What Dentists Need to Know Before Selling to a DSO
By Selling your practice is a major decision you face. You must decide when is the right time to sell? At what price will you sell? To whom do you want to sell your practice? And how will you transition out? These last couple of years haven’t helped any with Covid not going away anytime soon, the economy during a recession, and potential tax increases at the state and federal levels. To add to all of that, now corporate buyers, called Dental Service Organizations, or DSOs, are becoming more and more prominent. I would like to talk about DSOs and make sure you know who they are, what their goals are, and what you may be getting yourselves into.
There are many shapes and sizes of DSOs. Some start out as a small group, owned by a dentist or a group of dentists and backed by a local or national bank. These small groups grow and eventually outgrow their bank, then look to other forms of financing to grow into a DSO. That’s when they reach out to private equity groups that have billions of dollars of cash from investors to provide to the DSOs. The private equity groups invest in the DSOs in exchange for ownership. That can come in many forms, but they usually take the majority ownership in the group. I won’t get into how they structure the ownership too much since private equity groups are not dentists and some states require someone to be a dentist to own a practice, but just know that they typically have a dentist own a piece of the DSO in order to tread in the grey area of legally owning a practice. Some attorneys will argue that this isn’t even legal, but they get away with it.
The DSOs look for practices that are well run with annual collections above $1 million. Some DSOs will buy practices that are doing less and merge them into a practice nearby. Or they buy a practice because it is in a great location, and it will help fill their footprint. They also like to buy a practice that has six to eight operatories. They love it if it has more than eight ops. They also do not want to go in and update the practice. They will do it but expect to receive a lower price.
One of the major requirements of the DSOs is that the selling doctor and any longtime associates stay after the sale is complete and work back in the practice. Most want the seller to stay a minimum of three years. That can be negotiable for a shorter or longer period. You might find a small group or associate who will let you leave shortly after the sale, but those are few and far between. For the most part, if you do not want to stay on and work, they do not want your practice. The employment salary is typically market. Some will pay more; some will pay less. Several DSOs have benefits that the seller will be able to participate in as well. If you have a great benefits package that you are currently providing your staff, there is a pretty good chance that will be reduced to the benefits package the DSOs offer their other practices.
When DSOs look at a practice, expect to run a lot of reports, both from the practice management system and from your accountant. They also will want to know what you’re paying your staff, benefits, sick time, holiday pay and any other compensation or days off you may provide them. Again, if you give your staff a few extra personal holidays, extra bonuses, or any other perks, you can expect those to be eliminated. If you have special payments or provide free dental work or discounts, there’s a chance those will be cut as well.
When DSOs write up an offer, they need to be read very carefully. Even though these are non-binding, the DSOs will refer to them during the entire process. Once the offer, called a Letter of Intent or LOI, is signed off on by both parties, it will be handed over to the attorneys to draft up an agreement. After it’s handed over to the attorneys, the purchase and sale agreement will be written according to the LOI.
The DSOs make their offers challenging to understand. Some will give you a purchase price that includes accounts receivable in the price. You might read the offer and say, “Wow, they’re offering me 100% of last year’s collections.” No, they’re not. They’re offering you 70% of last year’s collections and they will pay the market rate for the accounts receivable. The offer will pay you a percentage of the purchase price upfront. It’s typically around 70% of the purchase price at closing. They will have you carry a note or finance the last 30% and pay you a market interest rate. You may receive a lump sum payment each year while you work back. If you have a three-year work back employment agreement, you may get one-third of the 30% paid the first year, one-third the second year, and one-third the third year. However! You are typically required to keep the production level or net income of your practice up to a certain level. If you do not, you will either get a pro-rated amount, or you may not get paid that portion at all! Go back and read that again, as it is important. If you are counting on that last 30%, there is a bit of a gamble. What happens if they change the culture and the entire staff, and many patients leave? What happens if you have health problems? What happens if there’s a pandemic (we know that happens)? What happens during a recession? There are so many things that can happen in those three years.
Another thing to watch out for is how do they make the calculation for net income. Most will charge the practice a 5% – 15% management fee. They require you to make a net income number, but now they added a management fee on top. I’ve seen this in place where they added staff to the practice as well as an associate. The doctor didn’t make his net income number to no fault of his own.
I have heard stories of DSOs offering practices above-market prices. We have been involved in several DSO sales lately and we have not seen a DSO pay above market for a practice. They have typically paid the market price. If your friend tells you they received 120% of collections, ask them to prove it. DSOs will quote prices on occasion based on EBITDA. That’s “Earnings Before Interest, Tax, Depreciation, and Amortization”. It’s a term used in the investment world for private equity as well as Wall Street. There are different ways to calculate EBITDA that private equity groups can manipulate, so don’t get caught up in quoting prices based on a fancy word. I’ve heard doctors say they sold their practice for 5 or 6 times EBITDA only to find out they input that management fee and the note payment into the EBITDA calculation. It truly wasn’t anywhere 6 times EBITDA.
There are good DSOs and not-so-good DSOs out there. Some will completely change the culture of your practice. They will scare staff away with benefit and salary changes. Some will keep everything the same to the best of their abilities. But the staff knows you will eventually leave, so they may more readily look at other opportunities.
The best advice I can give you is that if you are looking at an offer from a DSO, be sure and have an expert review the offer. Many of the local attorneys and brokers have worked with the DSOs. They know who are good and who may be a bit challenging. They also know the inside secrets the DSOs have where they may try to sneak something by you. I’ve seen doctors sell to DSOs and quite a few months later leaving the final 30% on the table. They just couldn’t take working for someone else in a different manner than they were used to. Know what you’re getting yourself into before you take that leap.
Read MoreWhat Do You Think Your Practice is Worth?
Megan Urban, Practice Transition Advisor at Omni Practice Group, explains why it is a good idea to get an understanding of what your practice is worth 2-3 years before you plan to sell.
Read MoreIt’s All in the Numbers
As you close out this past year and reflect on the first full year without any shutdowns as 2020 brought us, it makes sense to step back and take a look at your numbers. This is the case whether you are in your first year of practice ownership, have owned your practice for ten years, or you are getting closer and closer to retirement. You should always be managing your practice to your numbers while keeping the number one goal of taking care of your patients to the best of your ability.
So that all sounds great, but how do you manage to your numbers? The first step is grabbing your Profit and Loss statement and a Production by Provider or Production by Procedure report for 2020. If you know Microsoft Excel, you can input the numbers into an Excel spreadsheet. If you don’t know Excel, you can grab your handy-dandy calculator.
Most numbers you manage to are calculated based on a percentage of your gross collections. That’s the top number on your profit and loss statement. You should take the number after returns or other credits to gross revenue. Some Profit and Loss statements may call this number Profit and others will call it Revenue.
The first number to look at is your staff expense as a percentage of revenue. Add your staff salaries, payroll tax for staff, and staff benefits. Divide that total by revenue. Your target should be about 25% of revenue. If you’re slightly above 25%, don’t worry, increasing collections while keeping staff salaries flat will help you improve this number. If you’re over 35% and you really don’t think you can improve collections, you should analyze your staff. Maybe you have too many, or maybe your staff that is overpaid. These days, it’s easy to overpay staff since they’re hard to come by. Time and time again, when we look at practice numbers, this is one of the biggest profitability killers.
The next number to look at is facilities expense as a percentage of collections. This includes your base rent plus any of the common areas that you pay for and other facilities expense – garbage, parking lot maintenance, etc. This expense should not be more than 7% to 9% of revenue. If you are significantly higher than this number, you are not maximizing your facility, overpaying on rent, or you have too big of space for what you need. You can either increase collections or decide to downsize your space, sublease space, or do something else that will help get your numbers down in the 7% to 9% range.
Dental Supplies expense is something else to look at. Divide Dental Supplies expense by revenue. The target is 6% of revenue. If you’re a few percentage points off, don’t worry about it. If you’re at 12% to 15% or higher, you may have supplies walking out the door, overstocking your supply cabinet, or you’re buying top-end products. This should be a quick fix if you have a meeting with your person that orders supplies and give them a budget.
Lab expense is similar to dental supplies. If you’re a basic crown and bridge practice, you should be at 7% to 9% of revenues if you don’t use a milling machine in-house or you don’t place a lot of implants. The latter two will skew the numbers. Negotiate with your lab if you are higher than 7% to 9%. If you’re with a high-end lab, you’re at 12% and love their work, don’t change labs. You’re only a few points off. You can make up the difference elsewhere.
The other quick measure is hygiene as a percentage of total collections. Take your Production by Provider report or Production by Procedure report and figure out how much of collections are coming out of hygiene as a percentage of total revenue. The target is to be above 30% of revenue coming from your hygiene program. If you’re in the low 20% or less and you have a general dental practice, you should take a look at your hygiene schedule and see how many patients they’re seeing per day. Maybe their schedule isn’t full, or maybe hygiene is booked out for several months and the hygienist can’t keep up. You will need to analyze this for yourself.
Looking at your numbers is something all business owners do to help them manage their practice. These are a few simple numbers that you can quickly measure a few times per year, make a few changes and you can get your overhead down below the national average of 65%. Best wishes on the New Year and may your overhead be under control.
Read MoreWhy Practices Don’t Sell
By Megan 
Urban, Practice Transition Consultant
Your practice has successfully worked for you for many years so why isn’t it selling? It could be the transition consultant (broker) you are using, or it could be your practice.
Working with an experienced transition consultant is important. We know where and how to advertise. It doesn’t work to simply advertise on a website. You will want marketing and advertising in schools across the country, dental journals, and county/state societies. An experienced consultant already has a list of potential buyers for your area or type and may have other creative grassroots ideas to find the right buyer.
The right consultant cares about you, your team, practice, and goals. It shouldn’t be just about the commission money. Your consultant should be responsive and professional to potential buyers and you.
A comprehensive valuation and prospectus are important. If you or your consultant price your practice too high, it can be offensive to potential buyers, and they won’t feel comfortable offering a lower price. Even if you find a buyer willing to overpay for your practice, the bank will not finance 100%, which means you have to become a bank for a specific amount of the purchase price.
Sometimes even when you have the right consultant your practice may have other reasons for not selling. Sometimes it’s simply not finding the right dentist at the right time. Often it is because your location is not desirable to new buyers and their families. Sometimes it’s the size of the practice. We all know 3 op practices can be very efficient and profitable, but many buyers want 4 to 6 ops, especially to add more hygiene.
Declining collections the last 3 years or simply low collections can be a deterrent to potential buyers and banks unless you have a reason. They understand more time off due to vacation or health issues. Low new patient count, too many PPOs with low reimbursement, and low hygiene production can be concerning to buyers.
Most buyers understand they may need to update style or equipment and technology, but if it’s a lot of cost and effort, they may keep looking for a better practice.
If your practice falls into any of these areas of concern, it will take more time than the average to sell. Lowering the price may help, but if there is no interest, it’s not the price that’s the problem. Don’t give up or get mad, just understand that while your practice may have been perfect for you, it can be a while to find the right buyer.
4 Interesting Things to Implement So Your Dental Office Runs Smoothly
By Dr. Mehmood Asghar
When you walk into your dental office and see your staff members bustling around you, you might assume they are working productively. But your staff and employees are constantly trying their best to catch up with their daily tasks; they are just busy – not productive.
A successful dental practice is one where routine tasks are streamlined, and all processes run smoothly. If despite your best effort, you and your team fail to achieve your key performance indicator (KPI) goals, it is time to make some changes. Here are 4 things that you can implement in your dental practice to improve productivity and ensure that your training runs smoothly:
1. Invest in Good Practice Management Software
A practice management software is not just necessary for billing purposes or to manage patient records. Modern practice management software takes most of the burden off your team’s shoulders and automates various processes. For example, instead of writing individual appointment reminder emails to patients, the software can automatically send reminders and even reschedule appointments if needed.
Besides, with modern software, you don’t need to maintain your material inventory manually. You can simply assign a barcode to all the products, and the system will record the information regarding the quantity and expiry dates of each item. The system will automatically inform you if any material is short in supply or is about to expire.
Most importantly, good practice management software allows you to manage your finances – cut unnecessary spending and increase spending in areas that matter, like buying new equipment, refurbishing the waiting room, etc. The software will provide you with a detailed overview of your earnings and expenditures, and help you identify exactly where you’re leaking money.
2. Buy State-of-the-art Equipment
Being a successful clinician requires two major things: clinical expertise and the right armamentarium. Investing in modern diagnostic or therapeutic equipment will help you improve your treatment outcome, reduce treatment time and increase productivity. For example, it would be a good idea to invest in a desktop 3D printer: instead of waiting for 1-2 weeks for your lab to prepare a patient’s crowns, why not print them chairside in one day?
Fortunately, 3D printers are much more cost-effective today than they were a few years ago. According to research by SmarTech Analysis, in-office dental 3D printers, capable of printing surgical models, implant templates, clear aligners, and even dental prostheses, may cost less than $5000 by 2021.
You may also consider investing in 3D imaging technology. Today, dental implants have become the most favorable and desirable tooth replacement option. According to the American College of Prosthodontists, over 2.3 million implant-supported crowns are made annually in the US alone. With this considerable reliance on dental implants for tooth replacement, it only makes sense to invest in equipment that aids in implant therapy. Cone-beam CT (CBCT) technology considerably improves the clinical outcome of implant and other oral surgical procedures. Besides, this technology can also be used in the early diagnosis and management of oral disease and malignancies.
3. Automate Processes
Did you know that a significant time of your employees is spent in the sterilization control room? This is not because they are lazy; it’s because they have to frequently wash, clean, and sterilize dental instruments – either because of a small autoclave machine or due to increased patient flow. Regardless of the main reason, you can improve your team’s productivity by buying a fully automated sterilization system, which takes away the multiple, time-consuming steps involved in manually sterilizing the instruments. The initial cost of such equipment might be high, but it will prove a worthwhile investment in the long run, especially considering the time saved.
4. Staff Training and Workshops
While seemingly unessential, staff training and workshops to refresh/upgrade their clinical skills and enhance their expertise in inpatient/data management software go a long way in improving their efficiency. These workshops also ensure that all staff members remember their roles and responsibilities, thereby streamlining the work in your practice.
No matter how good a clinician one is, they cannot run a successful practice unless they are seasoned managers. According to the statistics provided by the American Dental Association, the average hours worked by dentists in 1900 were 1,810.6, compared to 1448.8 hours in 2020. This downward trend shows the impact of the latest technology and good practice management in increasing dental office efficiency, productivity, and earnings. So, follow the tips given in this article to convert your practice into an efficient, productive, and profitable business.
Author bio: Dr. Mehmood Asghar is a dentist, an educator, and a researcher in dental biomaterials. He is currently working as an Assistant Professor in Dental Biomaterials at the National University of Medical Sciences, Pakistan, in addition to pursuing a Ph.D. in Dental Biomaterials. Apart from his professional activities, Dr. Asghar loves reading, writing, and working out.
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