Dental Service Organization or Private Buyer: Which makes more sense for your dental practice sale?

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The process of getting ready for a dental practice sale is as unique as your practice — everyone’s transition story looks a little different. 

Some folks value getting it done as quickly and simply as possible. Others are willing to put in a significant amount of time and energy to make sure that they’re getting the absolute highest value.

Some dentists want to sell outright to another dentist who will take up their role in the practice and carry on their legacy. Other doctors want to cement their legacy by becoming part of a larger organization that they can have a role in shaping.

The path you choose is entirely your choice. No one path is THE correct path. What is important is that you understand how to get to YOUR ideal outcome so that you can prepare for it. If you are planning to sell 100% of your practice (by far the most popular option), we can sort dental practice sales into two categories: selling to a private buyer or selling to a dental service organization.

Dental Service Organization or private buyer for a dental practice?

Either option can be good, depending on what you want.

That’s a big idea. Now let’s take a look at the pros and cons of these two different buyer types for prospective sellers.

Facilitating a dental practice sale to a private buyer

The majority of dental practice sales in California are between one buyer and one seller. Individual buyers are typically the fastest, most no-nonsense way to get a dental practice sale completed. Banks are usually happy to give these buyers loans (dentists are great risks, and banks will bet on you all day). These buyers want to enjoy the life that you’ve enjoyed for years – the benefits of practice ownership are undeniable. 

The pros of a dental practice sale with a private buyer

  • Compatibility – Selling to one person makes it simpler to gauge their fit with your practice. The right fit has a number of components: it’s just easier clinically, logistically, culturally match with an individual than a group. If you sell to a DSO, you’re dealing with a large group of people, some of whom you may fit well with and others you may not.
  • Money Upfront – When you sell to a private buyer, you immediately put money in the bank, and it’s often more than you would when you sell to a DSO. While this is commonly misunderstood, it’s true — in most cases, you’ll actually come out ahead financially with a private buyer.
  • Simplicity – Less moving parts make for an easier sale. The due diligence process is more straightforward. On the buyer side, they’re typically less picky about the fit and logistics and are able to integrate themself easily into your existing business.

The cons of a dental practice sale with a private buyer

  • Availability – While it isn’t always true, it can sometimes feel much harder to find a private buyer in comparison to DSOs (who are actively looking for practices to buy). This can be especially true if you’re trying to avoid using a dental practice sales broker. 
  • Lack of experience – Typically, a private buyer will have gone through this process only once or twice in their career. That means they may not always know what to expect from a dental practice sale. They may need more questions answered and won’t always adhere to a strict timetable. 

Facilitating a dental practice sale to a Dental Service Organization

DSOs go by many names (the ADA has proposed a classification structure), but the basic idea is the same. They develop large group practices, trying to capture efficiencies of scale and utilizing professional management teams to make the whole greater than the sum of its parts. Often, the end goal is a sale of the group for a significant profit. Today, dentists affiliated with DSOs represent a significant minority of the industry. The ADA’s Health Policy Institute puts the number of California dentists associated with DSOs at 8.1%.

The pros of a dental practice sale with a DSO

They handle the business, so you can go home at the end of the day. 

As a business owner, you know how many other things can demand your attention apart from your patient. Whether it’s coordinating staff training, HR issues, marketing, equipment upgrades, or accounting or compliance challenges, running a business takes some work. While many dentists find it manageable (especially with a consultant), some are just ready to leave it all behind. If this sounds like you, selling to a DSO may be something to consider.

The long-term potential upside may be higher. 

The DSO is not just here to help you grow the practice – they are here to transform your individual practice into part of a large group. In many cases, you receive a small piece of equity in that group and can cash out if they are able to successfully sell it to private equity. The larger groups can command a higher valuation than an individual practice, but the path to a big sale is not guaranteed. Think of it like any investment decision.

The cons of a dental practice sale with a dental service organization

You lose autonomy and flexibility. 

In nearly all situations, the Dental service organization will require that the selling doctor say on as an associate. Selling to a DSO is the start of a long-term relationship. Furthermore, the sale is structured in such a way that you must meet certain collection or profit (EBITDA) targets in order to receive the entire ‘purchase price’. 

This means that you can’t start slowing down like you could if you worked back as an associate for a traditional buyer. You can’t phase out and start spending more time with family (or on the lake or golf course) without risking missing out on some major payments. Plus, no matter who owns the practice, as the ‘boots on the ground’, the selling doctor is still responsible for handling all kinds of business issues, staff disputes, etc. that will inevitably arise. The DSO is limited in their ability to exert leadership in the practice – it’s up to you.

The long-term potential upside may be lower with a dental service organization. 

Furthermore, working as an associate means you are taking home an associate’s salary – say 28% of production. Since you no longer own the equity in your practice, you are not taking home any profit. Over the course of a 3 – 5 year buyout period, this difference can more than account for the ‘higher offer’ from a DSO.

If you are an enterprising dentist looking to be a part of something bigger than your individual practice and are willing to work hard in a corporate environment, then the DSO model may be for you.

Be sure to run your own due diligence on the DSO as they carefully consider your practice. Remember that you are getting into a long(-ish) term relationship. Make sure it’s a good culture match. Consider their funding sources and long-term vision. Explore your exit options in case you discover it is absolutely not for you. Ask around about their reputation.

There are some great DSOs out there that are doctor/patient-centric and do a great job of executing their vision. Just do your homework and make sure it’s for you. If this all seems pretty overwhelming — that’s because it is! Don’t worry, we have folks who are excited and willing to help guide you through this process. We’re happy to chat and give you some no-pressure options on how to proceed.

Talk to an agent today!

 

Trevor Kimball, PhD