by By Brannon Moncrief, Principal, CEO, McLerran & Associates
Affiliating with a DSO is one of the most impactful decisions a practice owner will make in his or her career. Therefore, it is imperative that dentists get educated about the options available in today’s marketplace and make intentional, pragmatic decisions to ensure their objectives are fulfilled and life after the sale is enjoyable. If done properly, a DSO affiliation can be financially rewarding, unlock significant wealth creation opportunities, and improve both the seller’s quality of life and practice performance.
However, significant adverse ramifications can occur if this process is not handled with deliberation and care, including financial hardship, loss of autonomy (both clinically and operationally), and decline in professional fulfillment. In this article, we explore the biggest mistakes dentists make when partnering with a DSO.
No. 1: Responding to unsolicited offers/failure to create competition
If you own a successful practice, we have no doubt that you have been inundated with direct mail, email blasts, or cold calls from DSOs expressing an interest in purchasing your office. Most established DSOs have built an entire business development team focused exclusively on pursuing acquisition opportunities and courting potential sellers. In addition, many DSOs financially incentivize doctors to refer their colleagues in exchange for substantial referral fees. The goal of these solicitations is simple … to pique your interest and open the door to an initial conversation that eventually leads to you selling your practice without obtaining proper representation or “shopping around”.
While a DSO affiliation may be a viable option and an unsolicited offer can seem attractive at first glance, it is important to acknowledge that DSO buyers are not altruistic in their approach. The truth is that DSOs want to buy your practice for the lowest valuation possible, which leads to higher returns for their private equity investors. You would do the same if you were in their shoes. That said, it has been eye opening to see how much more DSO buyers are willing and able to pay for practices when they are put in a competitive situation and you have an experienced sell-side advisor negotiating on your behalf. Entertaining offers from multiple buyers also provides you with a clear perspective on the various options available and the ability to choose the right DSO for your practice from both an economic and fit perspective.
The bottom line: If you fail to create a competitive environment for your practice and respond to an unsolicited offer, you will accept a lower valuation and leave deal terms on the table that you could have cultivated by taking a more thoughtful approach.
No. 2: Selling to the wrong DSO
We find ourselves saying this frequently, “If you have met one DSO, you have met one DSO.” The consolidation of the dental industry has accelerated beyond anyone’s expectations in recent years. As a result, there are a multitude of new and established DSOs searching for practice acquisition opportunities, each with their own distinct history, culture, executive team, investors, infrastructure, management style, deal structure, financial outlook, etc. Some buyers have robust infrastructure while others have little to none. Certain buyers have a heavy hand from a managerial perspective while others are more hands off. Many buyers offer the opportunity for the seller to retain/roll equity and participate in the financial upside of the business post-closing, while others don’t provide any wealth creation opportunities outside of the initial practice valuation.
Each practice owner has unique personal and professional goals they want to achieve. Should a DSO affiliation make sense, defining those goals and choosing the right DSO partner who can help achieve them is critically important. As you can imagine, partnering with the wrong DSO can have grave consequences for you and your practice both economically and emotionally. Unfortunately, we hear stories all too often of a doctor who responded to an unsolicited offer and sold to a DSO without exploring their options, only to realize that a DSO sale was either not the right fit for their situation or their post-closing work environment was far from ideal (not to mention the practice likely sold for less than its true market value). All of this is to say – do your homework and evaluate your options so you are ultimately in the position to choose THE DSO that is the best fit for you and your practice.
No. 3: Failure to obtain proper representation
Failing to obtain proper representation is one of the most common mistakes we see practice owners make when pursuing a DSO sale. With so many DSO buyers looking to acquire practices and soliciting sellers directly, many practice owners feel they can navigate the sales process on their own and save themselves a commission. Unfortunately, that “savings” typically comes at an enormous cost. As we have outlined, the reality is that affiliating with a DSO is both a rewarding and treacherous journey that will have lasting implications for you and your practice.
Therefore, the decision to partner with a DSO should not be taken lightly. Engaging an experienced sell-side advisor to serve as your advocate, protect your best interest, and help you navigate the process from start to finish is a fundamental element to achieving a successful result. Once you have accepted an offer, it is also critical to engage a dental attorney who has a significant amount of experience in handling DSO transactions and consult with your accountant to minimize the tax implications associated with the sale.
In conclusion
Pursuing a DSO affiliation is a challenging and potentially rewarding endeavor that requires serious deliberation and a disciplined approach to the sales process to ensure that you maximize your return. The exciting news is that there are a multitude of viable options available and dental practice valuations have recently reached an all-time high. Therefore, it is an ideal time for successful practice owners to consider partnering with a DSO.
Brannon Moncrief has over 20 years of dental industry experience as a banker, practice broker, and sell-side advisor. Brannon is the Principal, CEO of McLerran & Associates, a nationwide firm specializing in providing sell-side advisory to large dental practice owners (and specialists) seeking a DSO affiliation or private equity partner.
