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April 23, 2021

What to Ask a DSO Before You Sell

Signing DSO offer

By Matt Porter, MBA, CVA

My family and I are in the process of selling our home. We have already received a number of offers, and we will likely accept the highest one.

As a dentist, you may have received an exorbitant offer from a dental services organization (DSO), and you may be tempted to take it.

However, selling your practice to a DSO isn’t the same as me selling my house. Instead, the process could be compared to me selling my home and then living with the buyer for the next three years.

In that scenario, the sale price wouldn’t be the most important factor. Get to know the buyer and see if our personalities, cleanliness habits and schedules mesh well. Set clear expectations for how utilities and other expenses will be shared. Is this person someone you can see yourself living with for the next two to three years?

Before you let a DSO “move in” with you, you should make sure that it is the right fit for your practice. Here are some questions to ask a DSO before you decide to sell:

Experience

Ask questions to learn more about the DSO’s history and experience.

  1. How long ago did you purchase your first practice?
  2. How many practices do you already own in my city?

Avoid doing a deal with a DSO that is just starting out or just moving to your city. The DSO will be learning by trial and error, and that inexperience could negatively impact your patients, team and profitability. You can’t afford to be a DSO’s experimental practice.

Sale Terms

The DSO may have approached you with a specific sale price in mind, but you should dig deeper to learn the specifics.

  1. Is the sale price dependent on any performance after the sale?
  2. How much will I be paid for my production after closing?
  3. How long am I required to continue working at the practice? What happens if I leave early?
  4. Will I receive the entire purchase price in cash at closing? If not, how is the sale structured?
    1. Is there a holdback? If so, what are the terms?
    2. Is there an earnout? If so, what are the production goals I need to achieve to qualify for the remainder of my practice sale price?

Have a clear understanding of exactly when and how much you will be paid.

Equity

Some DSOs offer equity, while others do not, so you need to discuss those terms as well.

  1. What is the exit timeline for the parent company?
  2. What class of stock will I receive?
  3. How much debt does the parent company carry?
  4. Can I grow and add more locations?
  5. Will my equity be eligible for recap at the same terms as the parent company?
  6. Is my equity in my practice or in the parent company?
  7. Does my equity pay dividends or profits? If so, how frequently?

Not all equity is created equal, so make sure the proposed equity structure will benefit you. If you don’t clearly understand the equity component of the offer or if the DSO is an unproven group, make sure the cash you will receive up front at closing is compelling enough to sell. Don’t make your decision solely on the equity or holdbacks in case they don’t come to fruition.

Real Estate

If you also own your building, you will need to figure out how your real estate plays into the sale. Some dentists choose to retain ownership of their building and lease the space to the DSO.

  1. What is the monthly rent rate?
  2. How many years is the lease?
  3. Can the DSO break the lease without penalty?
  4. Who pays for the repairs, property taxes, HOA dues, insurance, etc.?
  5. Does the rent increase each year?

A clear understanding of these details can help you determine if selling to a DSO will be best for your practice.

Testimonials

Before you sign on the dotted line, you should also speak with other doctors who have sold to the DSO and ask about their experience.

  1. Did the DSO follow through on their commitments?
  2. Do you still have complete clinical autonomy after the sale?
  3. How much was changed in your practice after the sale?
  4. Were you still permitted to use your same labs and supplies?

You only have one chance to sell your practice, so you want to get it right. A DSO is a practical option for many dentists, but you first need to conduct thorough due diligence of the organization.

If you decide to proceed, we recommend you have an advisor on your side who knows what deals, offers and groups are in the market. DSOs are experienced negotiators with abundant financial resources, and an advisor can help ensure you receive fair sale terms that will best benefit your business.

As seen in the April 2021 edition of Inscriptions published by the Arizona Dental Association.

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