DSO M&A 101: Understanding Dental Mergers and Acquisitions

The dental industry is rapidly consolidating, with predictions indicating that 75% to 80% of dental practices will be affiliated with dental support organizations (DSOs) within the next decade, said Brian Colao, director of the Dykema DSO Industry Group. This trend, which began around 2010, accelerated in 2015 due to favorable financing conditions and increased investor interest. Although higher interest rates have slowed the pace since 2021, approximately 30% of the dental market is currently affiliated with DSOs.

Understanding this context is crucial for both practice owners and DSO executives considering mergers and acquisitions (M&A). Knowing the market trends and the factors influencing them can help make informed decisions.

Debunking M&A Myths

Navigating the world of mergers and acquisitions in the dental industry can be tricky, especially with various myths and misconceptions clouding judgment. It’s important to address these myths head-on to make well-informed decisions.

Myth #1: Loss of Clinical Autonomy

One common fear among private practice owners is losing clinical autonomy. However, Duff Bourassa, Managing Director at E78 Partners, reassured that this isn’t the case.

“One of the biggest fears of private practice owners is the concern they will have to give their clinical autonomy. That’s not what happens,” said Bourassa.

In reality, DSOs often sought to maintain the clinical practices that made the acquired offices successful in the first place.

Myth #2: Immediate Departure of the Dentist

Another misconception is that DSOs want the selling dentist to leave immediately. In reality, DSOs typically prefer the dentist to stay for at least two years, with longer commitments often resulting in better offers.

“Most DSOs want you to work for at least two years. The more time you commit to staying, the more likely you’ll get a better offer from a potential buyer,” explained Bourassa.

This continuity helps ensure a smooth transition for patients and staff, preserving the practice’s value.

Top Tips for Practices Considering Selling

Knowing how long you want to continue working is crucial. If you’re looking to exit within two years, a 100% buyout might be preferable. For longer commitments, equity deals are more beneficial.

“If you’re trying to get out within two years, then you may want to get a 100% buyout,” explained Bourassa. “But if you’re willing to work longer, then you want a deal that has more equity.”

Key Questions Practice Owners Should Consider When Selling

When considering selling to a DSO, it’s essential to ask the right questions to ensure you fully understand the deal and its implications. Rondi Michaux, former director of corporate development at 42 North Dental and Dental Care Alliance, suggested asking the following questions:

  • What are the employment contract terms?
  • How is the deal structured?
  • How long are you expected to work post-transaction?
  • What is the compensation structure?
  • What is the DSO’s management fee?
  • How are lab expenses factored?
  • How will your lease or real estate be handled?
  • Will the practice name change?
  • Will there be compensation for a second equity event?

“These questions help ensure that you fully understand the implications of the deal and can negotiate terms that align with your goals,” Michaux  advised. Also consider:

  • Impact on associates and team:  It’s essential to consider how the sale will affect your associates and staff. Ask about existing doctor contracts, employee benefits, vacation time, and sick leave. “What happens to the existing doctor contracts if you have associates?” asked Michaux. “What happens with employee benefits? Vacation time? Sick leave?”
  • Impact on Patients: Consider how the sale will be communicated to your patients, especially if you plan to retire or leave the practice. “How will patients be told, especially if you are retiring or leaving the practice?” Michaux suggested.

4 Ways to Prepare for the Selling Process

Preparation for selling a dental practice involves several important steps:

1. Leveraging technology.

Utilize AI for diagnostics, automate revenue cycles, and employ procurement solutions to cut costs. “Leverage all of the technologies available to you,” recommended Colao. “These include adding artificial intelligence to aid in diagnostics and automation that can streamline and shorten the revenue cycle.”

2. Evaluating overhead.

Optimize your payor mix and prepare for future equity events.“Evaluate your overhead to ensure it’s as low as possible,” advised Colao. “Review and optimize your payor mix and add the appropriate infrastructure.”

3. Preparing financials.

Ensure your accounting practices are solid and your financials are in order.“Review your accounting practices and ensure you have properly-prepared financials,” Colao added. “Potential buyers are going to want to see them.”

4. Hiring an expert.

Kevin Cumbus, Founding Partner at TUSK Practice Sales, emphasized the importance of hiring experts to guide you through the sale process. “You only get one chance to sell your life’s work,” said Cumbus. “We help identify potential buyers, handle non-disclosure agreements, and drive up interest and enterprise value.”

From Coffee to Close: The Selling Process

A typical sale process, from initial meetings to closing, takes 60 to 90 days but can extend to six months. “From ‘coffee to close,’ the sale process can take anywhere from 60 to 90 days,” said Michaux. “Some deals take up to six months.”

1. Have your documents ready.

Ensure you have the necessary documentation ready for the sale process:

  • Up to three years of P&L statements
  • Balance sheets, production, and collection reports
  • Real estate contracts and equipment expenses
  • Associate contracts and staff W2s
  • Disclosures of malpractice claims, legal issues, and inter-office relationships

2. Follow these selling timeline steps.

The sale timeline typically involves several key steps:

  1. Gather financial and operational details.
  2. Have a lawyer review the NDA.
  3. Conduct due diligence.
  4. Understand add-backs for non-disclosed expenses.
  5. Determine financial details and deal structure.
  6. Review the Letter of Intent (LOI) with a lawyer.
  7. Conduct further due diligence.
  8. Renegotiate real estate leases.
  9. Meet with the dental team before or after the sale.

Red Flags in Dental Practice Buying and Selling

Selling a dental practice can be complex, and both buyers and sellers need to be vigilant about potential issues that could derail the process. Understanding these red flags can help prevent costly mistakes and ensure a smoother transaction.

Red Flags for Buyers

Rondi Michaux and Duff Bourassa identified several potential red flags for buyers, including:

  • Family relationships and non-market salaries
  • High staff turnover
  • Discrepancies between P&L statements and tax returns
  • Out-of-date technology
  • Poor website functionality

“Family relationships and salaries that may not be market value are red flags,” noted Michaux. “Discrepancies between the profit & loss statement and tax returns are also concerning.”

Red Flags for Sellers

Sellers should also consider potential issues with buyers, including workplace culture, employee benefits, training opportunities, and compensation structures.

“The seller should ensure that their clinical and operational values align with the buyer,” advised Samantha Strain of Healthstream Ventures. “Overlooking operational and business integration capabilities can have devastating consequences.”

Predictions and Future Trends

Despite a slowdown in M&A activity due to high interest rates and compressed margins, industry consolidation is expected to continue. Strategic preparation now can position dental practices for successful partnerships in the future.

“The industry consolidation is still on track to increase from about 30% now to 75-80% in the next 10 years,” predicted Colao.

Achieve Your Dental Practice Goals with Planet DDS

Preparing for a dental practice sale involves careful planning, understanding market conditions, and addressing potential red flags. Whether you’re looking to grow your practice or prepare for a sale, ensuring efficiency and leveraging technology can help you achieve your goals.

“Whether you’re thinking about partnering with a group this year, next year, or a decade from now, you can put yourself in the best possible position by preparing now,” concluded Colao.

Ready to find out how Planet DDS can help you increase same-store growth, improve EBITDA, and run more efficiently? Schedule a demo today.