice philosophy and goals.

Get more production out of your facility 

Many dental offices fall into one or more of these categories: 

Open only four days per week.

Have no evening or Saturday hours.

Have multiple offices that are not fully staffed; some offices closed on certain days or have chairs that are not in use.

The number one factor that affects practice valuation is yearly production. To drive up valuation, you need to increase production. The owner-dentist does not have to work longer hours. Part-time dentists can be hired to work during the times the office(s) would otherwise be closed. 

In this era of flexible hours, there are dentists and team members who are looking for part-time work and nontraditional schedules. Filling the additional hours with patient care should not be a problem because many offices are already booked out weeks in advance due to demand. Also, social media marketing can make attracting new patients easy and cost-effective.

One important caveat is that DSOs are on the lookout for trends and sustainability. A one-year spike in production is not nearly as impressive as a multiyear track record with expanded hours and rising production.

Maintain a modern, well-run office 

As captains of their own ships, one mistake that retiring dentists often make is pulling back the throttle too early and drifting toward the dock. The office looks tired, team enthusiasm wanes, and the practice looks like its best days have passed. The goal is to keep the office looking sharp and the team disciplined until the day the doctor stops working. 

Although the office should be up to date, there are limits regarding how much the seller should invest in the practice to make it salable. Mike Anderson offered me this advice. “Be careful not to overinvest in your equipment or facility just prior to a sale. You probably won’t get a complete return on your investment. The projected future cash flow and profit is the main value driver, not the quality of the equipment.” 

When you have an ongoing relationship with a DSO, the company becomes not just your buyer, but your advisor. Your DSO will make recommendations in advance so that you can plan reasonable and necessary upgrades to your facilities and equipment.

Another aspect of a well-run office is a motivated team. If the office dynamics are toxic, potential buyers will become wary of moving forward. In many cases, the DSO wants to keep some or all of the current team in place and offer them additional training. This is because staff members are part of the continuity of care and the goodwill value of the practice.

Increase the number of large cases

Efficient practices have more value. Several doctors in different parts of the country recently told me the same thing: they all increased per-patient production by doing larger cases. These doctors are treatment planning comprehensively but are still somewhat conservative. They are offering more services and explaining treatment options in more detail. The other end of the continuum—chasing many patients for relatively small cases—is highly inefficient.

An increase in per-patient production also indicates a healthy case acceptance rate. DSOs want to know that when they generate patients through marketing, the leads will be followed up, patients will be informed, and many patients will accept treatment. You want your practice statistics to make a compelling case. Jay Schuster, DDS, a general dentist who recently sold his practice to a DSO, said, “DSOs look at all of the numbers. That’s what they do; they are numbers people.” 

Retain current patients

When patients demonstrate loyalty by returning to the same practice year after year, practice profitability increases for three reasons. 

First, marketing costs go down because the patient base is retained. In a general practice, for example, patients who have excellent dental health today may develop dental problems in the future as they age. When these issues arise, patients will seek care from their dentist of record. 

Second, in practices that employ hygienists, the hygiene program is robust. The additional revenue from a strong hygiene program is inherently impressive, a telling line item that augments overall yearly production and value. 

Third, loyal patients are an inimitable source of new patients due to word-of-mouth marketing. A strong hygiene program lends credence to the argument that the practice is a vibrant, self-sustaining business.

The bottom line is that you need to work purposefully to create strong financials, and you should focus on what the real estate market calls curb appeal. When a practice demonstrates growth and looks attractive and compelling, it will draw interested buyers. With the DSO model, you are not selling to a young dentist with little or no business experience. You are selling to a partner with the resources to complete the sale and the business acumen to keep it going. 

You are also casting off many of the day-to-day administrative chores so you can focus on treating patients during the years prior to your retirement. Dr. Schuster has never looked back. “I’m able to leave when I’m done with my last patient and I don’t have to worry about taking problems home or running the practice,” he said. 

Make your practice as attractive as possible to a DSO. You have something of value to sell, and right now the market wants what you have to offer.  

DAVID SCHWAB, PhD, is a professional speaker, author, and consultant. He helps dentists grow their practices, educate their patients, and train their teams to make practices more profitable. Dr. Schwab teaches dental teams on-site to convert leads, solve problems, and work together more cohesively. An international seminar speaker, Dr. Schwab’s seminars are as popular as they are useful. Contact him at (407) 324-1333, or visit davidschwab.com or linkedin.com/in/davidschwabphd.

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