They’re Heeeere…

In 2015 Dental Services Organizations, or DSOs, owned approximately 12% of all dental practices.  Experts predict that by the year 2025, DSOs will own 25% to 30% of all dental practices and almost 50% by 2030*.  As a practice broker keeping a pulse on the practice selling market, we have not seen a lot of large DSOs, let alone smaller groups buying practices.  However, as of recently, that appears to be changing.  We’ve been getting more and more calls from DSOs and Private Equity groups looking for practices to purchase.  So, who are these DSOs, what are they looking for and what are they requiring of sellers?

These DSOs are groups who are looking to consolidate the dental industry similar to what has been going on with pharmacies, surgery centers, and hospital systems for many years.  In fact, as a side note, two-thirds of pharmacy revenues come from corporate-owned pharmacies.  The DSOs, especially the large ones, are backed by private equity money looking for good returns on their money.  Smaller group practices are typically backed by local or national banks.  The private equity groups like the dental market as there are good margins in owning a dental practice.  I’ve heard they can typically get a return of 15% to 20% after paying an associate salary and all other overhead.  They don’t require financing, so they don’t have the debt service payments that individuals may have.  They often consolidate the “back-office” functions – Human Resources, accounting, and billing to save money.  They also can negotiate better insurance reimbursements and dental supply prices than the solo practitioner.  For staff, they can offer decent benefits packages as a result of economies of scale.   However, they may not pay staff wages as well as solo offices.  The larger groups range from 30 practices under ownership up to several hundred locations with groups like Heartland Dental.

What are they looking for when they acquire a dental practice?  Many of them claim they will pay a premium for a practice.   I’ve been working as a practice broker for almost 15 years, and I’ve never seen a group, DSO, or Private Equity investor purchase a practice for an above market price.  Most have purchased practices at market, or even slightly below.  They like larger practices doing at least $800,000 and up.  That doesn’t mean they won’t buy smaller practices, but the larger ones are more appealing.  They like to acquire smaller practices in the area where they already have a larger practice so they can consolidate the smaller practice into the larger practice.  Most of them want the selling doctor to stay on and work in the practice.  Many of them want the seller to stay for up to 3 years.  Most will negotiate down to 2 years.  They usually do not give you your entire purchase price upfront.  They’ll give you 80% of the purchase price at closing, you will have to wait for the other 20% to be paid out upon certain conditions being met.  Those conditions include serving your agreed-upon employment term, the practice production staying at where it was before or even growing, and other conditions may be possible such as hiring an associate, managing the practice, etc.  If you don’t meet your conditions, the DSO may pay none or only a part of the last 20% of the purchase price.  And, if after a few months you decide that working as an employee for the group isn’t what you thought it would be, or you decide to move out of the area for health reasons, or for some other reason you decide to leave the practice and not meet your term, then too bad for you.  You forfeit the 20% that the DSO owes you.

The small groups, DSOs, etc., will also tell you that they prefer you not get someone to represent you.  That includes an attorney, a consultant or a practice broker.  They want to use their experience, their sales tactics and their gaggle of attorneys to negotiate a great deal, FOR THEM!  Yes, they’re not looking out for your best interest.  They could care less if most of your retirement nest egg is in your practice.  They care about building their market share so that they can make as much money for their investors as possible.
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My advice if you have received a letter in the mail from a DSO or small group is to don’t go it alone!  You’ve been a dentist for quite a few years for crying out loud and haven’t negotiated a multi-million-dollar deal, dealt with aggressive attorneys or a large corporation.  Whether you use a broker, attorney or consultant, get someone on your team to represent you.  Our group at Omni has negotiated many deals ranging from $500,000 to $7 million and up.  This is what we do and have expertise.  Feel free to call us anytime to discuss your transition, an offer you received, or anything else where we can provide knowledge.   We’re always glad to help.

*Footnote: “Dental Service Organizations – The What and Why of DSOs – Part 1 of 6”  Posted on May 13, 2019 by Sara K. Stock. www.stocklegal.com/blog/dental-service-organizations-the-what-and-why-of-dsos