Understanding DSOs and Their Role in the Market

What are DSOs?

To circumvent laws regulating dental practice ownership, investors create separate entities — DSOs — to provide related practice management and business services such as marketing, bookkeeping, and financial services. Private equity firms dominate the DSO market; 27 of the top 30 DSOs are private equity-owned.

A DSO is an entity responsible for acquiring dental practices. Dental Service Organizations come in all different sizes, management philosophies, and clinical philosophies. Next you need to understand they have different marketing and operational strategies from nationally branded chains to regionally branded. DSOs then arrange for the doctor/patient relationship with a dentist to meet Texas State Dental Board requirements.

Private Equity and its Role in DSOs

Private equity is ownership or interest in an entity that is not publicly listed or traded. A source of investment capital comprised of institutional investors such as pension funds, and large private equity firms funded by accredited investors. Because private equity entails direct investment — often to gain

influence or control over a company’s operations — a significant capital outlay is required, which is why funds with deep pockets dominate the industry.

Private equity firms’ reputation for dramatically increasing the value of their investments has helped fuel this growth. Their ability to achieve high returns is typically attributed to a number of factors: high-powered incentives both for private equity portfolio managers and for the operating managers of businesses in the portfolio; the aggressive use of debt, which provides financing and tax advantages; a determined focus on cash flow and margin improvement; and freedom from restrictive public company regulations. 

But the fundamental reason behind private equity’s growth and high rates of return is something that has received little attention, perhaps because it’s so obvious: the firms’ standard practice of buying businesses and then, after steering them through a transition of rapid performance improvement, selling them. That strategy, which embodies a combination of business and investment-portfolio management, is at the core of private equity’s success.

How to Get the Best Deal From a DSO

How many times have you heard and received solicitations from DSOs telling you they pay significantly more than selling to a private dentist? How many times do you hear from DSOs and wonder which of their representatives you can trust? How many DSOs are there in the marketplace? Do you think DSOs are all the same and offer the same terms? How do you know what’s the best deal for you and what terms are important? Who is going to make the big money from the sale of your practice — the DSO, private equity group, or you?

The Right DSO can Offer a Great Opportunity for the Right Dentist

The process of selling to a DSO requires a knowledge of the multiplicity of terms that must be negotiated; knowing the value of your practice to DSOs and getting the best price for the sale of your practice to a DSO, work back arrangements and agreements, how much the DSOs can hold back of your sales price and what are the conditions required for you to get the rest of your money, tax planning to put the most money in your pocket, knowing who you are really dealing with and what is the DSOs track record, and getting the right fit (this is a partnership and not the time to make mistakes because a failed deal ruins lives). Undoing a bad deal or filing suit to get what was represented to you by a DSO can cost you tens of thousands of dollars and emotional strain that drains you of years of your life.

Which DSO is right for you? There are so many DSOs or versions of a DSO, it is imperative that you make sure you are making the right decision with the right terms for you. Knowing the DSO marketplace and creating a competitive environment where you have multiple DSOs vying for your practice is one of the only ways you can make sure you are getting the best deal. You will never get the same deal from a DSO that has no competition for the purchase of your practice. You need to make sure you are getting in front of the best DSOs for you.

Experience, education, network, and expertise provides you with the competitive advantages in dealing with DSOs. Remember, you spent many years building your practice and you need an advisor and counselor with the same kind of experience in the DSO market to give you the best representation to get in front of the best DSOs for you in such a highly complex transition. Money and price are important, however there are many other terms and considerations that are just as important for you in the sale of your practice to a DSO.

Frank J. Brown is the current owner of Watson Brown. He began his dental practice transition expertise in 1989 when he began providing Texas dentists and their families’ professional guidance on selling or buying a dental office. Frank earned his law degree from the University of Arkansas and earned his Master of Laws in taxation from Southern Methodist University School of Law. As a broker and tax attorney, Frank provides counsel to buyers and sellers before, during, and after their dental transitions while also drafting documents and valuing dental practices. For more information, call (469) 222-3200 or email frank@watsonbrownsales.com.