Posted by Amy Carbone on Jun 5, 2023 9:00:00 AM
If you’re a practice owner, it’s possible that you have been approached by a dental service organization (DSO) to sell your practice. While in some instances this may look attractive – to give up the responsibilities of staff, payroll, equipment, and all the other obligations of entrepreneurship – selling to a DSO is a big step that requires careful evaluation.
Whenever one of our clients runs into a situation like this, we take them through a thoughtful exercise, so that they can evaluate the offer rationally and decide what makes sense for them.
Here are some of the biggest considerations we discuss with our clients:
9 Considerations for Selling a Dental Practice to Dental Service Organizations
1. First, Plan For Not Selling to a Dental Service Organization
If you want to sell to a DSO, you need to create a ‘base-line’ scenario that shows your financial situation based on the assumption that you don’t sell. If you remember from science class, this would be the “control group” in your evaluation experiment. In plain English you need a comprehensive financial plan.
We take our clients through a financial planning process where we look at their goals, their resources, and whether they are taking advantage of all the opportunities available to them to grow their wealth. This may take the form of recommendations for instituting retirement plans, adjusting loan payments, filling insurance gaps, etc.
One consideration is that as a practice owner you may have a greater ability to put money away before taxes in defined contribution and defined benefit plans. We make sure that our clients explore l these opportunities to further their goals, as well as additional opportunities they may have to create wealth and reduce debt. Once we have this ‘baseline’ plan, we can project future scenarios using pragmatic assumptions of what your financial picture may look like if you don’t sell to the DSO.
2. Plan For If You Do Sell Your Practice To A Dental Service Organization
When you sell a business, the price you receive is typically a multiple of future earnings. You're giving up the chance to earn an income over a period as an owner to get a lump sum today. Given that you likely have one shot at doing this, you must be sure you use that lump sum wisely.
3. The Proceeds From Your DSO Sale Will Need to Fund Your Future
We can’t stress this point enough. We see people doing all kinds of things with the proceeds of their DSO sale, that don’t produce a dime for them in the future. They may start a backyard project or splurge on something they always wanted to purchase. And while it’s great to finally be able to afford your dreams, prior to spending it you’ll want to know if you need to use this asset to help secure financial independence. In many instances this isn’t fun money, it may be critical to the success of your financial future.
4. After You Sell to the DSO Your Income May Drop
This is just a fact. Many dentists who sell to a DSO see their incomes drop. You simply may not be taking as much money home because you are no longer the owner, you’re an associate, which means you may get paid more like an associate. That’s a consideration you may need to make – how will you compensate for a potential drop in income? Where will that extra money come from? How will it affect your lifestyle?
5. Consider The Tax Impact Of From Selling to a Dental Service Organization
Whenever you receive a lump sum of money you must pay taxes on it. Your financial planner needs to work with your accountant to figure out the tax implications of the sale on your overall financial picture. There may be things you can to do mitigate your tax bill and effort should be dedicated to determining the best approach.
6. Allocation Of Your Proceeds
Once you figure out how much you owe in taxes, then you can look at how to best allocate the funds. In our practice we look at the client’s overall financial picture when we make recommendations.
Sometimes clients just want to pay off all their loans. Often people will pay down their loans without considering the potential lost opportunity costs when compared to investing the money. Sometimes it does make sense to pay off loans, or at least parts of loans, but several scenarios, including the long-term implications of these decisions should be explored prior to moving forward.
7. Changes to Your Retirement Plans
Many DSOs offer 401(k)s, but the benefits are not typically the same as the 401(k) you currently have as a practice owner with matching, profit sharing and all the bells and whistles. If you have a cash balance plan that provided additional saving opportunities and tax reduction advantages, it will likely be gone once you sell to the DSO as well.
8. The ‘Earn Out’ of DSOs
When we develop financial models for our clients who are considering selling to a DSO, we also include yet another component of the deal, called an earn out. An earn out is the income you can get if you hit certain bonus targets over a period of time. For example, it could be a two-year or five-year earn out; every DSO will have its own program. If you hit your numbers and get the earn out, great! But what if you don’t? What will your financial picture look like?
9. The Stock Deal: Getting Paid (partially) In Stock
Most people who sell to a DSO get paid at least partly in stock – the stock of the DSO. Every DSO will tell you how many multiples you can earn when they themselves get acquired and recapitalize.
While this is wonderful, it’s also not guaranteed. What if nobody buys your DSO? What if the private equity market cools in the dental sector? No one knows what will happen in the future, and for this reason it’s important to run your financial plan with two scenarios: your DSO gets sold, and your DSO does not get sold. In our practice, we always model this piece so that our clients can see the difference. You need to look at the best-case scenario, and you also need to look at the worst-case scenario.
DSOs Are Only One Option; You Have Others
There you have it. If you are thinking about selling to a DSO, you need to go in knowing that your income may drop and that you may need to make your cash work extra hard for you. It’s important to make careful decisions about how much of it to use toward debt repayment, investing for the future, and how much can be spent to improve your current lifestyle.
By creating a benchmark financial plan for the “no-sale” scenario, you can then figure out what the return will be if you do sell to a DSO. What we find is that after going through this exercise some clients don’t see the value of selling. Sometimes it’s only marginally better than what they are doing now, after which they must consider other potential benefits of not running their own practice. Sometimes it’s almost a wash and a client will say they don’t want to give up control for something that won’t put them in a significantly better position than the one they’d be in ten years anyway, assuming they pursued the recommendations in their optimized plan. Then again, for some people, it’s a strong ‘yes’ – but at least through the evaluation process they are making a better-informed decision.
Remember if you are going to sell to a DSO, you will typically be signing a contract that requires you to stay on for a period of time– perhaps two to five years. That too will be something to think about.
Regardless of what you do, make sure to work with a financial advisor who is familiar with the financial life cycle of a dental professional. And if you have any remaining concerns, don’t hesitate to contact us, we are always happy to field questions on this topic.
About Treloar & Heisel
Treloar & Heisel, an EPIC company, offers dental and medical professionals a comprehensive suite of financial products and services ranging from business and personal insurance to wealth management. We are proud to assist thousands of clients from residency to practice and through retirement. Our experienced teams deliver custom-tailored advice through an active local presence, while our strong national network ensures that clients experience the same high level of service throughout the country.
Treloar & Heisel, Treloar & Heisel Wealth Management, and Treloar & Heisel Risk Management are all divisions of Treloar & Heisel, Inc.
Investment Advice offered through WCG Wealth Advisors, LLC, a Registered Investment Advisor doing business as Treloar & Heisel Wealth Management. Treloar & Heisel Wealth Management is a separate entity from The Wealth Consulting Group and WCG Wealth Advisors, LLC.
Insurance products offered separately through Treloar & Heisel and Treloar & Heisel Risk Management.
Treloar & Heisel, Inc., Treloar & Heisel Wealth Management, and WCG Wealth Advisors, LLC do not offer tax or legal advice.