There are many philosophies about selling your practice to a DSO, ranging from “never for any reason” to “it’s the greatest opportunity you will ever have.” This article is not about philosophy, but making a smart business and life decision that fits each individual practice owner.
You’ve worked hard, put in extensive time and effort to build a practice, most likely took on debt, and have dedicated your career to excellent patient care. Now you have an option of selling your practice to a DSO. What should you do? Every week Levin Group receives phone calls from dentists we have never met, asking if they should sell their practice to a DSO. First, it’s important to understand that there is no universally accepted definition of a DSO. In some cases, these callers have been approached by another practice group in the area that has three or four practices and call themselves a DSO, without the legal structure of a DSO. In other cases, they are approached by a broker who wants to represent them to sell them to a midsize to large DSO. In still other cases, they’ve been approached by a large DSO with an offer. How do you navigate the decision process to sell a practice, especially when you were not even actively looking to do so? I always begin, and it is just the beginning, by asking two questions.
Are you financially independent?
Your financial condition makes a significant difference. If you are financially independent and you are looking for a potential exit strategy, selling to a DSO can be a good option. Keep in mind though, that typically the DSO will require you to sign a contract with a commitment to work at least two or three additional years, and in most cases part of your purchase price will be paid out based on your production in those last two or three years. If you fail to hit the target production numbers, you will not get that portion of the overall purchase price. If you thrive, you receive the full payout and also have the option of continuing to practice longer, assuming they would like you to stay. This is somewhat standard in DSO practice purchases. For this article, financial independence means that whatever happens in your sale transaction, there will be no deleterious effect on your long-term retirement or lifestyle. Whether or not you are thrilled with the buyer, like the work environment, etc., you are still financially protected and can walk away if you choose. If you are not financially independent, then you must continue working. And you will probably continue working for the DSO you sell to. Although claims are often made about not changing anything in your practice after the sale, the reality is that changes occur, sometimes significant changes. The new owner of your practice will always work toward their own model, achieving their own objectives, maximizing certain areas such as production or profitability, and can be involved at every level down to what type of materials you use. If you are not financially independent, you need to be prepared for this and have the flexibility to work in an environment that you do not control. Many dentists can do this. Some cannot and end up less than satisfied with the new arrangement.
Do you want to be an employee?
The second question is also important. Some people can be good employees, and some are not cut out to have a boss. Those who are able to sell the practice and leave in a few years may be able to tolerate almost anything. Those who cannot walk away will have to accept the employer/employee relationship. It’s particularly important to assess whether you can realistically work for another owner. If you want to sell the practice, have access to immediate funds for lifestyle, savings, and investment, and you believe you can enjoy being an employee, then this is an option to consider.
Once I ask dentists those two questions, I remind them of the next very important point: don’t be afraid you’ll miss the boat. In many cases, calls from brokers are simply fishing expeditions (based on promises they may not be in a position to deliver on) to entice you to work with them. There are excellent brokers out there, and you should take the time to thoroughly investigate this broker or brokerage firm. Too many dentists waste time in discussions with brokers where the final offers don’t look anything like the original conversation. And be on guard for anyone calling to tell you that now is the most amazing time ever to sell a practice, and that your practice is worth more now than ever in the past. And the biggest red flag is being told if you do not sell now, there will be no one to buy your practice later.
Dispelling DSO myths
DSOs are growing. They will continue to grow. No one knows where they will max out, but there will always be some level of private practice ownership. If you do not sell today and you decide to sell in the next five years, you have five more years of your own income and tax benefits, and you’ll still be able to sell at a valuable price. A great practice is a great practice, and there will always be others to buy it. Don’t feel pressured into selling today by believing that your practice will suddenly become worthless. We are still seeing phenomenal private practices all over the country, and I believe they will have the same sale value (or more) five years from now that they do today. Just because you get an offer doesn’t mean you should jump through a hoop. If you were not looking to sell, and you receive an offer, one question to ask is whether you can sell for the same price five years later. In most cases, you can. This doesn’t mean you should ignore the offer or not consider the option, but you should not be pressured into thinking that this is your last chance to sell the practice. What you are initially promised is not always what you will get. Unfortunately, unrealistic promises are made in order to entice you to consider selling. We have seen many initial offers that were 50% higher than the final offer after the practice analysis and valuation. Also, keep in mind that practice analysis and valuations take time. If you are inclined to sell the practice, it is worth going through the valuation process with a credible offer, but if you are simply checking it out because you’ve been approached, you may waste a lot of time, effort, and money. There will be some level of accounting and legal fees you’ll need to incur. There is also a myth that we are in a bubble where DSOs are overpaying for practices. First, good DSOs are not overpaying at all. They are smart, have a formula, and while they might pay you more than you think you can get in an open market practice sale, they are not overpaying based on their own financial models. Second, if you continue to grow your practice over the next five years, the sale value will do nothing but increase. As I stated above, a great practice will still be a great practice, and there will be buyers available. We are not in a bubble.
Summary
The decision to sell to a DSO is not black and white. It is important not to rush to a decision after you have been approached. Analyze all aspects of a sale, as it will be one of the most critical points in your professional career and has a direct effect on your personal lifestyle and savings opportunity. One final thought: if you sell and that sale will not create financial independence for you, how will you accumulate enough wealth to reach retirement? A good financial planner can help you through this process. You must consider the effect of the sale price, taxes, and future earnings to determine when and how you will reach your retirement and financial goals. Take a breath, take time to think it through, and surround yourself with expert advisers. If you have a successful practice that is generating income, you have no pressure to rush out and sell to a DSO or anyone else. Approach it like the business decision it is and do what makes sense for you.
Editor's note: This article appeared in the March 2024 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
Roger P. Levin, DDS, CEO and founder of Levin Group, has worked with more than 30,000 practices to increase production. A recognized expert on dental practice management and marketing, he has written 67 books and more than 4,000 articles, and regularly presents seminars in the US and around the world. To contact Dr. Levin or to join the 40,000 dental professionals who receive his Practice Production Tip of the Day, visit levingroup.com or email [email protected].
