DSO Advising and Consultation Services
Whether you have already been approached by a DSO or simply need to prepare for the likely possibility, Legacy Practice Transitions can help you as a dental service organization consultant to advise you on everything you need to know before signing a letter of intent with a DSO. We assist dentists with everything starting with how DSOs vary significantly in valuations and EBITDA calculations, opportunities to invest or “equity roll”, clawbacks, holdbacks, earnouts, employment commitment, leadership, previous recapitalization success, and company culture. Most sellers are unaware that there could be as many as 25+ DSO options in their respective market and they partner with the first unsolicited offer while settling for less enterprise value, average at best deal structures, longer work commitments, less than optimal tax allocations, depressed EBITDA calculations that all favor the buy side.
Many sellers get excited by what they perceive to be a fair offer outlined in a letter of intent and they rarely understand all of the specifics and foreign descriptions throughout the offer. Often, they sign the letter of intent which includes a lengthy period of exclusivity with that specific DSO buyer. The starting sequence should begin by vetting different DSOs options to align with the seller’s established needs and goals. Once the right buyer has been identified, skillful negotiation is required to achieve the best possible deal for LPT clients.
We often see and hear about sellers leaving hundreds of thousands to millions of dollars on the table because they lacked the knowledge and experience to execute a strong deal with a sophisticated DSO buyer. Make sure you don’t bring a butter knife to a sword fight. Talking to an experienced dental consultant like Legacy Practice Transitions will help ensure a successful dental practice agreement so you don’t feel like you’re being taken advantage of.
The Function of Dental Service Organizations (DSO)
The foundation of DSOs provides fewer dental practice management responsibilities than the owner/operator model. Each dental organization operates and supports the dental practices they acquire in different capacities. Some DSOs will micromanage and make many changes, while others will approach the partnership in a more hands-off manner that allows for more individual practice autonomy. Each seller needs to properly convey the expectations they have of the DSO and vice versa. Without proper alignment and communication from both parties, the end result can become less than desirable.
The partnership with a DSO can also help create additional wealth accumulation. Many dental practices are looking for a way to increase revenue and investing with the DSO has been successful for many sellers, although there is no guaranteed return on that investment.
Understanding the DSO Offer
For many dental professionals, an initial offer from a DSO may seem very exciting. Consider a general dental practice receiving an offer of $2 million or more. If you have not had a proper valuation done for your practice recently, you could be leaving a lot of money on the table.
DSOs consider many facets of the practices they acquire. Revenue and margin will be one of the biggest factors when beginning their initial due diligence. The ultimate goal of investors such as private equity firms is to operate the practices in an efficient manner that maximizes profitability. Shrewd investors always aim to buy at the lowest enterprise value possible. Dental organizations frequently offer dental practices less money than they are willing to pay for the practice. It’s not uncommon to incentivize business development personnel with significant bonuses if the acquisition price is below a specific threshold established by the DSO.
For many dentists, a big number dangling in front of you looks incredibly tempting. Although the enterprise value is an important consideration, the deal structure is often more important. More pointedly, the devil is in the details when you’re looking at the monetary and contractual stipulations outlined in the binding agreements. Many of these stipulations can be negotiated to result in a more advantageous deal structure for the seller.
The initial offer is not the only concern of the advisors at Legacy Practice Transitions. Clawbacks, holdbacks, and earnouts are common conditions that you are required to meet in order to receive the enterprise value outlined in the agreement. For some sellers, failure to meet these conditions means you could end up paying back the DSO some of the original proceeds of the sale.
Calculating Your Dental Practice’s Value
Legacy Practice Transitions works as a dental consultant with dentists all over the country to protect their interests and make sure the agreement our clients sign with a DSO is fair. By identifying the actual value of your practice and translating DSO offers, we help you meet your practice goals and realize your vision for your career.
DSO contracts are highly complicated and nearly impenetrable for inexperienced consultants. While your passion is dentistry and caring for patients, Legacy Practice Transitions has honed our skills in helping practices earn the most out of DSO agreements and negotiating more equitable terms. The goal of every DSO is to increase profits by acquiring assets at the lowest costs. Our goal is to defend your interest while capitalizing on the benefits of DSO.
What is EBITDA?
Profits in a dental practice are the net income after operating overhead expenses, and a reasonable, going-market-rate doctor compensation. Profits do not include interest, taxes, depreciation, amortization, and certain discretionary items. Investment bankers refer to these profits, or excess earnings as “Earnings Before Interest, Taxes, Depreciation, And Amortization” or “EBITDA.”
How Legacy Practice Transitions Can Help Your Dental Practice
At Legacy Practice Transitions, we help dental professionals prepare and understand every aspect before they sign with a dental service organization (DSO). Our measured advice and highly experienced professionals work alongside you. While DSOs often market themselves as dental consulting services and advocates for your practice goals, Legacy Practice Transitions is not an investment group. When you hire Legacy Practice Transitions, we act as a true consultant for your interests and the benefits of your patients. We understand the challenges of the business process within the industry and consider solutions for your success. We never say that signing on with a DSO is a bad idea, but a clear vetting of these systems by our experts allows you to make an informed decision.
DSOs are becoming increasingly more popular because dental practices are viewed as a less risky investment than other healthcare vertices. While dental practice management and visionary growth form an intriguing sales pitch, working within dental chains is not the definition of success for many dentists. DSOs are changing the face of dentistry from being an owner-and-operator business structure to a corporate, investor-driven model. With thousands of DSOs in operation today, dental practice consolidation is occurring all over the country.
At Legacy Practice Transitions, we are here to look out for the best interests of dentists. Our specialists do all the valuation, contract reading, and math so you can meet your ultimate goals. We have the experience to understand, translate, and negotiate deals with DSOs so you have someone in your corner and you’re not being taken advantage of or leaving money on the table.
We understand that as a dentist, you have some experience running your business. You’ve probably negotiated deals for real estate, equipment, tools, and salaries throughout your career. However, that experience is vastly different from dealing with Private Equity Groups and Professional Investors.
While you may admire the skill and expertise of F1 drivers, your professional expertise lies elsewhere. Being a private dentist trying to negotiate with a DSO is akin to racing your four-door sedan against professional drivers with performance vehicles, pit crews, and deep financial backers. The experience can be incredibly overwhelming. When you work with Legacy Practice Transitions, we put you behind the wheel with our pit crew and the advisors you need to stay on track and avoid being overwhelmed by DSOs.
Talk to Legacy Practice Transitions Before Signing On to a DSO
The terms and conditions we’ve mentioned above are only a taste of what could be within a DSO contract. It’s always good to have an experienced set of eyes to weigh in on what you’re about to agree to. Don’t sign anything you don’t understand. Before getting lapped by DSOs, let’s work together to make sure you’re getting the best deal possible. Schedule a consultation with Legacy Practice Transitions today.